Fed Funds Futures, Claims, And S&P Earnings

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Fed Funds Futures, Claims, And S&P Earnings

Three points today:

#1: Fed Funds Futures prices after today’s release of the Federal Reserve’s minutes of their last meeting, where they cut rates to 0 – 25 basis points:

  • December 2020 expected Fed Funds rate: 8 basis points
  • June 2021: 11 bp
  • December 2021: 14 bp

Our take: that futures are pricing at least 21 months of zero rates even as fiscal stimulus is 10% of US GDP seems inconsistent with the equity market’s belief in a more V-ish shaped recovery. We wonder, however, if perhaps markets are sensing that the Fed sees the crisis and the fiscal policy response as their last best chance to see inflation finally rise to 2%. Either way, it is worth remembering that Fed Funds Futures have had a better call than either the Federal Reserve or human economists for many years now.

#2: Looking ahead to tomorrow’s Initial Claims for Unemployment Insurance report, here is the latest Google Trends chart for “unemployment” search volumes over the last 30 days:

Our take: the consensus expectation for this week’s report calls for 6.0 million new claims, down from 6.6 million last week but the Google search volume data shows a 6.7% increase over the last week. So don’t be surprised by a still-higher initial claims number.

#3: We’ll have a lot more on corporate earnings starting next week, but here is our stab at a Q1/Q2 run rate for S&P 500 operating earnings power:

  • Back in January 2020 Wall Street was looking for the S&P 500 to earn $177/share this year, which would have been 8.6% higher than 2019’s $163/share. As of today, the Street sits at $160/share for 2020, which is obviously way too high.
  • One way to frame expectations for 2020 earnings is to anchor on the 57% decline in earnings from the last cycle’s peak (2007) to trough (2009) and apply that to 2019’s $163/share. You get $70/share.
  • That $70/share happens to be the same as 2010’s midyear earnings power number, when US unemployment was +9%. While joblessness is certainly higher now, fiscal stimulus is also much more evident now vs. 2010 and household budgets should therefore not be as frayed as during the Great Recession.
  • Worth noting: Q4 2008 was the only quarter in history to show zero S&P 500 operating earnings. Q1 2020, no matter how bad it is, should not equal that performance if only because the first half of the quarter was running at a +$150/share earnings power run rate.

Our take: that $70/share in S&P 500 earnings power is both good and bad news. On the plus side, it’s a pretty reasonable number for a global pandemic with large scale lockdowns all over the world. On the downside, the S&P 500 at 2750 is looking for a speedy return to at least $120/share in earnings power (23x earnings). For that, we’ll need to see the US economy reopen at a spritely clip.

Sources:

Fed Funds Futures: https://www.cmegroup.com/trading/interest-rates/stir/30-day-federal-fund.html

Current earnings estimates via FactSet: https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_040320.pdf