Capital 19 Catch-Up

Weekly Index Movement

Aussie All Ords+3.2%

Despite concerns about the economy, U.S. stocks have started the year on an uptrend. On Friday, all three major averages closed out their second consecutive winning week.

The technology-heavy Nasdaq Composite saw an outsized gain of 4.8% for the week, while the S&P 500 and Dow Jones Industrial Average registered their best performances since November, logging weekly advances of 2.7% and 2%, respectively.

The S&P 500 is technically still mired in a bear market, but a closer look below the surface shows that most of its stocks are in the midst of a big rally.

While the benchmark is down 17% from its record high set on Jan. 3, 2022, about three-quarters of the stocks in the index are up 20% or more from their 52-week lows, according to data compiled by Bloomberg. Among the standouts are Wynn Resorts and Boeing Co., which have both surged more than 60% in the past three months alone.

So why isn’t the S&P 500 ripping higher? Blame it on the ugly performance of a handful of technology-related stocks whose massive market values give them greater influence over the index that is weighted by market capitalization. Just five stocks — Apple Inc., Inc., Tesla Inc., Microsoft Corp. and Meta Platforms Inc. — are responsible for nearly half of the S&P 500’s losses over the past 12 months.

Apple and Microsoft, for example, each with market values of roughly $2 trillion, have a combined weighting of more than 11% in the S&P 500. That gives them more sway over the index’s performance than all of the energy, materials and utilities companies in the benchmark. So even though American Airlines Group Inc. is up 34% this year, its 0.03% weighting does little to push the index higher.

Stocks have rallied in the first two weeks of the year amid optimism that cooling inflation will prompt the Federal Reserve to ease up on its most aggressive interest-rate hiking campaign in decades. The S&P 500 advanced 2.7% this week after government data showed consumer prices rose in December at the slowest pace in more than a year.

We said last week that inflation is a thing of the past. Here’s an update on month-on-month inflation. We now even have deflation!

That’s it ladies and gentlemen. The inflation story is over.

The market is now putting 96% odds on just a 25bps raise at the next Fed meeting on February 1st.

Stocks are reacting positively to that news and it also changes the focus for us as investors.

The nice thing about last year was the focus on inflation and interest rates made it easy to know what action to take. Short tech and long energy was our story all last year. You probably got fed up with hearing it.

Well that story is about to change. That trade will not work anymore.

This year is going to be much more difficult for we have three things to keep an eye on.

  1. Company Earnings

Earnings for companies in the S&P500 are forecast to fall by an average of 12% in 2023 (excluding energy).

Companies are having to contend with higher wages, higher cost of goods, higher transport costs and higher cost of capital. The true winners this year will be those companies that are able to raise their prices to compete with this. It’s going to be interesting to learn which companies have loyal enough customers who are willing to pay these higher prices.

On Friday, Delta Airlines (DAL) reported earnings. I don’t much care if they beat last year, what I want to know is how they went against Q4 of 2019, before the pandemic. In Q4 2019, DAL reported earnings of $1.70. Q4 2022 came in at $1.48.

That’s not too bad really and surprised me. But I suspect there was a certain amount of pent-up flying demand still in those numbers. It will be interesting to see if they can continue this as the year goes on. I doubt it.

Friday marked the beginning of Q4 earnings season with eight banks reporting. Of those only two beat forecasts. But somehow most of those ended up on the day. Digging deeper into the reports showed they set aside significant funds for expected bad loans this year. That isn’t a good sign. Or maybe it is. Maybe a prudent financial sector is just what we need right now.

Two companies that stood out were United Health (UNH) which beat estimates by 3%. Mind you, that is pretty standard stuff for them. They have only missed two reports since 2001. The other was Blackrock (BLK) which beat by 10.5%.

That’s why both of these companies are in our Dividend Growth Strategy. You can just depend on them to perform year after year.

As we go through earnings in the coming weeks I am going to be paying more attention to Revenue than Profits.

Any company can cut costs when needed to maintain profits. But you cannot do this for long before your sales suffer. I’m going to be on the look out for companies whose costs go up, but whose revenues go up even more. These are where we will focus this year.

2. China’s Post Pandemic Reopening

The last time China broke away from the global economy was just after the 2008 Financial Crisis, when it enacted a broad set of economic policies to insulate it from a global slowdown. The country’s economy is more than three times the size now ($18 trillion) as it was then ($5.1 trillion), so any acceleration in economic growth will be felt around the world.

Will they do anything to support their economy once they pass peak cases? I’m betting they do. And when they do it, they will do it big. There will be opportunities here. But we have to wait and see what they do first.

3. Positive Real Interest Rates

It must be more than 10 years since you could get a positive real (after inflation) return on risk-free assets (namely government bonds)

It might take investors a while to change but I am waiting for investors to ask the question

“why am I holding this stock for dividend income when the stock price goes up and down when I could get a guaranteed 5% on a risk free investment?”

Take my most disliked investment (actually, maybe Tesla (TSLA) beats it to this title), Commonwealth Bank of Australia (CBA). CBA will pay you dividends of $3.85. With franking that becomes $5.50.

The stock price today is $107.50 so the yield becomes 5.1% – For a risk asset, that is trading at pretty much an all-time high.

You can get 4.4% on a 12-month term deposit in Australia. With no asset price risk.

Is an extra 0.7% worth the asset price risk to you?

I never will understand investors in Aussie Banks when interest rates are this high (and maybe going a little bit higher)

But the point is, for the first time in 10 years, investors have a choice of where to put their money to earn a return. It will take a long time to shift sentiment but one risk to stocks is other assets are viable once more.

I do feel like 2023 will be a positive year for stocks, but it will be harder to select winners from losers.

For now stick with value and dividend growers, let’s see what happens with earnings and use that to guide stocks for this year.


Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account.