State of the markets - Mar 6th 2023

Markets: Deciphering the latest macro signals and market cues for investors

Mar 6

Last week marked the 1 year anniversary of this “State of the markets” column that I publish every Mon. Wow, time flies…

Now, it’s time to reinvent this weekly column. Time to redefine it…to focus it on the most important macro signals and market cues. It’s time to make it more actionable for investors like us.

And as always, I want you to be able to read it in just a few minutes.

Going forward, each week, I will cover:

The top 3-5 things you need to know as an investor (macro updates, market data, economic reports etc.)…AND…the context and key takeaway for each of these developments
Important upcoming market events
Current market risks

Paid subscribers will receive a separate weekly Mon email covering all my recent portfolio changes and my plans going forward.

So let’s dial in…

Market whispers

Stock buybacks by SP 500 companies are estimated to top $1T in 2023

These companies bought back about $900B of their stock in 2021 and spent about $1.26T doing the same in 2022. So while the 2023 estimate is lower than last year, it is nothing to sneeze about. These share repurchasing programs will provide much needed stock price support to markets through 2023.

Investor take-away

Look for companies that have announced share buyback programs AND have the financial strength to do so. These are companies with higher cash balances, lower total debt and expanding cashflow margins. e.g. AAPL’s buyback is good. UPST’s buyback is very risky. Also remember that share buybacks in 2023 are just getting started as we exit the blackout period during the Q4 earnings report season.

Interest rates to stay higher for longer in 2023

The FOMC is expected to push interest rates as high as 5.25 - 5.50% (currently 4.50-4.75%). And there is diminishing hope for any rate cuts this year. It is widely believed that the Feds will continue making 0.25% rate hikes (and not 0.50% hikes) until they feel confident that inflation is more consistently trending lower.

If interest rates stay higher through the end of 2023 and if we do not see a rate cut this year, then a recessionary slowdown is more likely, leading to lower revenues and earnings for US companies. The slowdown could last longer…3-4 quarters, extending into 2024.

I am adjusting my 2023 macro-map to reflect this stronger possibility (upcoming post).

Investor take-away

As we adjust our forecast of a recessionary slowdown, we can “guesstimate” when markets start recovering. They usually bottom 6-9 months before the recession ends. Sectors that do well in a recession include health care, consumer staples and bonds. Technology stocks tend to lead markets out of a recession.

Housing market slowing down and commercial real estate in trouble

Retail mortgage monthly payments are up 26%yoy and loan originations are down 70%yoy (a 28-year low). House prices are about 5% lower than their June 2022 peak. Today, more than 90% of homeowners either own their home outright or are locked in a mortgage rate at or lower than 5%. So they have less incentive to sell their current home and then buy another, more expensive home at a much higher interest rate. That said, given US population trends, there is a shortage of at least 3-5M homes and apartments in the country.

On the commercial side, tenants are increasingly defaulting on their rent payments and landlords are not able to make their debt payments. Demand for office space is down in most cities, especially downtowns and business districts. The work-from-home trend is take a strong foothold in more than 70% of companies globally.

Investor take-away

There might be good investing opportunities in companies that support the working-from-home trend. We may want to avoid real estate and home builder companies until a few months into the upcoming recessionary slowdown…remember the market recovery timeline we discussed above.

Market calendar

Mon Mar 6th - Quiet start to the week
Tue Mar 7th - Fed Chair Powell’s Senate testimony, Earnings - CRWD, SE
Wed Mar 8th - ADP employment and job openings report, Earnings - MDB, ASAN
Thu Mar 9th - Weekly jobless claims report, Earnings - DOCU, ORCL
Fri Mar 10th - Monthy US employment report

Upcoming important events

Mar 17th - Quad-witch quarterly options expiration
Mar 21st to 22nd - Next US FOMC meeting

Market risks

Markets might take a breather and not move much, at least in the early part of the week
Given that the SP 500 has stayed above it’s 200 day moving average for 30 straight days, there is more upside risk and the indexes could stay elevated. This applies to the Nasdaq as well
Friday’s US employment report might cause market volatility depending on the tone of the data

Cheers and good luck out there!