Financial markets and the Fed are playing a game of chicken. The Fed continues to wheel out its own people to double-down on their position that interest rates will be shortly be raised to above 5% and will stay there for ages until inflation is unquestionably showing signs of being 2% again, like it was in the good old days.
Financial markets, as shown by fed funds futures rates and trader sentiment, are calling BS on this. They insist that upcoming data will sway the Fed to stop raising interest rates soon and possibly even force them into a pivot back to lowering them before year-end due to having overshot with the hikes.
Until we learn for sure who the chicken is, market sentiment will continue to sit somewhere between hope and fear and last week was a classic example of this.
Stock indexes had broadly rallied to start 2023 and the biggest reason was that investors are interpreting further declines in inflation and slowing economic growth as increasing the chances for an economic “soft landing” . Nevertheless, for the second week running, the indexes were forced to stage a late-week rally, mostly led by beaten-down tech, to provide some window dressing for what was, on the face of it, a rather unimpressive weekly performance.
However, when you look more closely, it’s interesting to note that investors don’t appear to be fleeing stocks because they're were worried about a recession. If that were the case there’d be noticeable outperformance on the part of the more defensive stocks of companies that sell electricity, toilet paper or toothpaste over those of the more risky firms in tech and more discretionary areas. The opposite happened last week. That suggests that the market is just confused and churning without a real plan as to what it thinks or wants to do.
One obvious place it can look to for more directional clarity is earnings and Q4 2022 earnings season has started ramping up. There has been quite a lot of yucky news coming out of corporate America.
Just last week alone:
Goldman Sachs (GS) reported a major earnings miss as a barren investment banking /mergers and acquisitions landscape and the apparent failure of its consumer banking venture damaged earnings and the tone of the forward guidance.
Microsoft (MSFT) shares fell hard after the software giant announced it was cutting 10k jobs
Alphabet/Google (GOOGL) announced will cut 12k jobs or about 6% of its workforce in the largest round of layoffs in the company’s history, although the stock actually rebounded on this news
Bank of America (BAC) shares slid on a report it has frozen most hiring to save money
While Morgan Stanley (MS)'s stock initially shot higher on its cheery asset management earnings, CIO Mike Wilson reaffirmed his pessimistic outlook for the US stock market, saying margins and earnings are likely going to disappoint and reset guidance lower
Charles Schwab (SCHW) was massively downgraded by analysts with expectations of yield-seeking customers moving large amounts of cash out of Schwab’s highly profitable (to Schwab, that is, not to their account holders) Cash Sweep Account into money market, treasury bills and high yield savings accounts that these days finally pay close to 4% interest or sometimes even more
Insurance company Travelers (TRV) said catastrophe losses from the big winter storm at the end of 2022 negatively impacted its bottom line and its share price promptly dived 5%
Home Depot (HD) shares swiftly sank 4% after the Commerce Department reported housing starts and building permits fell more than anticipated last month (see OTHER NEWS, below)
Despite the fact that we did see pockets of good earnings news and guidance, Netflix (NFLX) for instance, we do seem to be experiencing an overall pattern of 2023 earnings estimates moving lower. But they are not yet collapsing and that alone could eventually end up being a positive for stocks.
The Producer Price Index (PPI) measure of wholesale inflation felt by manufacturers fell 0.5% in December, compared to expectations of a 0.1% decline after November's 0.2% gain. The index was up 6.2% year-over-year, down from 7.3% in November. More evidence that overall inflation may be falling nicely.
Americans cut back on spending at the height of the holiday season, particularly on vehicles and furniture and in popular gift categories. Retail Sales, the measure of purchases at stores, restaurants and online, declined 1.1% in December from the prior month. That was the biggest monthly decline of 2022 and marked the second consecutive monthly drop. In aggregate, however, 2022 saw the highest adjusted level of retail sales since 2004.
The beauty in this retail sales number was in the eye of the beholder and in this case the beholder was the stock market. The good news camp say it was further evidence of a slowing economy with lower consumer spending and therefore less pressure on the Fed to keep raising rates. So, thumbs up. But if it is interpreted as further evidence of a slowing economy with lower consumer spending and therefore lower sales and lower earnings for US companies, then that could be Bad News Bears for stocks.
Before heading off to frolic at the out-of-touch orgy of icky self-aggrandizement that is the World Economic Forum in Davos where billionaires tell multi-millionaires what they think would be best for the rest of us, US Treasury Secretary Janet Yellen informed us that the deadline for the US hitting its debt ceiling (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) passed last week.
In the short term, this just means that some reshuffling of government assets will take place but that Band-Aid can only realistically be expected to last until late spring/early summer, when a nasty and maybe protracted political fight is likely to break out about extending the limit.
Stand by for a lot of tiresome, grandstanding Congressional theater later this year, particularly from that subset of rabid ultras in the House and Senate who thrive on simply creating political chaos and division for the sake of it and you will hear some very apocalyptic sound bites from all sides. This toxic environment is going to be frenziedly amplified by America’s grotesquely-polarized media that prioritizes online clicks and scoring cheap political points over anything approaching intellectual rigor.
We went through all this crap in 2011 and the final outcome was that the financial markets’ fear of the apocalypse ended up creating a sensational buying opportunity for both stock and bond investors.
I know it’s early but I’m going to put this out there right now .. do not be afraid to ignore and completely tune out the deafening noise when it breaks and do not allow it to shake you out of your portfolio while this scary soundtrack blares in the background. Stay strong, this nonsense will eventually pass and you will be glad you disregarded it.
OTHER NEWS
From bad to worse to even worse .. As if FTX’s millions of customers had not had enough punches in the stomach lately, the bankrupt company finally came out and admitted last week that $415 million was stolen when it was hacked back in November, just two days after its bankruptcy filing. The hacker stole about $90 million from the US exchange (that was about half of all client assets stored there), around $323 million from FTX’s international platform and $2 million from Alameda Research, its affiliated hedge fund.
Also, in a candidate for the award for 2023’s most unsurprising piece of news so far, FTX at long last also admitted that a probe of its balance sheet showed the holdings of customer funds were lower than had been shown in the exchange’s internal accounts (shocker!), acknowledging for the first time that it knew that there was a shortfall of missing money at the crypto exchange, contrary to previous self-serving statements by the disgraced former CEO Sam Bankman-Fried, who is awaiting trial on massive fraud, corruption and theft charges.
Oh and by the way, as predicted by many, mammoth crypto lender Genesis has finally been brought down, filing for bankruptcy last week and blaming FTX with its dying breath. As we begin to get a peek behind the curtain of how Genesis operated and what happened to its customers’ money, it’s probably going to be disheartening news for the millions of people who believe there’s billions of their dollars still trapped there and likely yet another example of the fraud, delusion and sheer incompetence that continues to plague the entire crypto ecosystem as a direct result of the lack of regulation and oversight in the space.
Housing still in the dumps .. Homebuilders started new homes last month at a 1.38 million annual rate, down 1.4% from November and 22% below December 2021 levels. The number of permits issued — a clue as to where home construction is heading in the months ahead — fell 1.6% in a month and is now down 30% from a year ago. Builders are reacting to higher mortgage rates and stretched homebuyers by retrenching in their building plans.
Existing home sales, which make up the vast majority of the housing market, fell by 18% year-on-year to their lowest level since 2014. On a monthly basis they fell 1.5% in December, the 11th straight month of decline which is the longest such streak since the data began being collected in 1999.
The housing market has seized up as everyone involved is playing defense. Builders aren’t building. Buyers face extortionate prices and higher mortgage rates. Sellers aren’t active either because so many are still anchored to unrealistic 2021 prices and won’t budge or they don’t want to trade in their 2021-refinanced 2.75% mortgage for a brand new new 6.50% one.
Not so juicy .. The Wall Street Journal reported that Florida orange growers are harvesting their smallest crop in nearly 90 years, the result of an ill-timed freeze, two hurricanes and a citrus disease that is obliterating its groves. The state is expected to produce just 18 million 90-pound boxes of oranges, which would be less than half the size of last year’s poor crop and a 93% decline from Florida’s peak output in 1998.
To make matters worse, the Agriculture Department said the fruit this year is much smaller than usual, which means that more oranges are needed to fill each box and to squeeze for the same amount of juice. The measly crop is a blow to an industry that has become synonymous with Florida, which will now produce fewer oranges than California for the first time since World War II.
UNDER THE HOOD:
Missing from the October 2022 low that we are still bouncing from was the major spike in volume associated with investor capitulation in almost every true market bottom in recent decades. This continues to worry the technical guys when it comes to assessing the viability of the current rebound from those levels.
The S&P 500 is currently right at its very important 200-day moving average. This has been kryptonite for the index over the last 12 months as each time they test the level of this technical indicator, stocks have rolled over within a few days and begun a new downtrend, often heading back to lower lows.
Having said that, a close for the S&P 500 above the Q3 2022 highs of just above 4300 (we are at 3973 as of Friday’s close) could be a technically meaningful bullish development, shifting a lot of technical and trend-following models from bearish/neutral to neutral/bullish on a medium time frame.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
Big week ahead for Q4 2022 earnings, with about 90 of the S&P 500 companies scheduled to report in the next five days. Highlights will include results from Microsoft, Tesla, IBM, Intel, Visa, Johnson & Johnson, General Electric, Verizon, Lockheed Martin, AT&T, Boeing, American Express, Comcast, Chevron, Mastercard, Visa, American Airlines and Southwest Airlines.
The Federal Reserve’s preferred inflation gauge is part of the Personal Consumption Expenditures (PCE) report out this week. Personal earnings are expected to show a 0.2% month-over-month rise, while spending is seen falling by 0.1%.
The first estimate of Q4 2022 US Gross Domestic Product (GDP) comes out this week and is expected to show a 2.5% annual rate of growth. We will also see the Durable Goods report for December.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 31% (24% the previous week)
→Neutral: 36% (36% the previous week)
↓Bearish: 33% (40% the previous week)
Net Bull-Bear spread .. ↓Bearish by 2 (Bearish by 16 the previous week)
Source: American Association of Individual Investors (AAII).
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
The highest recorded percentage of AAII bearish sentiment was 70% and occurred on March 5th 2009, right near the end of the Great Financial Crisis. The lowest percentage of AAII bears was recorded at 6% on August 21st 1987, not long before the stock market crash of October 1987.
Weekly sentiment survey participants are usually polled on Tuesdays and/or Wednesdays.
LAST WEEK BY THE NUMBERS:
Last week’s market color from finviz.com:
- Last week’s best performing US sector: Communications Services (two biggest holdings: Alphabet/Google, Meta/Facebook) - up 1.8% for the week
- Last week’s worst performing US sector: Industrials (two biggest holdings: Raytheon, Honeywell) - down 3.5% for the week
- The NASDAQ-100 outperformed the S&P 500 again
- Emerging Markets did better than Foreign Developed and US Markets
- Small, Mid and Large Cap all performed about the same
- Growth stocks were up for the week, Value stocks were down
- The proprietary Lowry's measure for US Market Buying Power is currently at 177 and fell by 7 points last week and that of US Market Selling Pressure is now at 124 and rose by 3 points over the course of the week.
- SPY, the S&P 500 ETF, remains above both its 50-day and 90-day moving averages and now right at its long term trend line. SPY ended the week 14.3% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, is now above both its 50-day and 90-day moving averages but remains below its long term trend line. QQQ ended the week 23.9% below its all-time high (11/19/2021).
The Lowry’s Percent of Stocks Above Their 30-Day Moving Average reading fell from an overbought level of 82% to 51%.This important 0-100% reading measures overall positive stock participation. Higher readings indicate increasing positive market momentum, lower readings indicate increasing downside momentum. Extreme readings below 20% and above 80% could potentially point to imminent short term trend reversals.
- VIX, the commonly-accepted measure of anticipated stock market risk and volatility (often referred to as the “fear index”), implied by S&P 500 index option trading, ended the week higher at 19.9. It remains well below its 50-day and 90-day moving averages and also far below its long term trend line.
ARTICLE OF THE WEEK:
Are you rich? It’s complicated.
EXPLAINER: FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia to try to help explain Wall Street gobbledygook (may be lightly edited at times for clarity) .
The statutory debt limit, often referred to as the debt ceiling, was the limit set by Congress to the amount of debt that the U.S. government can take on. It also includes interest payments on existing debt. Once the government reaches the statutory debt limit, it cannot take on new obligations.
Under the U.S. Constitution, Congress has the power to borrow money. Prior to 1939, this meant that Congress would pass legislation authorizing the Treasury to issue specific amounts of bonds to raise funds for purposes specified in the legislation.
However, other than these specified amounts of earmarked borrowing, the Treasury was not authorized to borrow money on its own authority, and the U.S. government did not maintain a large revolving debt burden as a normal means of financing ongoing general spending, such as for paying for public services, government salaries, entitlements like Medicare, and tax refunds.
In 1939, Congress passed the Public Debt Act, which, along with subsequent amendments, delegated Congress's power to borrow money to the Treasury as long as the total consolidated federal debt stayed under the statutory debt limit set by the Act. This was a radical break from previous policy, effectively transferring by statute the Constitutionally enumerated power to borrow from the legislative branch to the executive branch of government.
Still, only the U.S. Congress has the authority to raise the statutory debt limit, which it has done more or less routinely though not without occasional contention. Raising the statutory debt limit has occurred 78 times since 1960. Raising the threshold has taken several different forms, such as redefining the debt limit, allowing a temporary extension to the ceiling and permanently raising the limit. The debt limit has been raised 49 times under Republican presidents and 29 times under Democratic presidents.
Though some politicians known as deficit hawks, along with many citizens, disapprove of raising the debt limit, Congress has regularly raised the ceiling to avoid defaulting on already committed government payments.
Opponents of fiscal discipline typically argue that refusing to raise the debt limit would lead to debt default by the Treasury and would be catastrophic for the U.S. economy. They claim that those living on Social Security would not receive their monthly payments, members of the military would go unpaid, large segments of the U.S. economy would experience great upheaval, and an unprecedented national economic crisis would ensue.
This tension has led to several episodes when budget negotiations between fiscal conservatives and other factions in government have broken down, forcing so-called government shutdowns by delaying the Treasury’s ability to continually expand the federal debt. During these episodes, government agencies are usually required to restrict some spending or temporarily suspend some operations.
This leads to what has become known as Washington Monument Syndrome: Government agencies selectively cut back their most popular services so as to cause as much discomfort and outrage among the public as possible, in order to put pressure on lawmakers to take on more public debt.
When Congress opts to raise the debt limit, the Congressional Budget Office (CBO) calculates an “X-date” which refers to the day that the government will likely exhaust its debt extension and need to extend the limit further, assuming that it has not increased its income and paid off debts.
The government gets income through taxes, so raising taxes could be one way to increase revenue to pay off debts. Alternatively, the government may choose to cut spending—restricting the funds it spends on infrastructure, the military, etc. The money saved through these cuts can also help prevent raising the debt ceiling. While raising the debt ceiling during times of acute budget pressures tends to be a bipartisan action, theories on ways to avoid it tend to fall more starkly along partisan lines.
The first statutory debt limit set in the U.S. was at $45 billion in 1939. However, Congress raised the ceiling annually during the duration of World War II. By 1946, the limit had reached $300 billion. Over the following decades, it continued to rise as federal government spending, and deficits grew. In 2013, instead of raising the limit, Congress temporarily suspended it, allowing the Treasury to borrow whatever funds it needs to finance government spending.
Temporary suspensions of the debt limit have become the new normal in the federal budgetary process. In a 2019 budget deal between Congress and the Trump administration, the debt limit was suspended for two years, allowing the Treasury to borrow without limit during that period.
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