State of the markets - Feb 27th 2023
Markets: What I am watching and doing in the markets this week
About 85% of SP 500 companies have thus far reported their Q4 earnings. Sales for these businesses grew 5.1% in the quarter, however profit margins have dropped about 4.7%, marking the sixth consecutive quarterly decline in earnings power of the SP 500 index. 65% of them beat revenue estimates and 68% of them beat earnings estimates. These beat %s are well below their 5-year and 10-year averages.
Since the peak of mid-2021, US companies have, in general, been selling more but earning less profits doing so. Rising commodity prices, transportation costs, labor costs and energy costs are all taking their toll on the bottomline. Now, if the consumer slows down their spending, sales will decline, inventories will rise, fixed costs will remain in place, prices will be lowered, earnings will get further compressed.
Investors are slowly but surely picking up on these risks and last week’s higher inflation readings did not help matters.
This quote by Ashton Curtis from MS caught my eye…
"Nobody who is long anything seems comfortable being so, but everyone who is bearish / short something seems quite confident. The dizzying + perplexing part is the speed and frequency with which we shift focus on what will down the market next. The list of concerns is long – yes -- though really every one of the risks has been debated ad nauseam … and now we are (over)extrapolating seasonal adjustments in macro data. Discouragingly, the only constant here is that, collectively, we don’t seem to have a clue."
The SP 500 is close to a decision point here as it sits just above it’s 150DMA. Will it go lower and retest it’s Oct lows of 3,491? Or will it bounce off it’s MAs and start trending higher towards the 2023 highs of 4195?
Notice the RSI and the MACD indicators at the bottom of the chart? They are at or close to their Dec lows. Remember how bearish we felt then waiting for the Santa rally to show up?
Tue Feb 21st was the first day of the year when we had more stocks hitting new lows versus reaching new highs.
Sentiment also seems to trying to decide whether to stay in buy mode (Greed) or start taking gains from the YTD move up.
US $DXY - With more talk about interest rates going higher and staying higher for longer, the US$ is once again catching a bid
Natural gas - Dropped more than 80% since Aug 2022 and hit a 52 week low last week. These prices are lower than the pre-pandemic lows. Even EU is seeing gas prices lower than before the Russian invasion of Ukraine. Beachman added to his natural gas position on Tuesday with an eye on higher gas prices in the near future. Winter is coming…
A few key learnings from last week floated to the top of my notes:
The US GDP increased 2.7% in Q4, lower than the 2.9% estimate. 2023 FY estimates are for growth of between 0.5 to 1.6%.
Personal Consumption Expenditures index (PCE), the US Feds favorite inflation indicator came in hotter than expected for Jan. It rose to 5.4%yoy versus the 5% estimate. Even Dec’s number was revised higher by 0.3% to 5.3%yoy.
Core PCE for Jan was 4.7%yoy versus the 4.3% estimate. Dec’s PCE was revised 0.2% higher to 4.6%.
These numbers for Jan as well as the revisions for Dec spooked investors leading stocks and bonds lower and yields higher. The debate now is focused on three questions:
Will the FOMC have to raise rates higher than expected?
Will rates stay higher for longer?
Will the pivot to lower rates come earlier, even if inflation is not at the 2% Fed target level?
We got a few rosy manufacturing reports last week that added to the confusing economic signals.
The Manufacturing Purchasing Managers Index (PMI) rose to 47.8 in Jan versus the 47.1 estimate and higher than Dec’s 46.9. The Services PMI was 50.5 in Jan versus 47.2 expected and Dec’s 46.8.
BYND - Narrower Q4 loss and beat on top line
COIN - Beat revenue and earnings estimates. Smaller user base with waning interest in crypto
CVNA - Missed on Q4 top line and bottom line estimates
HD - Missed on Q4 revenue, beat on earnings. Bleaker forward guidance
NVDA - Beat on top and bottom lines and raised forward guidance
PANW - Beat on top and bottom lines. Raised 2023 guidance
SQ - Beat on topline and miss on bottom line
WMT - Beat on top line and bottom line. Weaker 2023 guidance
Initial jobless claims for the week ending Feb 18th fell to 192,000, lower than the 200k estimate as well as lower than the previous week’s 195k claims. Continuing claims also decreased to 1.65M, below economists’ estimates.
Existing home sales dropped by 0.7% in Jan, the 12th straight monthly decline. Sales are currently -37%yoy, the slowest since 1999.
Median house prices rose 1.3%yoy, however have been falling each month for 7 straight months now. The US housing market has lost $2.3T in value in the past year.
Applications to purchase homes fell by 18% last week to the lowest level since 1995. New home orders fell 93% in Q4. The cancellation rate on new home orders jumped to 24.6%, much higher than the 8.7% rate from a year ago.
90% of US homeowners either own their home outright or are locked in a mortgage with a fixed interest rate of 5% or lower. Very little incentive to sell your existing home and pay a higher mortgage rate on a new home. The 30-year fixed rate mortgage is hovering around 6.3%.
The average house payment to US median income ratio is currently 40%, well above historical levels and not sustainable in the least.
Consumer spending jumped 1.8% in Jan versus the 1.4% estimate. This was the other macro data surprise last week, further feeding into the narrative that inflation is stickier because the consumer is stronger and still spending.
Household debt hit $16.9T in Q4. Credit card balances increased +6.6% to $986B, the highest quarterly growth on record. Credit card balances increased +15.2%yoy.
Now we have to play closer attention to what WMT and HD told us last week about the consumer - they are buying less expensive stuff, they are buying mostly necessities and less nice-to-haves. TGT, this week, is likely to have a similar update.
The IMF cut the UK’s growth forecast for 2023, putting it well below its developed market peers. Britain is the only economy in the G7 not to have recovered to its pre-pandemic size. The Bank of England (BoE) expects that UK GDP will not return to the pre-Covid levels until 2026.
Europe continues to track about 6 months behind the US in terms of their inflation and rates cycles.
Japan’s core inflation rate hit a four-decade high of 4.2% in Jan. Interestingly enough the BOJ thinks that an interest rate hike is not needed to bring it back down. I am not sure how they will do this. More yield curve control (YCC)?
Key market events
Mon Feb 27th - Home sales report, Earnings: WDAY, ZM
Tue Feb 28th - Inventory reports, Earnings: HP, TGT, RIVN
Wed Mar 1st - ISM manufacturing index report, Earnings: CRM, SNOW, OKTA
Thu Mar 2nd - Jobless claims report, Earnings: COST, DELL, HPE, ZS, AVGO
Fri Mar 3rd - ISM services index report
Next US FOMC meeting is Mar 21 - 22, 2023.
The biggest risks that I am tracking this week are:
Markets are at a fork in the road and could be at risk of dipping lower this week
Options markets are almostly perfectly poised at a total put to call ratio of 1.00. That said, each day this week, the 0DTE options trades have been leaning more bearish (Put options). When options skew bearish towards puts, market makers have to hedge their portfolios by selling stocks, leading to lower prices
As we get to the end of the earnings season, market swings will be dictated more by macro data instead of earnings updates
Here is what I plan to do with my portfolio…