1) Overnight on Wall Street, US stocks fell to their lowest level in 22 months, hit by a quadruple whammy of high inflation, rising interest rates, turmoil in bond markets and earnings downgrades.
Quoted on Bloomberg, Shawn Snyder, head of investment strategy at Citi US Wealth Management said "the market is now coming to terms with the idea that a recession is almost a given at this point and it's really making adjustments for that."
A recession would inevitably lead to earnings downgrades, seen by some as being the cause of the next leg down in global stock markets. Others might think the risks are already priced into many stocks, given the S&P 500 Index (SP: .INX) has fallen 24% so far this year, with the NASDAQ-100 Index (NASDAQ: NDX) down 32% year to date.
2) Speaking of earnings downgrades, Apple (NASDAQ: AAPL) shares fell almost 5% after an analyst downgrade from Bank of America warning of weaker consumer demand for its popular devices.
According to Bloomberg, "people familiar with the matter" said Apple has told suppliers to pull back from efforts to increase assembly of the iPhone 14 product family by as many as 6 million units in the second half of this year.
The Apple share price has now fallen almost 22% so far in 2022.
Apple shares trade on a forecast price-to-earnings ratio (P/E) of 22 times, according to data from S&P Capital IQ, the equivalent of an earnings yield of 4.5%. When interest rates were effectively zero, such an earnings yield looked attractive; much less so today with the 5-year US treasury yield now at 4%.
Whilst retirees and other income-chasing investors might finally be able to earn some sort of return on their cash, they are paying for the privilege with falling stock prices.
3) Unlike the US, here in Australia we have stocks that trade on attractive dividend yields, even more so for those paying fully franked dividends.
Just like the US, however, the earnings risk for Australian stocks is elevated as we too deal with rising inflation and RBA interest rate hikes.
The retirees favourite – Australian bank stocks – are facing headwinds including higher deposit costs, more expensive wholesale funding, a weaker housing market and slowing economy.
Those risks are probably not yet reflected in the Commonwealth Bank of Australia (ASX: CBA) share price, trading on a P/E ratio of 17 times and a fully franked dividend yield of 4.2%. CBA shares have fallen 7% since reporting results in August. They looked downright expensive then, and still look pricey today.
4) So where is the value in Australian shares today? I'd suggest not obviously amongst the S&P/ASX 200 (ASX: XJO) blue chips.
BHP Group Ltd (ASX: BHP) shares look incredibly cheap, both from a yield and P/E perspective, but you'd be buying them at the top of the cycle.
Telstra Corporation Ltd (ASX: TLS) shares trade on a decent 4.7% fully franked dividend yield, but they are expensive on a P/E basis at 27 times earnings.
Wesfarmers Ltd (ASX: WES) are closer to fair value, trading on a 4.2% fully franked dividend yield and 21 times earnings.
Looking at companies further down the ASX 200 market cap brings us to JB Hi-Fi Limited (ASX: JBH) shares, trading on a trailing fully franked dividend yield of 8.3% and a trailing P/E of just 9 times earnings.
JB Hi-Fi shares look cheap as chips, not withstanding it too faces headwinds in terms of a slowing economy as higher interest rates start to bite on discretionary spending.
5) All eyes will be on the RBA next Tuesday, with markets pricing in a 76% chance of a 50 basis point increase in interest rates, taking the RBA cash rate to 2.85%.
Morgan Stanley recently increased its peak cash rate prediction from 3.1% to 3.6%, saying "domestic inflation pressures will require a larger demand contraction to come under control," according to the AFR.
The good news is that, after Tuesday, most of the RBA's heavy lifting will already be done, having moved the cash rate up from just 0.1% in April in some of the fastest tightening on record.
The bad news is still ahead as low fixed rate mortgages start to roll off, replaced by standard variable home loans at around 6.5%, and increasing, no doubt putting the brakes on consumer spending. No wonder many retail stocks, like JB Hi-Fi and Super Retail Group Ltd (ASX: SUL) are trading on cheap multiples.
6) Somewhat stating the obvious, former US Treasury secretary Lawrence Summers said in an interview quoted in the AFR, "we're living through a period of elevated risk."
Still, with reports of retail investors now finally throwing in the towel, buying stocks in uncertain times like these has historically been a good move, when viewed through a holding period of three to five years. Just be prepared for some bumpy times along the journey.
