Markets continue to be surprisingly resilient. The Nasdaq has been the star of the show so far in 2023 with better than a 20% gain for the year to date. However, the rally has been narrow, with the S&P 500 up less than 8% for the year including dividends. The Russell 2000 has largely flat lined for 2023.
Given the second and third largest bank failures in U.S. history occurred less than a month ago, stocks have performed much better than one would expect, especially given the Federal Reserve is still in a monetary tightening mode. However, I believe investors are going to get a reality check on at least a couple of fronts over the next month.
The first is on the jobs front, which has been one of the few consistent areas of strength in the economy over the past few quarters. 2023 has seen a notable increase in layoff notices from across the economy and has been particularly noticeable in the high paying tech industry. February Job Openings fell significantly more than expected yesterday and went under the 10 million level for the first time since May of 2021. This morning, the ADP Jobs reports showed 145,000 jobs were created in March. This was below the 200,000 consensus and February's 261,000 level.
While a poor BLS jobs number Friday might be greeted with some enthusiasm from investors as it would show Powell's medicine is working, this is a not a good sign for the economy. Nor will it be good for consumer sentiment or commercial real estate which is already struggling with high office vacancy rates. My view continues to be that the jobs market is deteriorating faster than most pundits believe and my call is that we will see a negative monthly job print before the end of summer.
First quarter earnings reports will kick off next week starting with the major banks like Citigroup (C) . Given JP Morgan's (JPM) Jamie Dimon's comments this week within his shareholder letter, I think results are likely to be muted and guidance very conservative. They will set the tone for what I believe will be a disappointing earnings quarter.
I see more downward post earnings price target revisions from analysts this quarter than upward ones. This will hardly be a positive for the overall market environment. I also expect job cuts will continue or accelerate further as companies take additional steps to maintain their profit margins within a slowing economy with inflation levels still high.
As for my own portfolio, I am largely making incremental and conservative moves. I moved some of more of my cash allocation to three-month T bills which yielded nearly 5% on Monday. I also closed out my puts on Bank of America (BAC) for a slight loss. While I don't like the overall market, I do believe the steps taken by the FDIC and Treasury Department have stopped fears of financial contagion for the time being.
I also just opened a small initial position in Starwood Property Trust (STWD) via covered call orders. The stock has gotten knocked down in the wake of the recent bank failures and justifiable concerns about the commercial real estate market. But the company is well run and has a very diverse set of assets. Thanks to the over 15% drop in the stock over the past month, the shares yield in the low double digits as well.
And that is how I am keeping engaged in the market and not being lulled to sleep by the recent stabilization in the market.
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