Markets continued to rally on Thursday with the S&P 500 up nearly one and a half percent on the day with the Nasdaq more than doubling that performance. Meta Platforms (META) was a big part of the surge as it rose over 20% on the day thanks to better quarterly results and guidance than expected.
With that, the tech heavy index has now clawed back over half its deep losses in 2022 in just the first five weeks of 2023. That momentum is likely to be tested in trading today thanks to the poor results that came out from tech giants Apple (AAPL) , Amazon (AMZN) and Alphabet (GOOGL) after the bell yesterday.
My view is we are probably at or very near the highs the market will provide at least through the first half of year. There have been positive news events that have helped buoy the markets early in 2023. These include the full reopening of China after three years of lockdown lunacy and we have seen some signs that inflation is indeed cooling.
The winter in Europe has been less challenging than originally feared and energy supplies there are holding up better than most expected. The war in Ukraine also seems to have mostly ground down into a stalemate, albeit a very bloody one.
However, I think this is as good as it gets for a while.
Earnings are under pressure as we have seen throughout this fourth quarter earnings season. It looks like the corporate sector is in the midst of a widespread effort to improve margins by accelerating restructuring initiatives. In addition, average productivity fell 1.3% on a year-over-year basis in 2022, marking it the largest annual slump in the measure since 1974.
The number of job cuts announced in January were 102,943, up from 43,651 in December and the highest monthly total since September 2020. I expect this to be a major theme that will play out for at least the first half of 2023. As Twitter and others have shown, there is a whole lot of fat that can be cut from the tech sector without impacting operations.
I also think investors are sleeping on the situation in Ukraine. It looks like Russia is tripling down on forces in the area with the intent of launching a major offensive in the near term, most likely in spring if not sooner.
The war has been a nice tale of David versus Goliath to this point, but I am not counting out the latter making a major breakout over the next few months. This will escalate the conflict still further and likely change the narrative on how this war is likely to conclude. I don't think the market is pricing in that scenario or its ramifications.
Plus, the yield curve remains significantly inverted with the Two-Year Treasury yield approximately 70bps above that of the 10-Year. Also, on the monetary front, the M2 Money Supply shrunk by just over 1% in 2022 with its equivalent in Europe declining some 4%. Taking into account historically high inflation in 2022, the 'real' money supply shrank even more drastically.
Like every investor, I have liked seeing all the green arrow signs in my portfolio in 2023. However, the market seems to be more than overdue for at least a 'pause'. With that view, I shifted more of my cash allocation over into three month T-bills yesterday as I see limited opportunities to deploy new capital into the market after the big rally to start the year.
In addition, I bought some puts on luxury homebuilder Toll Brothers (TOL) . Homebuilders have been 'en fuego' lately despite a largely punk housing market. The stock of Toll Brothers has climbed 50% over the past three months.
Layoffs in tech, Wall Street and other high paying industries can't be helping buyer confidence at the upper end of the income scale. I think reality sets soon after the spring selling season and TOL gives up at least half its recent gains.
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