February 1st, 2023
Earnings down, recession imminent. And, stocks up?
We are in the midst of arguably the most widely forecasted “recession” in history; and it may never arrive!
My first thought? The crowd is lost – the data says otherwise.
We certainly paid the price in 2022 for an – arguably – unavoidable windfall of spending. From the $5 trillion in fiscal spending via the CARES Act, the American Rescue Plan Act, and the (questionably named) Inflation Reduction Act. Then, of course, the billions handed out via PPP & SBA loans. In addition to spending, inflationary fires were fanned by the war in Ukraine, China shutdowns, supply chain issues, oil price shocks and last but certainly not least: corporate greed. Nothing in life is free, and we are now paying the tab for the stimulus measures enacted to weather the pandemic storm.
The Fed has made its intentions clear: combat inflation at whatever cost necessary. Well, the cost is 3-million jobs to be exact. Debt has become too expensive to take on for many – as the Fed intended – and the layoffs have been robust.
Inflation persists. Yet the data is coming back better, and better, every month. Earnings and GDP aren’t so bad either. Investors seem to be finally breathing a collective sigh of relief after what was an epic fall from grace for our largest wealth creators – tech giants – as well as the systemic contraction across the entire stock market.
I expect that inflation will continue to trend down in 2023, although getting to the Fed’s ideal 2% target is a lofty goal. History tells us that a strong bounce-back year is common following double-digit annual declines. If the Fed remains flexible and allows the data to catch up, 2023 could surprise the skeptics with stellar returns for the investors who adopt a similarly agile and data-driven, investing approach.
Below is your AllOneWealth Market & Economic Update by the numbers.
Interested in learning more? Schedule a call with me HERE.
Warmly,
Mark S Sauer
Market Update
Global Equities: Inflation data, earnings and a new found positive market sentiment has resulted in the S&P 500 up 6.4% for the month of January. The Dow Jones Industrial Average gained 2.9% while the Nasdaq led the major domestic indices with an 11% gain for the month. As of close of market today (2/1/23), the Nasdaq is now up 14.3% for the year. Emerging Markets were up 8.3%.
Economic Update
Tough Talk from the Fed: The Fed professes to be data-driven, but so far, the data isn’t swaying its resolve to persist in hiking rates. Various Fed members publicly commented on inflation and rate hikes, with St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester representing the hawkish contingent and insisting rates need to be hiked well above 5%. Neither Bullard nor Mester vote on policy in 2023. The market is anticipating a downshift to a mere 25-basis point hike in February, sentiment that was supported by Philadelphia Fed President Patrick Harker and Dallas Fed President Lorrie Logan, both voting members in 2023. Still, no Fed member expects rate cuts in 2023, in contrast to market expectation that the Fed will be forced to pivot before year’s end.
Charts of the Month
Nasdaq
Our first chart of the month is a weekly view of the Nasdaq Composite Index finding itself in a much different positions than in last week’s newsletter. The Nasdaq is up 11% year-to-date. Blasting its way through a huge supply and demand level at 1200 (green line) and now attempting to break, and hold, above the 50-week moving average (blue line). The 50-week moving average is a huge line in the sand – getting back above this moving average could indicate a change in trend. A great sign for investors in 2023.
PCE
Our next chart shows the annual rate of the Personal Consumption Expenditures (PCE) and Core PCE, which strips out food and energy prices. PCE has been trending lower for six consecutive months and Core PCE has been showing improvement for four months. The Fed will undoubtedly persist in hiking interest rates next week, and likely again in March, but if this downtrend continues, it could be enough to sway the Fed into pausing at its May meeting. The rally to start 2023 reflects this optimism that inflation has, in fact, already peaked and that the Fed will soon be forced to acknowledge what the bond market is seeing.
Emerging Markets
Our final chart is a three-month look at the iShares MSCI Emerging Markets ETF (ticker EEM), plotted against its 50-day (blue line) and 200-day (red line) moving averages. Emerging markets are performing very well year-to-date, up nearly 9.4% while the S&P is up less than 7.4% (as of 2/1/2023). Despite the strong start to 2023, Emerging markets have lagged the S&P by roughly 40% since the market lows of the pandemic, giving EEM ample room to run as China attempts to shift from lockdowns to an open economy – an undertaking proving to be quite challenging but the market seems to be optimistic thus far. The setup is bullish from a technical perspective as well, with a golden cross of the 50-day over the 200-day about to occur.
