The already-wide gap between what the Fed says will happen and what the market thinks will happen just keeps on getting wider. Fed presidents are out there barking at us at every opportunity that the Fed Funds rate that it controls will be around 5.1% by year-end, or a full percentage point higher than where we are now. The stock market, by means of the Fed Funds futures prices set by large institutional traders, have this rate priced at south of 4.4%.
Such a divergence is extremely unusual and one of them will probably end up being right. If it’s the market (and historically speaking, it usually is), then the Fed will pivot to an end to the policy of raising rates (Q1?) and consider lowering them sooner rather than later (Q2? Q3?). If it’s the Fed, then such a pivot won’t come until much later in the year (Q4, if at all?) and stocks will have at least the next three quarters to potentially move steadily but solidly lower from here while we wait.
This will impact the “soft vs. hard landing” debate, in other words; will inflation be beaten by the interest rate hikes without a major, damaging recession (soft) or will the policy push the economy into a nasty recession that badly harms company earnings (hard).
This issue won’t be settled for weeks or months and until it is, the pendulum will probably continue to swing back and forth between hope and fear. But barring a major macroeconomic surprise or an utterly disastrous turn of events in the earnings arena, the S&P 500 is likely going to remain quite range-bound, although within rather elastic guard-rails. The fact is that, as things stand, we do not know whether this bear market is about to come to an end or is setting itself up to take another nasty leg lower. Neither case can be ruled out and near-term volatility will be the most plausible result.
At this point, it feels as though the market is beginning to think that Wednesdays’ expected 0.25% rate hike (see THE WEEK’S UPCOMING CALENDAR, below) could be the last in the cycle and the long-awaited pause will come at the next meeting in March. Some of the more wide-eyed optimists even believe that we may get a hint to this effect from Fed Chair Jerome Powell’s press conference on Wednesday afternoon. Personally, I think this is a bit fanciful - but we’ll see.
Last week, the market did not, as was the case for much of last year, interpret strong economic data as being bad news because it might mean that the Fed won’t pause.
It was announced that Q4 2022 Gross Domestic Product (GDP) rose at an annual rate of 2.9%, a little higher than expected, following a 3.2% increase for the third quarter. As always on Wall Street, there were two ways of looking at the numbers.
The “glass is half-empty” case is there was good growth but for the wrong reasons as imports fell and inventory numbers were building at a time when supply chain issues were getting resolved, implying an increasingly more depressed and lower-spending American consumer.
Investors chose, however, to go down the “glass is half-full” route that what the GDP numbers actually showed was the US economy’s fierce resilience in the face of the long campaign of aggressive Fed rate hikes, which ultimately bolsters the soft landing case.
We also got the Fed’s absolute fave data point and its chosen proxy for inflation, Personal Consumption Expenditures (PCE), which rose 0.1% in December and was up just 5.0% from a year ago, down half a percentage point from the year-on-year rate of the month before. This was all roughly in line with economist estimates and considered a definite positive in the battle against inflation in the eyes of the Fed. At the same time, we also learned that the University of Michigan’s Consumer Sentiment Index is on the rise, boosting optimism about the economy.
Packaging all this data together, stocks had a generally strong week with just a few pockets of weakness (notably the Healthcare sector). Investors seemed very inclined last week to give most stocks the benefit of the doubt and see buying opportunities almost everywhere going into this week’s critical Fed meeting and interest rate announcement. But investors and their stocks can often be fickle friends, let’s see how things shake out on Wednesday.
OTHER NEWS ..
NYSE tech trouble .. The New York Stock Exchange (NYSE) suffered a severe technical glitch at the opening bell last Tuesday morning that caused wild unjustified price swings in the shares of more than 250 companies, leading to trading halts. The exchange added that some trades will be declared "null and void" as a result because they were erroneous under its rules. The NYSE said operations were said to be back to normal after about half an hour.
My broad advice to clients has always been to place trades only between 10:30am and 3pm ET and only on days when the S&P 500 is up or down by less than 2% on the day at that point. Not that this will always save you from technology glitches, but outside of these hours there’s always a greater potential for factors that are idiosyncratic to stock exchange participants on that day to be the principal determinant of prices rather than just market forces.
U-Turn Larry .. Former US Treasury Secretary Larry Summers, traditionally a big fan of aggressive interest rate hikes, joined Team Pivot last week when he surprised many by warning the Fed against signaling any more rate hikes after this week's monetary policy announcement, which, he said, could hurt already fragile economic growth.
Early skirmishes .. On Thursday, we saw the first sign of financial market skittishness re: the likely upcoming debt ceiling shit-show that I talked about in my report last week. Stocks dived briefly on news that Senate Majority Leader Chuck Schumer was discussing having to “protect the full faith and credit of the United States” in the face of rumblings from extremist senators that seem “disturbingly at ease with taking our economy hostage in exchange for gutting vital programs” like Social Security and Medicare.
Watch this space but, as I said last week, try your very best to ignore all this hysterical hot air when it comes to making changes to your portfolio.
UNDER THE HOOD ..
The S&P 500 and NASDAQ-100 are now both comfortably above their respective 200-day moving averages. That's a key level for market technicians that can now act as support for when things get softer in the future instead of a technical ceiling that the market kept hitting and backing away from, which is what it was before.
Markets deal in probabilities, not certainties and the technical probabilities favoring clearer skies ahead are no doubt increasing. For instance, the spread between Lowry’s Buying Power and Selling Pressure is at its most positive level in favor of the buyers in nearly two years. This tells us that the net effect on price of buyers is greater than the net effect from sellers.
However, one sign that is missing is a surge in volume as the rally begins. Pent up Demand should be wildly unleashed, yet net upside-volume has actually been falling since November. While volume around the holidays is always structurally lower, the trend has remained in place into January. This lack of power behind the gains could be indicative of just investor bottom-fishing rather than the rampant un-caging of the bulls.
Further evidence that bottom-fishing is what is going on rather than a full-on demand surge is the relative outperformance of the market’s most beaten down areas (stocks more than 30% below their one year highs). Real rallies are built on a base of the indiscriminate buying of anything that moves, not just the bargain basement stuff.
So the jury is still out and until that changes, we remain in a downward-trending environment from a technical perspective.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
Huge. It’s the only word that can accurately describe this week’s upcoming financial calendar.
About 20% of S&P 500 companies are scheduled to report in the next five days, including such monsters as Apple, Alphabet/Google, Meta/Facebook, Amazon, Exxon-Mobil, Pfizer, McDonalds, UPS, General Motors, Eli Lilly, T-Mobile US, Ford, Starbucks, Merck, Qualcomm, Caterpillar and Advanced Micro Devices.
However, even this illustrious list of earnings reports is overshadowed by the week’s main event; the conclusion of the two-day meeting of the Federal Reserve Open Market Committee on Wednesday. The overwhelming expectation is that the Federal Funds rate will be further raised by a quarter of a percentage point but, as always, the post-meeting press conference from Fed Chair Jerome Powell at around 2:30pm ET will be closely watched for hints about the Fed's next moves.
And, as if all that excitement wasn’t enough, Friday brings us the latest Jobs Report. Consensus calls for the creation of another 190k jobs in the US economy between December 2022 and January 2023, following a gain of 223k the previous month. The unemployment rate is expected to tick back up by a tenth of a point, to 3.6%.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months) ..
↑Bullish: 28% (31% the previous week)
→Neutral: 35% (36% the previous week)
↓Bearish: 37% (33% the previous week)
Net Bull-Bear spread .. ↓Bearish by 9 (Bearish by 2 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: Consumer Cyclical (two biggest holdings: Amazon, Tesla) - up 6.4% for the week
- Last week’s worst performing US sector: Healthcare (two biggest holdings: UnitedHealth Group, Johnson & Johnson) - down 0.8% for the week
- The NASDAQ-100 strongly outperformed the S&P 500
- US Markets soundly beat both Emerging Markets and Foreign Developed
- Large Cap did a little better than Mid and Small Cap
- Growth stocks performed a little better than Value stocks
- The proprietary Lowry's measure for US Market Buying Power is currently at 183 and rose by 6 points last week and that of US Market Selling Pressure is now at 113 and fell by 11 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 above its long term trend line. SPY ended the week 12.1% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, remains above both its 50-day and 90-day moving averages and has now moved above its long term trend line. QQQ ended the week 20.2% below its all-time high (11/19/2021).
The Lowry’s Percent of Stocks Above Their 30-Day Moving Average reading rose slightly from 51% to 54%.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 lower at 18.5. It remains well below its 50-day and 90-day moving averages and is also still far below its long term trend line.
ARTICLE OF THE WEEK ..
Josh Brown’s insight into how, after just three months, ChatGPT (see EXPLAINER: FINANCIAL TERM OF THE WEEK, below) is in many ways already everything that Bitcoin promised to be and has simply not delivered on for well over a decade now.
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) .
ChatGPT, the free chatbot released in late 2022 by artificial intelligence (AI) research company OpenAI, has taken the internet by storm. In its first months of existence, ChatGPT inspired users to imagine a host of use cases for the model, including using ChatGPT to negotiate parking tickets, make workout plans, and even create bedtime stories for children. Some artificial intelligence experts believe that ChatGPT could revolutionize both the way that humans interact with chatbots and AI more broadly.
What is Chat GPT? .. Put simply, ChatGPT is an AI model that engages in conversational dialogue. It is an example of a chatbot, akin to the automated chat services found on some companies’ customer service websites.3 It was developed by OpenAI, a tech research company dedicated to ensuring that artificial intelligence benefits all of humanity. The “GPT” in ChatGPT refers to “Generative Pre-training Transformer,” referring to the way that ChatGPT processes language.
What sets ChatGPT apart from chatbots over the last several decades, however, is that ChatGPT was trained using reinforcement learning from human feedback (RLHF). RLHF involves the use of human AI trainers and reward models to develop ChatGPT into a bot capable of challenging incorrect assumptions, answering follow-up questions, and admitting mistakes.
To put ChatGPT to the test, Investopedia asked it to “write a journalistic-style article explaining what ChatGPT is.” The bot responded that it was “designed to generate human-like text based on a given prompt or conversation.” It added that, because it is trained on a data set of human conversations, it can understand context and intent and is able to have more natural, intuitive conversations.
In its response to our prompt, ChatGPT said that its applications could include customer service bots, creation of content for social media or blogs, and translation of text from one language to another.
Benefits of ChatGPT .. As mentioned, there are numerous potential uses for ChatGPT. They range from more direct, chatbot-type functions to much more obscure applications, and it is likely that users will explore a host of other possible ways to utilize this technology in the future, including in search engines.
While chatbots have existed for many years, ChatGPT is viewed as a significant improvement on the intelligibility, fluidity, and thoroughness of prior models. One demonstration of the sophistication of ChatGPT provided by OpenAI includes a prompt that was designed to trick the bot: asking about when Christopher Columbus (supposedly) came to the United States in 2015. ChatGPT’s response easily avoided the trap, clarifying that while Columbus did not come to the U.S. in 2015, it can posit some of the ways he may have reacted to his visit if he had.
Limitations/Drawbacks .. OpenAI lists some of the limitations of ChatGPT as it currently exists in its presentation of the model. These include that ChatGPT sometimes writes coherent but incorrect statements, that it makes assumptions about ambiguous queries, and that the model tends to be excessively verbose, among similar concerns.
In the first weeks of its public release, ChatGPT made headlines for its alleged use among students in creating AI-written papers and assignments. Concerns about the misuse of ChatGPT for academic cheating grew large enough that a computer science student at Princeton University created an app designed to identify and expose writing created by the bot.
For some, ChatGPT poses additional and more serious risks. For instance, some analysts have predicted that the bot could be used to make malware and phishing attacks more sophisticated, or that hackers may utilize the technology to develop their own AI models that may be less well-controlled. As concerns about misinformation have proliferated, some are especially sensitive to the possibility that ChatGPT could be used to create and share convincing but misleading material of a political nature.
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