Five day workweek. Are you ready? You sure? Yes, the week past was another holiday shortened week. Trading volumes for the first week of 2023 might not have exactly been heavy, but it was apparent that most traders and investors had at least returned to work. The four day workweek, like the Santa Claus Rally period that ended this past Wednesday, closed higher than where it started. The week ahead is a full five day workweek, being the only one of its kind in a four week stretch that culminates next week and by Friday, yes this Friday already... we'll see fourth quarter earnings season kick off in earnest.
A positive force behind market performance of late has been the macro which overall has been weak. Remember, when thinking about the forward trajectory of monetary policy, good is bad and bad is good. Before we even get to last Friday's December employment data, which put markets over the top for the week, one must consider the four surveys released last week covering the manufacturing and services sides of the US economy and the plethora of weak looking macro that preceded these reports over the past three to four weeks.
On the manufacturing side of the economy, both the S&P Global PMI and ISM Manufacturing Index placed the month of December in headline contractionary territory. As far as the Institute for Supply Management is concerned, this was the second straight month spent in manufacturing contraction. As far as S&P Global is concerned, December was the third consecutive month of headline decay.
One looking at the results of the ISM manufacturing survey would quickly be drawn to deeply contractionary prints for New Orders, Backlog of Orders, and Imports as well as an incredible slowdown in Pricing, which should help as far as policy is concerned.
Much was the same on the services side of the economy, which is obviously much larger than the manufacturing side here in the US. As far as services are concerned, both surveys, the S&P Global Services PMI and the ISM Non-Manufacturing Index showed the US economy moving backwards. For the ISM, this was month number one in contraction, but for S&P Global, the string of consecutive monthly losses is now up to six.
For services, just like with manufacturing, New Orders (the most important component of these surveys) was an area of profound weakness. Unlike with the manufacturing side, pricing here remained strong, but employment dipped into contraction.
On Employment
From these four surveys, we move onto December jobs related data. On Friday, the BLS posted non-farm payroll growth of 223K jobs. Though this number did beat consensus, it was down from November and the lowest monthly print in the series since January of 2021. The good news from a central banker's perspective was that participation increased to 62.3%, while average weekly hours dropped to 34.3 and average hourly earnings growth slowed dramatically to 4.6% y/y.
What these numbers express is that while the demand side of the labor market did indeed do a good job of absorbing more job seekers, enough of these numbers show rapidly increasing competition on the supply side of these labor markets. In other words, job seekers are competing against one another for open positions.
Reports like this will keep hopes for a softish landing rather than a harsh landing alive. What the Fed is hoping to do is force inflation lower by putting a drag on the economy rather than halting economic activity altogether. The question now becomes, with so many short-term rate hikes already having commenced, where does the damage stop based only on what the Fed has done so far? It's a good question, and one I don't think anyone at the central bank really knows the answer to.
Marketplace
Equity markets, while really stuck in a range for a couple of weeks now, moved sharply higher on Friday in response to that employment data as both Treasury yields and the US Dollar Index took sizable tumbles.
For the traditional Santa Claus Rally period (last five trading days of the outgoing year plus the first two trading days of the incoming year), the S&P 500 gained 0.8%. For the first week of 2023 (which would also be year to date), the S&P 500 swung up 1.45% thanks to Friday's run of 2.28%. The Nasdaq Composite rallied 2.56% on Friday to close out the week up 0.98%, while the Russell 2000 gained 2.28% on Friday to end up 1.79% for the week.
The Philadelphia Semiconductor Index is a metric that I watch closely as the semis often serve to reflect broader economic realities. This index roared 4.67% higher on Friday and 4.11% for the week, reversing a four week slide.
Interestingly, if one sees December 28th as a market bottom, temporary or not, then one would have to see this past Friday's action as a positive reversal of trend as all of our major indexes moved higher on overwhelmingly positive breadth and increased trading volume. Do I seem skeptical? That's because I am. Oh, I want to believe. Trust me. I am just not sure what I trust based on what occurred during a shortened holiday week just in front of earnings season. Let's just say I would rather be late to the party because I was cautious, than get slam-dunked on because I was not.
All 11 S&P sector-select SPDR ETFs shaded green on Friday, while for the week, 10 of the 11 sectors traded higher led by Communication Services (XLC) . That fund soared 5.02% higher on strength in Broadcasting/Entertainment and Telecom. Six of the 11 Sector SPDRs gained at least 2.25% for the week, as only Health Care (XLV) lost ground (-0.13%) over the four day period. That group was weighed upon by the providers.
According to FactSet, the S&P 500 now trades at 16.5 times forward looking earnings, down from 17.3 times three weeks ago. This ratio remains significantly lower than the S&P 500's five year average of 18.5 times, and is once again also below its five year average of 17.1.
This Week
For the coming week, traders will have to stay focused as there will be some more key macroeconomic data-points released and on Friday the large banks will lead off the unofficial start of earnings season for the fourth quarter of 2022.
Last week, Fed speakers, as a group finally crawled back out from their holes after a lengthy holiday break. This week, Fed Chair Jerome Powell, speaking on Tuesday morning, will headline at least five public appearances by Fed officials that are currently on our radar. As far as the macro goes, December CPI, which is due on Thursday morning... will be the week's key data-point release. The US Treasury will also auction of $32B worth of 10 year paper on Wednesday afternoon as well as $18B worth of 30 year bonds on Thursday.
As already mentioned, fourth quarter earnings season kicks off in earnest this week. Names of interest reporting through Thursday would be Jefferies (JEF) , Bed Bath & Beyond (BBBY) , and Taiwan Semiconductor (TSM) . On Friday, the flood gates open up as we hear from the likes of Bank of America (BAC) , Blackrock (BLK) , Citigroup (C) , Delta Air Lines (DAL) , JP Morgan (JPM) , UnitedHealth (UNH) , and Wells Fargo (WFC) .
Earnings
According to FactSet, fourth quarter S&P 500 earnings expectations have now been reduced to $54.01 from the $57.78 that was projected three months ago. Estimates for CY 2023 have now come in all the way to $230.51 from $241.20 three months ago and almost $234 three weeks ago. Many expected these full year views to come in further, perhaps much lower. I am seeing some projections in the $190 to $220 range.
Still using FactSet as a source, earnings "growth" for the fourth quarter is seen at -4.1% y/y, which is down from a view of -2.8% three weeks ago, so these professional views are rapidly changing. This would be the first quarter of S&P earnings contraction since Q3 2020 when the economy was still dealing with pandemic lockdowns. Revenue growth is seen at 3.8% y/y.
For the fourth quarter, four sectors are seen actually growing earnings, led again by Energy, while Commercial Services, Discretionaries and Materials (thanks to US dollar valuations) all weigh heavily upon the S&P 500 as a whole. Energy remains, even after a string of quarters as a leader, historically undervalued. The sector currently trades at 9.7 times forward looking earnings compared to a 10 year average of 15.7 times.
Just an FYI... For the first (current) quarter, consensus is for earnings growth of -0.1% on revenue growth of 3.4%. For the full calendar year 2023, earnings are seen growing 4.8% on revenue growth of 3.2%.
What Now?
My answer to that question remains as it has been. Enjoy the rallies. Trade the rallies. I still prefer trading over investing in the current climate. I still intend to maintain a higher than usual allocation toward cash/T-Bills. I still see an economy that is showing more signs of a coming recession than of resiliency. I could be wrong. I always understand this.
The Fed still could steer the economy toward a soft landing. That said, their track record is awful. Once in recession, job losses will become a greater problem. The service side of the economy obviously is several months behind the manufacturing side in its stage of decay. What happens when traders and investors realize that the broader economy has already weakened to the point where the landing is not so soft and the positioning of monetary policy at that time is considerably too tight for the environment?
Just as we have had to wait and still wait on the lagging impact of tighter policy upon the real economy in order to survey the damage already done, we will have to wait for any improvement to economic conditions once it dawns upon the voting membership of the FOMC just what they have wrought. This is not a proactive crew that we are dealing with, gang. They do not anticipate. They react. Usually late. Sometimes very late. That is why it is difficult to be medium-term optimistic.
Economics (All Times Eastern)
15:00 - Consumer Credit (Nov): Last $27.08B.
The Fed (All Times Eastern)
12:30 - Speaker: Atlanta Fed Pres. Raphael Bostic.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (AYI) (3.02)
After the Close: (JEF) (.52)
