• Stocks pulled back as inflation data remained elevated, potentially causing the Federal Reserve to tighten more than was initially anticipated.  This battle over when the Fed will pause will most likely continue throughout the first half of 2023 which, in turn, should keep a lid on stock prices.  However, we believe that at some point over the next two to three quarters, investors will look past the current environment and toward one during which the Fed can be less restrictive in terms of monetary policy.  Sounding like a broken record from prior weeks, we will reiterate that “after the run-up in the stock market since the beginning of 2023 some profit-taking is in order.  However, we will watch to see if this transition has some legs.  At the present time, a well-diversified portfolio, including some international holdings and bonds is in order.  We noted last week that investors can expect perhaps a pause, but no pivot from the Fed.  After the economic data referenced both below, a pivot over the near-term is certainly out of the question.  Even a pause becomes less likely as is evidenced by the preponderance of economists expecting the Fed Funds Rate to now peak at 5.50% rather than 5.25%.   The Open Market Committee of the Federal Reserve (FOMC) will meet again March 21-22.  To us, it’s all about the Fed’s intended glide path to 2% inflation, which at the present is unknown to the public.  How much of a slowdown is the Fed willing to accept to get to two percent?  Answer that and you will have the slope of the glide path.
  • A consolidation is in order.  Given the run-up off the mid-October lows and after a strong January, perhaps a breather is in order.  Given the recent bear market, that may send tremors through the minds of investors.  However, historically consolidations are healthy for bull markets as they provide dry powder to move higher.
  • Treasury yields move higher.  As a result of the strong economic data, the yield curve on U.S. Treasuries lifted across the board with the one-year bill closing at 5.05%.  At the present, for many of our clients with permanent fixed income needs, we are laddering bonds to avoid renewal risk or the risk that upon maturity of current holdings, yields will be lower.
  • Home Depot misses on revenue beats on earnings.  Blaming slumping lumber prices (thankfully for the consumer), for the first time since 2019, earnings from home improvement giant Home Depot came in slightly below the consensus estimate while quarterly earnings rose to $3.30/share, $0.02 above Wall Street forecasts.  CFO Richard McPhail expects continued headwinds, noting that “During COVID, we saw a shift into goods.  Over the last really almost two years, we’ve seen a gradual shift back away from goods into services and we think our market has reflected that and we think that that dynamic could put some pressure on our market.  It is worthy of noting that Home Depot competitor, Lowe’s is due to report earnings this coming week.
  • Earnings from Nvidia (NVDA) surpass estimates.  Chip giant, Nvidia, rose this past week as the company beat on both the revenue and earnings per share estimates.  Revenue rose to $6.05 billion as compared to an estimate of $6.0 billion while earnings rose to $0.88 per share compared with the consensus of $0.81.  Data center revenue, which includes AI (Artificial Intelligence), rose 11% on a year-over-year basis.  Along with Nvidia, the share price of other AI stocks such as SoundHound (SOUN) and C3.ai, Inc. (AI) have risen sharply year-to-date as investors see AI as the next opportunity for growth in the technology sector. Given the tenor of the market, we would certainly wait for a pullback in NVDA.
  • North American Rig Counts Dip Slightly.  Over the past few weeks, rig counts in North America have held in at around 750.  At this level, enough oil is being pumped to support the market as well as the price of crude.  We will see if the continued opening of the Chinese economy along with the eventual replenishing of the Strategic Petroleum Reserve (SPR) tips that balance.
  • Inflation remains elevated. The closely watched personal consumption expenditures price index (see below) rose 0.6% during the month of January and has risen by 5.4% over the past twelve months.  This compares to increases of 0.2% and 5.3% during December and raises the concern that we have and is certainly shared by the Federal Reserve that, although inflation in the goods sector has come down meaningfully, inflation in the service sector will be more difficult to break.
  • The minutes of the January meeting of the Federal Reserve’s Open Market Committee (FOMC) were released this past week and although almost all voting members voted for at least an 0.25% increase in the Federal Funds Rate, a few voted for an increase of 0.50%.
  • Upcoming Economic Reports scheduled to be released this week include – on Monday, January Orders for Durable Goods and January Pending Home Sales; on Tuesday, January Wholesale Inventories and February Consumer Confidence; on Thursday, Fourth Quarter Productivity along with the Weekly Report of Initial Claims for Unemployment Insurance.
  • As we turn toward the close of earnings season, the list of companies scheduled to report earnings are dwindling.  That said, some notables include Occidental Petroleum (OXY), Monster Beverage (MNST), Autozone (AZO), Target (TGT), Lowe’s (LOW), Salesforce (CRM), Broadcom (AVGO), Costco (COST), Vmware (VMW) and Anheuser Busch (BUD)..

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