· The move in stocks to the upside this past week from near-term support is further confirmation of the likelihood that the market is supported to the downside by reasonable valuations and adequate corporate revenue and earnings projections but also limited to the upside by those same valuations and economic activity not strong enough to generate “escape velocity” given the alternatives in fixed income. This tug of war will ultimately be settled by how entrenched the Fed believes inflation has become in the U.S./global economy as well as the course of action it believes necessary to quell that inflation. It could one of those time frames where investors bide their time as the market digests the returns over the past decade (obviously also including last year), eventually shaking out the weak, impatient hands before climbing again.
We will stick with our belief that despite the rebound this past week “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.’”
· Important enough to restate. Investors can expect perhaps a pause, but no pivot from the Fed. 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.
· February NonFarm Payroll Report, front and center. This Friday, the Department of Labor will announce the number of jobs that were created during February. After a strong January, during which payrolls swelled by 517,000, the consensus estimate is for another 200,000. Although investors will closely watch this number to gauge the strength of the labor market, we will also be tuned in to the revisions, if any, from the prior two months.
· Warren Buffett responding to the attack by some politicians on public companies repurchasing their own stock. “When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongues demagogue (characters that are not mutually exclusive).”
· This is not your 2008 Mortgage Market. Perhaps the Fed is having a difficult time slowing the economy, in part because it’s rate hikes are not impacting current mortgage holders as 88% of them hold fixed-rate mortgages which is very unlike the housing crisis of 2008 when approximately 80% of subprime mortgages issued were Adjustable Rate Mortgages.
· At least in regard to Shipping, the Supply Chain Has Recovered. According to WCI, Bloomberg and the Apollo Chief Economist Torsten Slok, after peaking at more than $16,000 the price of transporting a 40-foot container from China to the United States is back at pre-pandemic levels or approximately $2,000.
· For a number of reasons, we are glad February is over. According to Bespoke, “since 1945, February has been the S&P 500’s second worst performing month in terms of average monthly returns (-0.18%). Bulls tend to get back on track in March, though, as the average monthly return has been a gain of 1.13% with gains 64% of the time.”
· Investor Sentiment Remains Bearish. According to the American Association of Individual Investors “bearish sentiment, expectations that stock prices will fall over the next six months, jumped 6.2 percentage points to 44.8%. Pessimism is at an unusually high level for the first time since January5, 2023, and is at its highest level since December 19, 2022 (47.6%). Additionally, bearish sentiment is above its historical average of 31.0% for the 62nd time out of the past 67 weeks.” It is important to note that sentiment is a contrarian indicator.
· Upcoming Economic Reports scheduled to be released this week include – on Monday, January Factory Orders; on Tuesday, January Consumer Credit; on Wednesday, the U.S. Trade Balance and the Job Opening and Labor Turnover Survey (JOLTS); on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance; and on Friday, the NonFarm Payroll Report for February.
· As we turn toward the close of earnings season, the list of companies scheduled to report earnings are dwindling. That said, some notables include Dick’s Sporting Goods (DKS), Keycorp (KEY), Crowdstrike (CRWD), Adidas (ADDYY), Campbell Soup (CBP), Docusign (DOCU), Toro (TTC), BJ’s Wholesale Club (BJ), Oracle (ORCL), Ulta Beauty (ULTA) and JD.com (JD).