The market has had a strong start to the New Year. After losing a third of its value in 2022, the Nasdaq is up roughly 9% so far in 2023. The S&P 500 has recovered approximately a quarter of its 20% decline last year, just three weeks into the first quarter.
While I am happy to see this bounce, especially after last week's option expiration saw so many of my covered call positions expire in the money which greatly bolstered the cash balance within my portfolio, my view on the overall market remains cautious. The war in Ukraine is fast approaching its one year anniversary. The yield curve remains significantly inverted, signaling a likely recession in the quarters ahead.
More importantly, reading the tea leaves for fourth quarter earnings season points to the rapidly deteriorating health of the consumer who contributes some 70% of overall economic activity in this country.
Take a look at the data coming from the fourth quarter that credit card concern Synchrony Financial (SYN) posted this week. Top and bottom-line numbers were more than solid. However, the company boosted its provision for credit card losses for the quarter to $1.2 billion. This is up from just under $930 million in the prior quarter and more than double provisions from the same period a year ago. Sledding will get tougher ahead as the company believes charge-offs will come in at 4.75% to 5% for all of 2023 compared to just under 3.5% in the recently completed fourth quarter.
It is much the same story at Capital One (COF) which reported its fourth quarter results after the bell on Tuesday. Its credit card delinquency rate rose to 3.43% for the quarter from 3.32% in third quarter and 2.22% from 4Q2021. Net charge offs rose to 3.57% more than double the rate of the same period a year ago.
Ally Financial (ALLY) rose nicely this week after than a better-than-expected fourth quarter and solid forward guidance. However, these results are being driven primarily by the company's insurance division which in benefiting from favorable net interest margin trends. The company's provision for credit losses more than doubled to $490 million from just $210 million in the fourth quarter of 2021.
The stock of D.R. Horton (DHI) rose after beating expectations with its fourth quarter numbers yesterday. Unfortunately, comps are going to get much tougher going forward for homebuilders thanks to a skittish consumer and average mortgage rates north of 6%. New sales orders dropped by 38% in Horton's fourth quarter which is exactly in-line with the 38% drop in existing home sales in December for the industry overall.
Finally, we are seeing widespread layoff announcements across the economy over the past couple of months which seem to be accelerating. Big Tech names like Amazon (AMZN) , Meta Platforms (META) , Salesforce (CRM) , Alphabet (GOOGL) and Microsoft (MSFT) are all significantly downsizing their workforces, as our major investment banks like Goldman Sachs (GS) and smaller names throughout the adtech and fintech sectors.
It seems every day brings more layoff news. Yesterday it was 3M Company (MMM) announcing it was laying off 2,500 employees in manufacturing after posting fourth quarter numbers and issuing tepid guidance. All these tea leaves point to a weakening outlook for the consumer and the economy as we get farther into 2023.
This leaves me with the view that the nice start the market has gotten off to in 2023 will soon fade.
(AMZN, MSFT, and GOOGL are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)
