Earnings have proven dramatic for the equity markets but that shouldn’t detract from strong fundamentals
As we approach three-quarters of the way through earnings, most companies in our universe have reported strong results despite increased volatility. Across the S&P 500, both sales and earnings have surprised to the upside with industrials as the only sector to show a negative earnings surprise from just a few companies. Forward guidance has been more conservative than some hoped, leading to material drops in equity prices after announcements; we believe this is overblown as companies are guiding conservatively from our perspective. While not as high as last quarter, companies are still referencing supply chains at an elevated rate and the same can be said for inflation and pricing. We believe that supply chain backlogs and the omicron variant are casting a shadow on otherwise solid fundamentals as all companies in our universe continue to show credit strength. Fed rate hiking cycles tend to cause above-average volatility, especially in rate-sensitive areas like growth companies. However, we believe that by separating the noise of the equity markets from the signals that actually move credit quality, we have a strong portfolio of counterparties to invest in.
The price of crude oil spikes while tight commodity markets and lingering supply chain bottlenecks persist
As we enter the spring, the world is seeing a shortage across all commodity markets. The global lack of inputs creates a shortage of outputs, and unless supply can substantially increase or we see a reduction in demand, we are most likely facing higher-priced commodities in the near term. Many markets are currently trading in backwardation, meaning traders are paying premiums for immediate supply and owning the physical material upfront. The current WTI contract recently surpassed $92 per barrel, the highest price since 2014. Moving in parallel, all six main industrial metals traded on the London Metal Exchange transitioned into backwardation in late 2021, a signal of commodity tightness not seen since 2007. Looking forward, we do not see any indications of any supply chain improvements, leading us to believe that the price of crude oil to remain elevated in the near term.