State of the markets - Dec 5th 2022

Markets: What I am watching and doing in the markets this week

There are only 19 trading days left in 2022 (including two 1/2 days). After last week’s less hawkish comments from Chair Powell (more details below), the bulls are rooting for a year-end Santa rally. I happen to be in the bullish camp for the short term.

The next couple of weeks typically also include the strongest corporate buy back period of the year. While retail investors are strategically harvesting tax-losses by selling loser positions, fund managers are window-dressing their portfolios and year-end reports by buying the stronger stocks. And, lets not forget the dreaded quarterly triple witching next Friday Dec 16th.

So the tug of war, push and pull forces continue to move this market in multiple directions, especially when we are close to being done with new earnings reports.

Current state

The upward trend since the lows of mid-Oct continues along with a rising RSI and a bullish oscillator. The SP 500 is above all it’s major moving averages and these MAs will likely provide bottoming support to the index.

Trading volumes continue to be thin. When market actvity is low as such, we tend to experience higher volatility (upside or downside).

Sentiment

Wowzer! The F&G index is now in extreme greed territory. It has done a full 180 over the past year. FOMU (fear of materially underperforming) continues to build and when this pressure cooker blows, the market could find itself going higher faster and furiously. This is one of the risks that I am watching.

Call to Put ratio

Minor shifts in the put to call ratios from last week. Generally more bullish behavior in the equity and index ratios, although bearishness on bonds seems to have increased by over 20%. I find that interesting and worth keeping an eye on.

Other indicators

• US $DXY - The US$ is at it’s lowest levels since July 2022 and it continues to trend lower

• Oil - The average cost of regular unleaded gasoline fell below $3.42/gallon, about the lowest since the Russian invasion of Ukraine in February

• Copper - The industrial metal rose about 7.5% over the past week and by 11% in Nov, after 7 consecutive months losses. Investors are betting that manufacturing will pick up in China due easing of COVID restrictions and lockdowns. China is the world’s largest consumer of copper, however we should note that they are pretty good about buying the lows in the metal

Last week

Here are the key business updates that stood out to me last week:

GDP

US Q3 GDP increased by a 2.9% annual rate, higher than the 2.7% expected. This was after a higher revision from the initial 2.6% reported, showing the economy is stronger than previously expected. There seems to be a bit of noise in these numbers due to shifting inventory and trade numbers. Excluding the more volatile categories, growth was actually quite docile and going forward, I am expecting lower GDP numbers for the next 3-4 quarters.

Inflation

Personal consumption expenditure (PCE), the US Federal Reserve’s preferred inflation index, rose 6%yoy through October. This was down from 6.3% in Sept. The core PCE index, which strips out food and energy costs, rose 5%yoy, about the same as it’s been for most of 2022.

Fun fact: Prices for chicken breasts in the U.S. have dropped about 70% since early June. Wings and tenders have gotten cheaper, too, as poultry companies increased production and demand from restaurants and supermarkets has remained flat.

EU inflation came in at 10%, which was lower than the previous month’s 10.6%. The drop was mostly due to lower energy prices. EU central banks have been signaling continued rate hikes as inflation is due to ease only in H2 2023.

US Fed

In a speech last week, Chair Powell confirmed the following:

• The Fed will raise interest rates by 0.5% at its Dec 14 meeting

• The Fed will moderate the pace of its interest rate increases going forward

• The peak for the Fed’s benchmark interest rate will be “somewhat higher” than estimated in September (which was 4.6% for 2023). The futures market is expecting rates to peak at about 5% in Q2 2023

Powell said that an economic soft landing is “very plausible”, but not easy. Markets read his comments as much less hawkish than his previous public appearance and they rallied hard last week.

Manufacturing

• Chicago purchasing managers index (Chicago PMI), dropped to 37.2 in Oct, from 45.2 in Sept. Anything below 50 represents a contraction in activity and any reading below 40 has coincided with a recession

• Institute for Supply Management's manufacturing index (ISM) posted a Nov reading of 49%, lower than the estimated 49.8%. This was also 1.2% lower than Oct and the lowest since May 2020.

• Dallas manufacturing index report reported a steep drop from 6.0 last month to 0.8 now. It usually averages around 10.8. Order volumes are down. There is less panic pre-ordering and buying. Inventories are declining and lead times for new orders are becoming shorter.

Earnings

• ASAN - weaker forecast due to macro pressures on enterprise spend

• CRM - higher Q3 revenue but guided Q4 lower with co-CEO leaving

• CRWD - market over-reaction, imo, to percieved slight slowdown in forward revenues

• HPE - mixed report with quarterly loss and upbeat forward outlook

• INTU - beat on revenues and earnings; Quickbooks business is healthy, mostly used by SMB

• MRVL - sales and earnings fell short of estimates, weaker forward guidance due to inventory issues

• OKTA - raised forward guidance

• PATH - raised Q4 guidance

• SNOW - beat revenue expectations; lower than expected Q4 forecast

• SPLK - Q3 beat expectations with improved sales and cash flow and raised forward guidance

• WDAY - higher subscription revenue and better forward guidance

• ZS - beat expectations, but muted guidance due to longer deal cycles

Labor

We got lots of jobs related updates last week, including:

• ADP reported that private companies added just 127,000 positions for the month, well below the 190,000 consensus estimate. This was the smallest net addition in almost two years and it signaled that the job market could be cooling. It was also a major drop from the Oct 239,000 number

• The Labor Department reported that job openings fell to 10.33M positions in Oct, which was down from 10.69M in Sept and below the 10.4M estimate.

• There are now 1.7 job openings per available, unhired worker

• The labor force participation rate continued to tick lower to 62.1% from 62.2%, well below the pre-pandemic level of 63.4%

• U.S. Bureau of Labor Statistics reported 263,000 jobs were added in Nov. Oct was revised +23,000 to 284,000 and September was revised -46,000 to 269,000 for a net of +23,000 jobs

• Jobless claims for the week ending Nov. 26 was smaller than expected, according to the Department of Labor. There were 225,000 claims of unemployment, below estimate of 235,000 and lower than the prior week’s 240,000. That means fewer Americans than the week before are without jobs. That can also indicate that the labor market is healthier than anticipated with less Americans reportedly out of work

• The US unemployment rate held steady at 3.7%

• Average hourly rates were up 0.6%mom and up 5.1%yoy…this was the biggest increase since Jan. Both these came in higher than expected, signifying that labor rates are still rising and could contribute to more inflation

• Meanwhile, layoffs continue…mostly in tech, including Doordash 14% of its workforce 1,250 jobs, Kraken crypto exchange 1,100 jobs.

Real estate

Pending home sales (signed contracts on existing homes) fell 4.6% in Oct, according to the National Association of Realtors. This was the fifth consecutive drop in as many months.

Crypto

India's central bank is launching a retail pilot of its CBDC...a digital rupee. Digital rupee tokens will be issued in the same denominations as paper currency or coins and users can transact with merchants or other users through a digital wallet issued by participating banks. If the 1.4B people in India embrace this CBDC, it could accelerate similar efforts by other central banks.

Consumers

• The 5-day holiday shopping period saw $35.4B spent by consumers online. That included $9B 2.3%yoy in Black Friday and and $11.3B 5.3%yoy in Cyber Monday sales

• COST and AMZN, both, reported slowing sales in Nov compared to Oct

• The Conference Board’s Consumer Confidence Index® decreased in Nov to 100.2, down from Oct’s 102.2 reading

• Consumers are pessimistic about the economy with 26.7% (up from 24%) saying that business conditions are "bad"

• Consumers' assessment of the labor market was favorable with 45.8% saying jobs were "plentiful," up from 44.8%

China

China has eased some COVID rules in the face of continued protests against the COVID restrictions as well as other political issues. China said it would bolster vaccination among senior citizens (over age 80). The govt is cracking down on demonstrations. Meanwhile the FXI China index ETF keeps rising mostly on speculation of re-opening soon.

Apple

There are growing concerns about iPhone Pro-14 unit shortfalls due to Chinese protests mentioned above. The Apple plant in Zhengzhou will likely result in a 6M iPhone Pro shortfall this year. How will Apple address this risk? They are accelerating their shift of production away from China towards other regions.

Key market events

• Mon 12/5 - GTLB

• Tue 12/6 - MDB, S

• Wed 12/7 - HCP

• Thu 12/8 - COST, ORCL, DOCU, LULU, BCOM

• Fri 12/9- ?

• Dec 14 - FOMC Dec meeting

• Dec 16 - Triple witching options expiration

Risks

• Tax loss selling will continue into any decent market rallies in Dec

• FOMU continues to build in this market and investors could easily get ahead of themselves if the buying interest dam bursts. Ideally, I would like markets to move higher slowly and steadily. Big upside jumps are not good for longer term market stability

• Stagflation is a risk that is increasingly being flagged by economists - a scenario where growth continues to slow, unemployment ticker higher and inflation remains elevated

Beachman’s plan

Here is what I plan to do with my portfolio…

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