Weekly Commentary (1/30/23) – Markets Move Higher on the Week to Extend 2023 Rally

Equity markets finished higher over the week as investors seem unimpressed by a general trend of contracting earnings and seem more influenced by signals that the economy is slowing in an orderly manner. In other words, equity prices appear to be discounting a “soft landing” for the US economy as the Fed’s rate cuts slow the engines. It is also likely that the more bearish investors are hedging their bets and rotating some capital to equities, in case their macro-economic and near-term market forecasts are wrong.

For the week, the DJIA added 1.81% while the S&P 500 lifted 2.48%. The tech-heavy Nasdaq popped 4.32%. The MSCI EAFE Index moved higher by 1.40% and emerging market equities (MSCI EM) added 1.44%. Small company stocks, represented by the Russell 2000, gained 2.37%. Fixed income, represented by the Bloomberg/Barclays Aggregate, inched higher by 0.02% for the week as yields were generally unchanged. As a result, the 10 YR US Treasury closed at a yield of 3.52% (up 4 bps from the previous week’s closing yield of ~3.48%) as investors continue to be drawn to decent yields and the perceived safety of treasuries. Gold prices closed at $1,923/oz – down 0.15%. Oil prices moved slightly lower by 0.37% to $81.01.

Last week the index of leading economic indicators was down 1.0% versus the consensus of down 0.7%, the Purchasing Mangers Index (PMI) was 46.8, and anything less than 50 is generally a signal of a contracting economy. The Personal Consumption Expenditures Index (PCE) for December was 5.0% which is down from 5.5% and 6.1% for November and October, respectively. The PCE is the Fed’s preferred measure of inflation. Housing had a lift over consensus projections as pending home sales were up 2.5% versus -1.0% and new home sales were 616k versus 615k forecast.

Though some of the signals are mixed. For now, investors appear more interested in how the end game of the Fed’s efforts to fight inflation plays out than they are interested in the fact that the economy is showing clear signs of slowing and perhaps contracting. The US economy did grow 2.9% in Q4 ’22, down from 3.3% in Q3 and eternally optimistic equity investors extended the 2023 New Year rally. With 28% of S&P 500 companies having reported for Q4, the “blended EPS” (combines reported with reaming estimates) indicates the earnings have declined ~5.1%. Multiples are rising while earnings are shrinking. Meanwhile a wave of Tech layoffs was announced, yet labor remains tight, so far, with jobless claims coming in at 186,000 versus a 205,000 estimate.

The first Federal Open Markets Committee (FOMC) meeting of 2023 will be held this week. The market is signaling it expects a 25-bps increase of the Discount Rate. More important will be the Fed’s language in announcing this rate and the inferences the market takes from its messaging. We expect the Fed will emphasize the “higher for longer” messaging, but we do not expect the market to believe that, immediately.

Patience and focus on the long-term results will be rewarded.

“Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.” – Charlie Munger