Capital 19 Catch-Up

Weekly Index Movement

Aussie All Ords+1.6%

It was looking like a frustrating week for bulls as the S&P 500 traded down on each of the first three trading days of the shortened week. Heading into Friday, there was a modestly positive bias, and bulls took the slack and ran with it pulling stocks higher all day.

It was nice to end the week on a positive note, but the pattern for all three major indices remains the same as the market remains stuck in a downtrend that has been in place for over a year. As we’re all familiar with by now, every time a rally approaches the 200-DMA it gets stopped in its tracks.

The technicians among you will be enjoying that chart and telling me about the index rejecting a bearish trendline and that it is now going to make a new lower low.

I say no. This setup is too obvious. Everyone can see it so the market will not do it.

I rather suspect Mr Market will punch higher and break the trendline and also break the most recent high from late November. That will suck people into the rally and get them to buy. Once they are all in, say after a week or so, it will fall over and head down causing them all to sell out at a loss. Once again.

I do tend to think we have seen the post-pandemic low. News is getting incrementally better, not worse like it was before. But at the same time, there are still unknowns out there.

The Fed next meets on Feb 1st. I expect they will deliver a 25bps rise to interest rates. (personally, I think they have done enough and should stand pat, but they won’t listen to me). But that rise on Feb 1st will be the last. They will then leave interest rates where they are for the rest of the year.

If you listen to the Fed they haven’t been saying this. They have been saying they still have work to do to get inflation under control. But this is just jaw-boning to stop markets getting too far ahead of themselves.

With the uncertainty gone we can now focus on company earnings. We have had 11 announcements so far and they have not been great.

The banks were generally weak. Goldman Sachs (GS), the biggest brand in the banking world, reported fourth-quarter earnings per share that fell 69% from a year ago and full-year per share earnings that were off 49% from 2021. Revenue in Goldman’s flagship investment banking unit fell 48% for the full year.

The retail banks all stated higher provision for loss as they anticipate increasing bad loans as the year rolls on which is not a good sign for the consumer.

Retail Sales were not good either. They dipped for a second straight month, something that has only happened 7 times since 2010. That is not a good sign for the economy.

Big tech are all announcing redundancies. Microsoft is laying off around 5% of the workforce, Amazon is cutting 18,000 and Google is cutting 12,000.

But these numbers really are tiny so don’t read anything into them. Microsoft, for example, doubled its workforce after the pandemic lockdowns so a small scaling back looks insufficient to me.

Netflix surprised the market by adding 8 million subscribers. Most likely due to their new policy of cracking down on password sharing so will be a one-time hit. Earnings came in at 12c vs 42c expected and their CEO stepped down.

I’ve never been a fan of Netflix as an investment. I’d argue peak subscribers occurred during the lockdowns. If you can’t get someone to subscribe to Netflix when they are imprisoned in their living room, they are never going to subscribe. Growth from here can only come from increasing subscription prices.

The stock might be down 50% from pandemic highs, but on a PE of 29 it is still priced for consistent growth and I can’t see where that will come from.

The weak start to Q4 earnings season has caused analysts to cut their forecasts, but they still expect full-year earnings to be 3.6% higher than last year. Basically, they are betting Q3 and Q4 of 2023 will show good growth.

And that is why the index has been showing strength so far in 2023.

I do worry the analysts are wrong here. I can’t find anything to say things will pick up in the back half of the year.

Look at this trend in profit margins

Peak margins occurred in the pandemic lockdowns of Q2 2021. They are now back to pre-pandemic levels. To produce growth over last year companies will need to increase revenue by enough to offset this falling margin.

This will be what I am looking for this earnings season to find us opportunities. Companies that increase revenues significantly.

One on my radar at present is CrowdStrike (CRWD). Analysts are expecting a 45% increase on last year when they announce in the second week of March.

This idea that earnings will be strong in the second half seems to come from the idea the Fed will cut rates. If that happens, it doesn’t matter what earnings are, stocks will be off to the races.

Our model portfolios are interesting to watch. Two, in particular, tell you a lot about what is happening in the market.

The Dividend Growth Strategy was the best performer last year, by quite some margin. So far, in January of 2023 it is up 0.67%.

The Top 30 Strategy was the worst performer of last year. But it is up 2.1% so far in January.

The main difference between these strategies is that Dividend Growth is a value-based approach, but the Top 30 is growth.

Top 30 also singles out individual stocks with large changes to forecasted earnings. It is more of a stock pickers approach to investing and I suspect is the style that will win this year.

I am very confident 2023 will be a positive year for stocks. But we will have volatility, especially in the first half. Use those periods to buy your positions and don’t chase stocks after a run.

This week we have GDP on Thursday, expected to show a gain of +2.6% and earnings season continues. The big one will be Microsoft on Tuesday.


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 and might not be suitable for you.