State of the Markets - Feb 6th 2023
State of the Markets - Feb 6th 2023
Markets: What I am watching and doing in the markets this week
I am still traveling internationally, however I am returning stateside later this week. It has been an interesting, eye-opening trip and I have been posting some observations on my chat line in the Substack app. You can find them using the link in the header of any of my emails.
Beachman's Newletter is read across 68 countries around the world and 48 states in the US. I find that fascinating and incredibly humbling.
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Current state
The character of the market has definitely changed. In addition to prices, breadth has improved significantly. 10 of the 11 SP 500 sectors are currently above their 200-day moving averages, Utilities being left behind. This 10/11 event does not happen often and when it does, it has historically been a good buying opportunity. That said, I am cautiously optimistic while expecting markets to dip lower towards end Q1....that's my base case. Of course the bullish cash is that we keep climbing and the bear case is that we go down to retest the Oct 2022 lows.
Sentiment
Investor sentiment has shifted very quickly over the past month. Last Thu saw one of the largest options trading volumes ever with about 40M calls vs. 28M puts for a total of about 68M options bets. Typical daily volume is about 45M options.
Other indicators
US $DXY - rose over 3% over the past 4 days and is expected to rise further due to increasing US China tensions
Oil - in danger of breaking lower
Copper - showing major topping signs since mid-Jan
Natural gas - at historical lows which might be an interesting investing opportunity
Last week
A few key learnings from last week floated to the top of my notes:
FOMC
The US FOMC raised interest rates by 0.25%, as expected, bringing the interest rate range to 4.50-4.75%. Fed Chair Jerome Powell's comment at the press conference was that the "full effects" of the rate hikes have "yet to be felt." This tells me that the FOMC is not close to pivoting. They have at least one 0.25% hike in their bag (March meeting) and will then likely sit and wait for more data. Right now, inflation is fading to the background as a concern. Labor market strength and labor rates are the big concern.
Economy
Q4 US GDP, the sum of all goods and services produced for the Oct-Dec period, rose 2.9%yoy, higher than the 2.8% estimate and slower than the Q3 3.2%yoy number.
Inflation
PCE (personal consumption expenditures price) index dropped to 5.02%yoy in Dec, lower than Nov's 5.54%yoy. Excluding food and energy, the Core PCE index was 4.4%yoy, down from 4.7%yoy in Nov. Core PCE index is the US Fed’s preferred inflation indicator.
Earnings
AAPL - Q4 revenues and earnings came in below analyst expectations. But the stock was not punished
AMD - Q4 top line beat and adjusted earnings bottom line beat. Data center doing well. PC is weak. Taking marketshare from Intel
AMZN - Q4 revenue beat. Q1 guidance was softer. AWS growing 20%yoy
BA - Q4 loss and revenue short of estimates. Some momentum from travel resurgence
GOOGL - Q4 top line and bottom line misses. Cloud growing 38%yoy
IBM - Flat Q4 revenue growth. Announced 3,900 layoffs
JNJ - Q4 earnings beat. Missed on revenues. Slightly higher 2023 guidance
MCD - Beat on Q4 earnings and revenue. MCD usually does well in a recessionary slowdown as consumers downgrade their eating-out spend
META - Beat on Q4 top line and bottom line. Announced internal cost cutting and $40B buyback program. Did not talk as much about the metaverse as compared to last time. Reels business is steadily improving…this is key to their future growth
MMM - Q4 miss and guide below street estimates
MSFT - Q4 earnings beat estimates, but revenue miss. Azure cloud sales up 38%yoy versus 36% estimate. Forward guidance wishy washy
SBUX - Q4 miss on earnings and revenues. Business in China is still subdued
SNAP - Beat on Q4 earnings but missed on revenue. Q1 revenue estimate lowered. Their forward roadmap is very unclear
TSLA - Beat on Q4 earnings and revenue. Average selling price higher than estimates. Demand very strong
Labor
Huge upside labor surprises this week. Non-farm payrolls was 517,000 in Jan versus 187,000 est. This could change the macro forecast for 2023, but I need to see a trend develop instead of a one-time jump.
Similarly, job openings rose to more than 11M which was higher than the 10.3M estimate. There are almost 2 jobs for every unemployed person in the US.
Initial jobless claims for the prior week came in at 183,000 versus the estimate of 201,000.
Layoffs last week:
3M laying off 2500 positions
Gemini laying off 10% of workforce...about 100 positions
IBM laying off 3,900 employees
PYPL laying off 7% of it’s workforce
Spotify laying off 6% of their workforce....about 600 positions
UPST letting go of 20% of its staff
WDAY laying off 3% of their workforce
Tech is experiencing 41% of all announced layoffs followed by finance and then real estate.
Real estate
Housing prices cooling slowly and are down about 3% from their June 2022 highs. KB Homes reported a drop of 80% in home orders and a rise in cancellations to 68% from about 13% this time last year. Building permits are also down 30% yoy and housing starts are down 22%yoy.
Consumers
Consumer spending, which accounts for about 68% of GDP, increased 2.1% in Q4, down from 2.3% in Q3. Retail sales were down 1.1%yoy in Dec.
Europe
The EU’s Dec Manufacturing PMI came in below the recessionary 50 level indicating continued contraction in the region.
The ECB raised interest rates by 0.50% and is signaling more rate hikes to come. Similarly, the BoE raised rates in the UK by 0.50%. Remember that they are about 6 months behind the US in their fight against inflation.
Elevator company, OTIS, reported that their business in the eurozone is the strongest of any right now. The most construction is occurring there and the Middle East and not in the United States or China.
Asia
Japan's Manufacturing PMI remained in contraction (below the 50 mark) for the third sequential month reaching its lowest level since late 2020.
Australia also reported a sub-50 PMI. Australia's CPI was up 7.8%yoy in Q4, representing the sharpest rate of growth since 1990.
Key market events
Mon Feb 6th - Earnings: ON, PINS, ZI
Tue Feb 7th - Earnings: ENPH
Wed Feb 8th - Earnings: UBER, DIS, AFRM, HOOD
Thu Feb 9th - MSCI index reshuffles, weekly jobless claims report, Earnings: NET, PYPL
Fri Feb 10th - UofMich consumer sentiment report
Risks
The biggest risk at this time is that growth stocks have moved up too much too fast. There certainly is a bit of FOMO developing and investors who have been on the sidelines are wondering if they should buy in now or wait. I wrote more about this last week here
The surprise major upside employment report last week has also raised questions about whether the FOMC will raise rates more than previously anticipated. Bond rates rose on the news signaling that interest rates could stay elevated longer. This will put further downside pressure on growth stocks in the short term
Beachman’s plan
Here is what I plan to do with my portfolio…