To reiterate what I said last week, the absolutely key question when it comes to financial markets in 2023 is: Will inflation fall faster than economic growth and earnings?
Mark your calendars for when we will get the next hints at an answer ..
Thursday, January 12th when the US Consumer Price Index (CPI) measure of retail inflation is released. Why It’s Important: The key for the next CPI report (and every CPI report in 2023) is solid evidence of continued downward momentum in inflation. Specifically, the headline CPI number turning negative month-over-month (down from the 0.1% increase last month) and the year-over-year reading falling below last month’s 7.1%. Even more important than headline CPI, however, is the Core CPI reading as it give us a better view of service sector inflation. Markets will want to see tangible declines from the 0.2% month-over-month and 6.0% year-over-year increases that we saw for November. If we see this hoped-for trajectory, stocks could definitely begin to pick themselves up off the floor. A failure on the part of the CPI data to come through with these improvements, however, could be very damaging indeed.
Friday, January 13th through Friday, January 27th which is the meat of the Q4 2022 earnings season.Why It’s Important: One of the main reasons stocks dropped in December was the growing concern about the likely state of corporate earnings in 2023. If the general tendency of Q4 earnings is disappointing, that will begin to weigh heavily on stocks. Conversely, if earnings are more resilient than currently feared, then that will be an early positive catalyst.
Bottom Line: Markets enter 2023 at an important transition point. One path is paved with continued disinflation, resilient earnings, gently moderating growth, a more balanced labor market with higher unemployment and rising stock and bond prices. The other path is paved with sticky inflation, rapidly slowing growth, a continued tight labor market with low unemployment and continually falling stock and bond prices. These two data points in January will offer important clues as to towards which path the markets are heading.
Nothing new was really added to the overall narrative during what was a low-volume trading week with a somewhat negative feel to it. Traders trickled back from the holiday break on Tuesday, with exactly the same lack of excitement for growth-focused stocks that they've had for pretty much all of 2022. Markets churned back and forth aimlessly all week.
A daily average of only around 3 billion shares changed hands on the New York Stock Exchange last week versus the year-to-date average of more than 4.6 billion. Low trading volume can exacerbate daily moves, there are just fewer traders at their desks inclined to step in and counter any trend that develops.
The final grisly scorecard for calendar year 2022 was a 19% decline for the S&P 500, its biggest pullback since 2008 and fourth worst year in its history, and a 33% decline for the NASDAQ, also its worst year since 2008. And add to that, of course, a collapse in government bond prices as yields spiked with the Fed’s aggressive interest rate hiking policy as well as the implosion of the whole crypto eco-system in a mushroom cloud of fraud and deceit.
There is an unfortunate behavioral tendency early in a calendar year that can be summed up in the expression: “things had better improve quickly or I’m out”, referring of course to clients throwing in the towel and selling out of stock positions because the turnaround does not appear imminent. This is, of course, the exact opposite of what is sensible, but many people still do it.
We are experiencing historic times in financial markets. Most investors have some kind of a combination of both stocks and bonds. The year that just ended was the most difficult for stocks since 2008 and the worst year for bonds in any of our lifetimes. Both at the same time!!
Never before in history have both stocks and bonds both fallen by double-digits in the same calendar year. That makes it a really, really bad time to sell if you don’t have to. It also makes it a really, really good time to buy stock ETFs if you have a long term horizon.
Market history is extremely clear: Periods like this provide opportunities to help secure your long term financial future, as long as you resist the urge for short term protection at the expense of longer term gains. The actions you take at times like this determine the end-balance of money available to you in the far future to a much greater degree than the actions you take during those years when stocks are moving higher all the time (almost every year from 2009-2021 for example!). There is definitely light at the end of the tunnel but the problem is that we have no idea how long this current tunnel may be.
While we can never know where we’re going, we ought to try to understand where we are. The goal of this weekly report (and the quarterly market reviews, look out for the next one sometime this week) is to help you recognize why markets are falling at the moment, but also to show you what I believe likely needs to in place for this bear market to finally end (there is a legitimate path to a rebound in early 2023, not an easy one, but it does exist) and also to put everything in a proper long term context.
OTHER NEWS
Stock-pickers just suck .. Just in case there’s anyone left on the planet who still thinks that picking stocks is a profitable endeavor in the long term, a report in the New York Times showed that, over the last five years, not a single actively-managed mutual fund in the US beat the market regularly, using the definition that S&P Dow Jones Indices has employed for two decades.
The S&P Dow Jones team looked at all 2,132 actively-managed domestic stock mutual funds (non-index funds that have professional human fund managers picking the stocks in the fund) that had been operating for at least twelve months as of June 2018, excluding very narrowly-focused sector funds and leveraged funds that, essentially, use borrowed money to magnify their returns.
The team selected the 25 percent of the funds with the best performance over the twelve months through June 2018. Then the analysts asked how many of those funds remained in the top quarter for the four succeeding twelve-month periods through June 2022.
The answer was none.
Not a single one of the actively-managed funds in the US managed to achieve top-quartile performance for five successive years. Then they did the same thing for actively-managed fixed income funds and came up with the same result: zero. Not a single bond fund was in the top quarter when it came to performance for five 12-month periods.
The inevitable conclusion: those fund managers who did make it into the top quartile from time-to-time simply got lucky for a year or two. They benefited from unsustainably good fortune for a while - and it always ran out. If it was down to skill, then why did it never, ever persist?
Then the researchers used a far easier test with a much lower bar. How many funds ended up in the top 50 percent all five years? How many simply did better the median for five years in a row?
For those 2,132 funds, the answer was .. a dismal one percent!
Consider a school with 210 students in a class. Not all the high performers will always score in the top 25 percent of their class every single year for five years, but you’d expect that at least some would. And if only two kids in the whole class showed above-average performance every year for five years, I’d begin to think that there was something seriously wrong at the school.
Growth vs.Value is not even a debate right now, with little sign of change .. Tesla’s price meltdown (it cratered almost 70% in 2022) has pushed it out of the top ten US companies by market value. As of last week it was in 16th place and dropping further down the charts like a stone.
The stock’s collapse continues to infect the whole high growth / tech / communications sector which had a brutal 2022. The Vanguard Value Stock ETF had declined only 2% year-to-date while the Vanguard Growth Stock ETF is down 33% (see this week’s EXPLAINER: FINANCIAL TERM OF THE WEEK below for more detail of the difference). There’s very little to suggest that this trend won’t continue into 2023, indeed plenty to suggest that it will.
For Growth stocks to flourish, it needs a set-up of: 1) quickly falling or at least steadily low interest rates, 2) at least a “normal” pace economic growth, and 3) geopolitical calm. We have quite literally the opposite of all those right now.
By the very nature of its construction, the S&P 500 is heavily overweight growth stocks, which is why its performance tends more towards that of the Growth ETF than the Value one.
UNDER THE HOOD:
Unsurprisingly, last week was characterized by typical seasonal choppy action and well below-average volume. However, sector performance greatly favored defensive areas at the expense of growth ones.
Lowry’s core technical indicators have been in decline for months but it is worth noting that the ranks of the most beaten-down stocks (those 30% or more below their highs) started expanding yet again last week. Masses of new lows like this are simply not bullish or indicative of selling exhaustion when they do not come during a panicky, all-encompassing selling climax.
The 2022 closing high for the S&P 500 was set on the first day of trading on January 3rd at 4796.56 and it has been all downhill from there. Now, with the NASDAQ Composite, led by fallen angels Apple, Amazon and particularly Tesla, reaching fresh 2022 lows just last week and many important stocks now below even their COVID-era lows, it’s pretty safe to say that the primary down-trend is back in charge and that the bears are not done with us yet.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
This trading week will be another holiday-shortened one, with stock and bond markets closed on Monday in observance of New Year's Day. Once Wall Street returns, there will be a handful of earnings releases from the last of the Q3 stragglers such as Walgreens and Conagra before attention turns swiftly and decisively to the Q4 releases which will start to arrive on January 13th.
The big economic data highlight of the week will be the Jobs Report on Friday. A gain of 217k jobs in December is expected, following an increase of 263k in November. The closely-watched unemployment rate is forecast to hold steady at a historically low 3.7%.
Before then, the Job Openings and Labor Turnover Survey (JOLTS) will come out and provide some context to how the labor market is looking. Estimates call for 10 million job openings on the last business day of November, which would be 334k fewer than in October.
Analysts will also be poring over the minutes from the latest Federal Open Market Committee's monetary policy meeting this week for clues as to the committee’s mindset and degree of unanimity among members about current policy .
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 26% (20% the previous week)
→Neutral: 26% (28% the previous week)
↓Bearish: 48% (52% the previous week)
Net Bull-Bear spread .. ↓Bearish by 22 (Bearish by 32 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: Energy (two biggest holdings: Exxon Mobil, Chevron) for the third week in a row - up 3.1% for the week
- Last week’s worst performing US sector: Materials (two biggest holdings: Linde, Air Products and Chemicals) - down 1.3% for the week
- The S&P 500 was just positive for the week vs NASDAQ-100 just negative
- US Markets finished just ahead of International Developed and Emerging Markets
- Large, Mid and Small Caps all did about the same
- Value stocks were just up for the week, Growth stocks were slightly down
- The proprietary Lowry's measure for US Market Buying Power is currently at 154 and fell by 1 point last week and that of US Market Selling Pressure is now at 155 and fell by 1 point over the course of the week.
- SPY, the S&P 500 ETF, remains below its 50-day and 90-day moving averages and is also still below its long term trend line. SPY ended the week 20% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, remains below its 50-day and 90-day moving averages and is still a long way below its long term trend line. QQQ ended the week 33.7% below its all-time high (11/19/2021).
The Lowry’s Percent of Stocks Above Their 30-Day Moving Average reading rose from 27% to 40%.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 21.7. It remains below its 50-day and 90-day moving averages and also below its long term trend line.
ARTICLE OF THE WEEK: From a fellow financial planner, a list of very commonly misunderstood concepts in personal finance and investing. Did you once believe any of these?
EXPLAINER: FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia to try to help explain Wall Street gobbledygook (may be edited at times for clarity) .
GROWTH STOCKS , VALUE STOCKS AND INCOME STOCKS
Investors who buy stocks typically do so for one of two reasons: They believe that the price will rise and allow them to sell the stock at a profit, or they intend to collect the dividends paid on the stock as investment income. Of course, some stocks can satisfy both objectives, at least to some extent, but most stocks can be classified into one of three categories: growth, income or value. Those who understand the characteristics of each type of stock can use this knowledge to grow their portfolios more efficiently.
As the name implies, growth stocks by definition are those that have substantial potential for growth in the foreseeable future. Growth companies may currently be growing at a faster rate than the overall markets, and they often devote most of their current revenue toward further expansion. Every sector of the market has growth companies, but they are more prevalent in some areas such as technology, alternative energy, and biotechnology.
Most growth stocks tend to be newer companies with innovative products that are expected to make a big impact on the market in the future, but there are exceptions. Some growth companies are simply very well-run entities with good business models that have capitalized on the demand for their products. Growth stocks can provide substantial returns on capital, but many of them are smaller, less-stable companies that may also experience severe price declines.
Undervalued companies can often provide long-term profits for those who do their homework. A value stock trades at a price below where it appears it should be based on its financial status and technical trading indicators. It may have high dividend payout ratios or low financial ratios such as price-to-book or price-earnings ratios. The stock price may also have dropped due to public perception regarding factors that have little to do with the company’s current operations.
For example, the stock price of a well-run, financially sound company may drop substantially for a short time period if the company CEO becomes embroiled in a serious personal scandal. Smart investors know that this may be a good time to buy the stock, as there is a chance that the public will eventually forget about the incident and the price will possibly revert to its previous level.
Of course, the definition of what exactly is a good value for a given stock is somewhat subjective and varies according to the investor’s philosophy and point of view. Value stocks are typically considered to carry less risk than growth stocks because they are usually those of larger, more-established companies. However, their prices do not always return to their previous higher levels as expected.
Some investors also look to income stocks to bolster their fixed-income portfolios with dividend yields that typically exceed those of guaranteed instruments such as Treasury securities or CDs.
There are two main types of income stocks. Utility stocks are common stocks that have historically remained fairly stable in price but usually pay competitive dividends. Preferred stocks are hybrid securities that behave more like bonds than stocks. They often have a call or put features or other characteristics, but also pay competitive yields.
Although income stocks can be an attractive alternative for investors unwilling to risk their principal, their values can decline when interest rates rise.
There is no one right way to discover these specific types of stocks. Those who want growth can peruse investing websites or bulletin boards for lists of growth companies, then do their own homework on them. Many analysts also publish blogs and newsletters that discuss stocks in each of the three categories.
Investors looking for income can calculate the dividend yields on common and preferred offerings, and then evaluate the amount of risk in the security. There are also stock screening programs available that investors can use to search for stocks according to specific criteria, such as dividend yields or financial ratios.
Bottom line: Stocks can provide a return on capital from future growth, current undervaluation or dividend income. Many stocks offer some combination of these and smart investors know that dividends can make a substantial difference in the total return they receive.
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