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Despite finishing the week on a softer note, markets continued their very strong start to the year. Despite trailing their tech counterparts in the NASDAQ, small-cap stocks (as measured by the Russell 2,000) posted their strongest start to the year since 1987.
US Markets rallied this week with all three major indices posting gains on the back of a better-than-expected Q4 ’22 GDP report and corporate earnings. On the economic data front, the initial estimate of 2022 Q4 growth was 2.9%, beating estimates and the PCE price index reported a 5% gain from December ’21 – slightly below expectations and the lowest reading since September 2021.
The broad stock market rallied on Friday to finish the week roughly unchanged. A strong end-of-week Initial Jobless Claims report combined with a declining Purchaser Price Index report offset the weak report in U.S. retail sales.
For our first market recap of 2023, we take a moment to both reflect on the year past and look forward to the year ahead. 2022 was a challenging year for investors; both the broad stock market and bond market finished in negative territory and a blended portfolio of 60% stocks and 40% bonds had its worst year since the 1930s.
We got more signs that the economy is softening, with the US manufacturing Purchasing Managers Index clocking in at 49. Why is 49 an important number? Anything below 50 signifies a shrinking of the manufacturing economy.
We have been conditioned to believe that Apple will always be “Apple”. No company has every dominated corporate America indefinitely. Apple will likely remain one of the larger Corporations in America for a while, but don’t expect the same share price growth that we’ve witnessed over the past 15 years.
After an explosive week in the markets last week, it was no surprise to see the markets take a bit of a breather this week. We did get some more encouraging inflation data this week, with the US Core Producer Price Index dropping below 7% for the month of October.
The market finally got the inflation data it so desperately wanted on Thursday. The Consumer Price Index (“CPI”) clocked in at 7.75% annualized for October. It was a disappointing 8.2% the previous month. Markets participants witnessed the best day for equities since April 2020.
As you have likely asked yourself with previous weekly updates, what does this have to do with investing!? Well, truth be told, not much really. Not directly anyway. Like baseball, investing is a marathon, not a sprint. Baseball owners hire general managers to run the team.
It might shock some readers to read this but the ten largest companies in American today will not likely be the ten largest in a decade from now. Look at Facebook. Or Netflix. Both were massive disrupters in their industries. And investors made boatloads of cash.
Equity markets capped off a strong week Friday by rallying immediately after the Wall Street Journal reported that there might be some deliberation amongst Fed officials about the path of interest rates after the expected 75 basis point hike at the next Federal Reserve Open Market Committee decision on November 2nd.
Baseball, like investing, is dependent on statistical analysis. Building a team is like building a portfolio. You can’t play without a pitcher, or a catcher, or first basemen. You need 9 players on the field.
The labor market isn’t slowing enough, and people are leaving the job market, decreasing the labor participation rate again. Its just not what traders wanted. As a result, the dramatic rise in markets on Monday and Tuesday were almost erased. We’ve witnessed this whipsaw action for months now.
Hurricane Ian made landfall on the west coast of Florida this week causing massive damage to the state. The storm surge and ensuing rainfall from Ian as it made its way across central Florida caused upwards of $40 billion in insured losses according to early estimates reported in the Wall St. Journal. It could shave off 0.3 percentage points off the country’s Q3 economic growth.
Major US equity indices sold off hard this week, with the Dow Jones Industrial Average putting in a new low for the year. It hasn’t been just the US. Global growth fears that have roiled markets across the globe.
It was a rough week for investors, as the major indices gave back all their gains from the prior week. Why? Traders (not investors) front ran this week’s inflation data, hoping for a much softer number that would take the Fed’s foot off the rate hike pedal.
Investors are engaged in a game of tug-of-war. What are they fighting about? Fear. Inflation fears and recession fears. Each piece of economic data seems like the bell starting the next round. Employment data for August was released Friday, showing 315,000 jobs being added, down from a revised 526,000 jobs in July.
The markets took an abrupt change Friday morning after Fed Governor Jay Powell delivered his speech at the Jackson Hole, Wyoming economic symposium. Consensus coming into the meeting was that the heavy lifting on rate hikes was behind us and the old dovish tone would return from Mr. Powell. It was not to be.
The Fed wants investors to know one thing.: Inflation must come down, and rate hikes will continue until that happens, even if it leads to a softening economy. Where interest rates have had a major effect is in real estate.
Imagine you hopped into a time machine and landed in 2015. Now, imagine someone telling you that the inflation rate in August of 2022 was 8.5%! And then, someone told you the market went “up” after the news.
There are a lot of shattered crystal balls on Wall Street! The unemployment rate is back to its pre-pandemic lows of 3.5% and we have finally clawed back all those lost jobs.
This week was action-packed, with more than 170 companies reporting earnings, in addition to a slew of economic data. We can safely assume at this point those corporate earnings, while still relatively strong overall, are slowing.
But the narrative seems to be shifting away from inflation fears towards recession fears, even though the two are linked. High prices for food and gasoline alone are taking even more of a cut from people’s wallets.
As the economy opened, the consumer started spending money on trips, restaurants and other experiences. As inflation picked up and savings were drawn down, spending started to slow.
Thursday marked the end of the first half to 2022 and I, for one, will be glad to put it in the rearview mirror. It was the worst first half in 52 years.
Historically, consumer sentiment peaks with market peaks and bottoms around market bottoms. It doesn’t really lead, nor lag the market. It’s more of a coincident indicator.
School is out and those who are planning a summer vacation away from home, buckle up; it’s going to cost a lot more than last year. Inflation is running rampant.
Food increased 10.1%. Energy was up a whopping 34.6% (gasoline alone was up 48.7%). New vehicles were up 12% while used vehicles cost 16.1% more than last year. Shelter (i.e., “rents”) were only up 5%.
In California, the current average is $6.246 vs $4.20 a year ago giving us the dubious distinction of being the most expensive state, by far, to top up the tank. (1)
Last week’s “retail Armageddon” was followed by good news coming out of retailers who reported this week. Per Bloomberg.com (2), consumers are dipping into their savings to keep spending.
