Market In a Snap! January 9th – January 13th, 2023

By: Dave Chenet

 CloseWeekly returnYTD return
    
S&P 5003,999.092.73%3.80%
Nasdaq Composite11,079.163.81%5.13%
Russell 2,0001,876.64.47%6.55%
Crude Oil80.002.05%-0.31%
US Treasury 10yr Yield3.51%  

Source: YCharts, Yahoo! finance

Market Recap

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.  The accommodative policies enacted in response to the COVID economic shutdown were quickly reversed as inflation proved less “transitory” than government officials had hoped.  As we turn the page to 2023, however, we enter the year with cautious optimism and focus on a few key areas:

  • Inflation & the Fed: The Federal Reserve was forced to dramatically tighten financial conditions throughout the course of last year to dampen the inflation that had arisen as a result of both fractured global supply chains and increased consumer demand on the back of fiscal stimulus.  Both Fed Funds rates and longer-term treasury rates increased substantially throughout the year, lowering bond prices and letting the air out of interest rate sensitive technology stocks.

Inflation, however, appears to have peaked.  This week gave us encouraging data that the pace of inflation is slowing.  While year-over-year CPI inflation remains high, the last six months has seen the growth of inflation fall to an annualized rate of 1.8% – a level that would signal the Federal Reserve tightening has had the intended effect. 

  • China reopening: China’s zero-covid policy has precluded an economic recovery in the world’s second largest economy, however, Beijing has begun to ease restrictions on travel and activity.  Simultaneously, credit conditions have been easing in China which will likely contribute to an uptick in economic growth and spillover to growth in other economies – notably the export-oriented economy of Germany.

In summary, while short-term challenges remain, the combination of lower stock prices reflecting current pessimism, a less aggressive Fed and a relatively strong US consumer may benefit asset prices in 2023 and beyond.

On a year-to-date basis, cyclical sectors (consumer discretionary, materials, real estate, etc) have been leading the markets higher with defensive sectors (consumer staples, health care, etc) lagging.  Regionally, Europe and Emerging Markets have lead US markets.


What We’re Reading:

NY Times: Tesla Cuts Prices Sharply as It Moves to Bolster Demand

FT: How do the Federal Reserve and ECB differ on tackling climate change?

Roosevelt Institute: The Causes of and Responses to Today’s Inflation

WSJ: US Cancer Death Rate Has Dropped by a Third Since 1991

Chart of the Week:

The S&P 500 fell 25% from its peak on October 12th of last year.  Using data from the 10 previous instances of 25%+ pullbacks since 1940, this has been an attractive long-term entry point for investors and has offered attractive subsequent returns. 

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.

Market In A Snap! December 12th – December 16th, 2022

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5003,852.36-2.08%-19.17%
Nasdaq Composite10,705.41-2.72%-31.57%
Russell 2,0001,763.42-1.85%-21.46%
Crude Oil$74.504.08%-1.26%
US Treasury 10yr Yield3.489%  

Source: Wall St. Journal

Market Recap

The Fed hiked rates by 50 basis points this week, bringing the rate up to 4.25% – 4.5%.  This rate hike cycle has the been the swiftest in decades, sending equity and fixed income markets materially lower year-to-date.  It seems like a broken record. Inflation is too high, and the Fed has taken away the punchbowl.  No more free money. No more asset purchases. No more cheap mortgage rates.  Undoing the massive stimulus that flooded the markets in 2020 and part of 2021 have been replaced by a restrictive stance, where money is more expensive and less plentiful. 

The result of this has been a slowing economy. 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.  The consumer price index for November also came in slightly lower (which is better) than projected. So, with the economic and inflation data softening, shouldn’t it be a clear sign for the Fed to step away from rate hikes and a hawkish stance?  You’d think, but no.   Why not?  The answer is multi-faceted.  One reason is employment. It’s still too strong.  Unemployment claims remain low, and there are still too many job openings.  The other reason is that one or two months of good inflation data isn’t enough to alter the Fed’s path.  They have said for months and months that they’ll need convincing evidence that inflation is clearly headed back towards 2%.  One or two months of declining rates isn’t enough.  What is ironic about this is that at beginning of the year all the economists and Wall Street strategists were arguing that the Fed was behind the curve. The Fed isn’t restricted enough.  Fast forward to now and these same experts are saying the Fed is “too” restrictive and that unnecessary damage to the economy will be the end result of the Fed’s current direction.

So, what do we know at this juncture?  At the very least, it’s clear that the effects of higher interest rates are taking a bite out of economic activity. Revenues are up in many industries but its from price increases, not volume increases. Many parts of corporate America are selling less stuff but at higher prices. Stocks have been in a bear market for most of 2022, with share losses coming from a decline in the earnings multiple. Call it the “P” Stocks decline because investors are less bullish. They want to pay less for that same dollar of earnings because they believe that earnings have stalled, or maybe declining…. or just not growing as fast as before.  So, heading into 2023, it’ll be all about earnings (the “E”).  Multiples on earnings typically decline “before” earnings actually decline.  It is likely that a recession happens in 2023. Earnings will likely decline. Stock prices will remain volatile.  At some point, hopefully in 2023, inflation will back under control and the Fed will be able to stop hiking rates.  Earnings will bottom at some point in 2023 or 2024 and the next bull market in stocks could resume.  It’s all a cycle.  Don’t forget that.

Market In A Snap! November 7th-November 11th, 2022

By: Jeff Anderson

 CloseWeekly returnYTD return
    
S&P 5003,992.935.9%-16.22%
Nasdaq Composite11,323.338.10%-27.62%
Russell 2,0001,882.744.60%-16.15%
Crude Oil$88.86-4.04%17.8%
US Treasury 10yr Yield3.842%  

Source: Wall St. Journal

Market Recap

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.  The Nasdaq Composite was up a whopping 7.35%.  Even the fixed income markets had a huge day, with the Bloomberg US Aggregate Bond Index gaining nearly 2%. That is a massive move in the credit markets.  As you can see from the chart above, all the major US indices are down for the year and still have a way to go.  It should be noted that we are still in a bear market and rallies (which are simply called bear-market rallies) are often more dramatic than rallies during a bull market.  One day doesn’t make a trend, but it goes to show you how sitting out of the market when you have a long-term time horizon can be costly to your returns.  We’ve cited on more than a few occasions how sitting on the sidelines for only a handful of days can have really hurt your returns.  Just think of Thursday’s crazy day.  If the long-term average annualized return for the S&P 500 is ~ 9 to 10%, missing a 6 or 7% return day can all but dash your hopes for the year.  Many of us want to time the market.  This should show you the perils of doing it wrong.  And, worse than that, if you did seem to time it right once, you may be emboldened to do it again…and again.  Eventually it will catch up to you. It is time “in” the market that matters most.  Granted, it also must include having a diversified portfolio that matches your time horizon.

We can’t forget to mention two other important news items. One, is the mid-term elections. It’s been a closer race than many thought. As of Friday, many races are still too close to call.  Odds are still in favor of the Republicans taking the House.  In the Senate, the Democrats have gained a seat and it’s coming down to the wire. If Republicans take both chambers, it will create gridlock which is normally favorable for markets. The other newsworthy note was that Ukrainian forces successfully pushed Russian troops out of Kherson, which was the only regional capital in the south of Ukraine that Moscow had seized.  The Ukrainian resolve has been impressive.  Hopefully, the conflict is closer to the end than the beginning.

https://www.wsj.com/articles/many-house-races-too-close-to-call-as-republicans-make-gains-11668162601?mod=us_lead_story

https://www.wsj.com/articles/ukrainian-forces-gain-on-kherson-as-russia-retreats-11668158517?mod=world_lead_story

Traditional Energy Companies are in the Green Energy Game:

Koch Industries, one the largest private companies in America, is getting into battery technology.  Many of us think of traditional energy companies as climate deniers or evil entities hell bent on destroying our planet in pursuit of profit.  I believe that, in the end, they are energy agnostic. They see where things are going. They want to be suppliers of energy in whatever form the market wants.  In the case of Koch’s investment in battery storage, its not for electric vehicles but rather for storing energy transmitted from wind and solar farms.  Both wind and solar can be intermittent. Having the ability to store energy in large batteries can go a long way to making renewable energy a dependable source for the US power grid. 

Image: wsj.com

https://www.wsj.com/articles/koch-teams-with-startup-to-build-giant-battery-factory-in-georgia-11668131957?mod=business_lead_pos4

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.