06 Feb Capital 19 Catch-Up
Weekly Index Movement
| S&P500 | +1.6% |
| Nasdaq | +3.3% |
| Aussie All Ords | +0.9% |
We have quite a bit to cover this week as last week was full of news. Overall the markets found it positive and the advance continued.
The Nasdaq has now soared 15% to start 2023
Let’s take a look at how the various sectors performed in January, spurred higher by rallies in some of the biggest losers of last year like Tesla (TSLA) and Coinbase (COIN). Even beleaguered, left-for-dead names like Carvana (CVNA) have been on a tear.
The problem is, I have noticed that every time these trash stocks have taken off, it marks the end of the rally, not the beginning.
Looking at the various sector performance for January we find:
Defensives were out of favour and money flowed into the beaten down growth sectors. This is a clear indication of a changing of the guard. The problems the market was predicting (higher interest rates and slowing growth) are no longer problems so traders went out and bought up those sectors because the stocks are now considered cheap.
And now that we are in February, what can we expect?
Historically, February has been a tale of two halves with positive returns on an average basis in the first half of the month and weakness in the second half.
The good news is, in years when January was an up month, that second half weakness is less prevalent.
So everything is looking quite positive. Whoa your horses there cowboy. Things are not as straightforward as they appear.
We had two big pieces of news last week.
First was Fed Powell’s interest rate announcement. He delivered the expected 25bps raise. Here are some of the key statements from his press conference
“We can now say for the first time that the disinflationary process has started.”
“we are not yet at a sufficiently restrictive policy stance, which is why….ongoing hikes will be appropriate”
“Given our outlook, I don’t see us cutting rates this year, if our outlook comes true,”
Powell also said that he still thinks the Fed can get inflation back down to 2% “without a really significant downturn, or a really significant increase in unemployment.”.
I didn’t even know disinflation was a word. Had to go and look it up. Turns out it means positive inflation but at a reduced pace. That is different to deflation which means negative changes to prices.
The market rallied on the news but it didn’t really tell us anything. He definitely was more dovish than last time but there is one area that concerns me greatly.
Powell has repeatedly referenced inflation in the Volcker era and that the Fed will not make the same mistake. Volcker thought he had beaten inflation in the 1970s and reduced interest rates early, only to have inflation return and cause him to send rates finally over 14% before inflation was really beaten.
The mistake was cutting rates too early.
The problem we have is the market thinks the Fed will cut rates twice before the end of the year. But Powell is doing his best to tell the market this will not happen.
If rates are not going to be cut……then stock prices are too high.
The second big piece of news was employment numbers on Friday. The US added 517,000 jobs in the month of December. Unemployment is now at 3.4%, a level not seen since the famous pub anthem by Bryan Adams.
The good news here is everyone having a job means no recession.
But the stock market fell 1% on Friday because this could add to demand inflation and make Powell continue to raise rates.
I doubt this alone will have any impact. This series is volatile and one monthly print should not be taken seriously. Of greater importance was the +4.4% increase in average hourly earnings. That continues the trend lower towards the +3% of 2018-2019 and a normal market. It is exactly what the market wants to see to placate the Fed.
In summary, the economic data last week was good and supports higher stock prices.
Now for the bad bit. What the market is expecting.
We are now 50% of the way through Q4 earnings and they have been on the weak side. Revenues are good but margins have contracted showing companies are struggling with increased costs. Expect to hear about more layoffs as they counter these expenses for next quarter.
According to FactSet, analysts think the next quarter of earnings will be the low point and then they will recover. The all-time high for earnings occurred in Q2 of 2022. They think the low point will be 7.5% lower than that. But then a recovery will happen and by Q3 of 2023 earnings will be at a new high once more.
This is why stock prices have been strong to start the year.
But it seems a pipe-dream to me. The Fed is trying to slow the economy. Many indicators are showing they have been successful in this. Just how companies are expected to beat all time high earnings in just 6 months time is a mystery.
And that leads me to be concerned the market has got ahead of itself and is in a short-term overbought position.
Big tech has done very well. Look at these YTD numbers
- Meta/Facebook: +55.0 percent
- Tesla: +54.2 pct
- Nvidia: +44.4 pct
- Amazon: +23.1 pct
- Apple: +18.9 pct
- Alphabet/Google: +18.8 pct
- Microsoft: +7.7 pct
These companies have had a great year, in the last month.
It is too much too fast and expecting too much for the future.
The US market is short-term overbought. Expect a pull-back very soon. I’m planning on taking some of those short-term profits and reducing positions now ahead of it.
Whilst I don’t think we will have a recession, I do appreciate the argument that every recession starts with a slowdown first which continues longer than expected and turns into a recession later.
Managing this process is the job of the central bank. But given how poorly they managed it on the way up, why should we expect them to get it right on the way down?
The more accurate question is – how badly are they going to get it wrong?
Big tech won’t really be out of the jungle until the Fed pivots and cuts rates. Until then we will have a sideways, rangebound market and the only way to make money will be to buy lows and sell highs.
I find investors are willing to buy lows, but selling highs is more difficult. I would urge you to look at your portfolio and lighten up some positions here.
The economic backdrop is good but getting worse. We have the risk the Fed stuffs it and crashes the economy (unlikely) but the main concern is analysts expecting an earnings recovery too quickly.
The coming week will be a big one for Australia when the RBA announces an interest rate rise on Tuesday. Everyone expects them to deliver +25bps and they probably will, but I would rather see a +40bps to scare consumers and bring the rate to a nice round number. I don’t like this +0.1% that is still hanging around.
The funny thing is, most Australian stocks are not greatly impacted by interest rates. Mining companies, for example, care a lot more about Chinese buying levels.
We are coming towards the crucial March dividend period. So if you have money sitting around and want to deploy it to get dividends, you are running out of time to do so.
Warning
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.