· The broader market digested gains made during the first couple weeks of the year as investors mulled the potential implication of declining bond yields (see rates below). The Dow Jones Industrial Average fell the first three trading days of this holiday shortened weeks before rebounding Friday. In our opinion it is time for investors to shed the belief that they will spot the perfect time to invest and begin to look for longer-term opportunities.
· Big tech continues to lay off workers. Microsoft and Google, following steps taken by Meta Platforms, Twitter and Amazon, laid off 10,000 and 12,000, respectively. All told, since the beginning of 2022, there have been over 225,000 workers laid off in the technology sector. Tech companies were in a bind for workers during COVID as E-commerce grew 44% in 2020, with consumers spending over $861 billion. Although a minor percent of their total labor force, the layoffs are nonetheless a sure sign that the increased demand during COVID was more of a pull forward rather than an increase in permanent demand.
· China’s Population Declines for the first time since 1961. The country’s National Bureau of Statistics reported a drop of roughly 850,000 amidst a population of approximately 1.410 billion. The decline was the first since the Great Famine which last two years and killed millions. The decline is a concern for Chinese economists in regard to the ability of the country to field enough laborers to satisfy a growing economy, one that has historically relied on a growing labor force rather than productivity growth. The drop in population also corresponds with an aging society which will increase the burden on the Chinese government in regard to health care and pension costs.
· Blame the labor shortage in the United States on long-term COVID. At present, according to the most recent Job Opening and Labor Turnover Survey (JOLTS) Report, at 10.500 million, there are more than four million more jobs available than Americans looking for jobs. In June 2022, the Census Bureau found that there were around sixteen million Americans of working age (18-65) that have long COVID and of those, two to four million are out of work as a result. The fear is that those individuals will never return to the labor force. Perhaps it is time that America solves its immigration problem.
· Goldman Sachs posted their worst quarterly earnings report in a decade. Earnings per share came in at $3.323 compared with estimates of $5.48 which represents a 66% y/y. Company officials blamed the decline on an 11% increase in operating expenses along with falling revenues. The reports comes soon after Goldman announced a reduction in their workforce of around 6% or 3,200 workers.
· After a tough 2022, thus far during 2023 bond investors are having a field day as thus far the iShares Core US Aggregate Bond ETF (AGG) has risen 3.20% while the iShares 20+ Year Treasury Bond ETF (TLT) has risen 6.67%. Before we get too excited, keep in mind that the two funds fell by 13.02% and 31.24% during 2022, respectively.
· Fed officials continue to talk tough on rates. This past week during a speech in Chicago Federal Reserve Governor Lael Brainard state that “even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2% on a sustained basis.”
· At this time, we believe calendar year 2023 will be one during which the Fed pauses, but does not pivot as it will move likely remain hawkish for longer than expected. Consider the recent statement by Atlanta Federal Reserve President Raphael Bostic, “fair to say that the Fed is willing to overshoot.”
· Is the year-to-date recovery in beaten up sectors of the market merely a rebound from tax loss selling or the start of something longer lasting? On balance, we believe so. However, we also believe that gains from this point will be disbursed over a much wider number of sectors as compared to 2022 (energy) or the previous bull cycle (growth) that lasted from 2009-2021.
· Upcoming Economic Reports scheduled to be released this week include – on Monday, the December Index of Leading Economic Indicators (LEI) from the Conference Board; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance, December Orders for Durable Goods, December Wholesale Inventories, December New Home Sales and the Initial Report on Q4 Gross Domestic Product (GDP); and on Friday, December Personal Income and Spending along with the Final Look from the University of Michigan at January Consumer Sentiment.
· The earnings beat goes on and as of today, they have been satisfactory relative to expectations. However, over the next couple of weeks, the market leaders will report and also provide their outlook for the upcoming quarter(s). Companies reporting this coming week include Microsoft (MSFT), 3M (MMM), Danaher (DHR), General Electric (GE), Johnson & Johnson (JNJ), Verizon (VZ), Texas Instruments (TXN), Raytheon (RTX), Boeing (BA), Union Pacific (UNP), AT&T (T), IBM (IBM), Nextera (NEE), Abbot Laboratories (ABT), Tesla (TSLA), Mastercard (MA), Comcast (CMCSA), LVMH (LVMUY), Visa (V), SAP (SAP) and Chevron (CVX).
· On the economic front…
o (Wednesday) Wholesale Inflation during December as measured by the Producer Price Index (PPI) showed a month-over-month drop of 0.5%, pushed lower by a 7.9% (9.1% y/y) decline in overall energy prices, including a 13.4% decline in the cost of gasoline. Over the past year the PPI has risen 6.5%, its lowest level since March 2021 and down from a peak rate of 11.7% during March 2022. Excluding food and energy, the so-called core PPI rose 0.1% during December, by 0.3% in November and by 4.6% y/y.
o (Wednesday) December Retail Sales fell 1.1% (6.0% y/y), the largest monthly drop in 2022 and, along with the inflation report immediately above, a sign that the sharp rate hikes initiated by the Fed during 2022 are working. As part of overall Retail Sales, spending on Motor Vehicles & Parts fell 1.2% (1.8% y/y). Retail Sales at Gasoline Stations fell 4.6% during December (5.2% y/y) as gasoline prices fell while Restaurant & Drinking Place Sales dropped 1.0% during December (12.1% y/y), after slipping 0.1% in November.
o (Wednesday) Industrial Production, a measure of the strength of the manufacturing, factory and utility sectors, fell 0.7% in December (1.6% y/y), this after slipping 0.6% during November. Capacity Utilization fell to 78.8% in December as compared to 79.4% in November, an indication of slowing economic growth. Manufacturing Capacity fell to 77.5% during December as compared to 78.5% in November and versus 78.6% one year prior.
o (Thursday) Housing Starts slipped 1.36% or 19,000 to a Seasonally Adjusted Annualized Rate (SAAR) of 1.382 million during December as compared to 1.401 million in November (-21.8% y/y). Single-family housing starts rose 11.26% or 92,000 to 909,000 (-25.0% y/y) while multi-family housing starts fell 18.91% to 463,000 in December compared to 571,000 one month prior (-16.3% y/y). Building Permits, an indicator of future stars, fell 1.55% to 1.330 million (-29.85% y/y) and are now below total housing starts.
o (Thursday) Initial Claims for Unemployment Benefits for the week ended January 14 fell 15,000 to 190,000, far below the consensus estimate, which in turn pushed the four-week rolling average down 6,500 to 206,000. Continuing claims for the weekn ending January 7th rose 17,000 to 1.647 million.
o (Friday) According to data released by the National Association of Realtors (NAR), Sales of Existing Homes fell for the 11th consecutive month, dropping 1.5% during December to a Seasonally Adjusted Annualized Rate (SAAR) of 4.020 million units from 4.090 million units during November and by 34.0% over the past twelve months, a sure sign that higher interest rates have severely eaten into demand for housing. According to the NAR Chief Economist Lawrence Yun, “December was another difficult month for buyers, who continue to face limited inventory and high mortgage rates.” According to the report, “total housing inventory registered at the end of December was 970,000 units, which was down 13.4% form November but up 10.2% from one year ago (880,000. Unsold inventory sits at a 2.9 month supply at the current sales price, down from 3.3 months in November, but up from 1.7 months in December 2021. The median existing home price for all housing types in December was $366,900, an increase of 2.3% from December 2021 ($358,800) as prices rose in all regions. This marks the 130 consecutive months of year-over-year increases, the longest-running streak on record.”