"For a time, there reigned, too, a sense of peculiar dread at this flitting apparition, as if it were treacherously beckoning us on and on, in order that the monster might turn around upon us, and rend us at last in the remotest and most savage seas."
- Herman Melville (Moby Dick, chapter 51), 1851
The Beckoning
Wow !! Just, wow. It is not like the macroeconomic data has been especially good. It has not been. It is not that earnings have been especially good. They have not been. It is not like the Fed could have even talked the markets up or down. Economists, traders, investors and the people one meets daily on the sidewalks of Main Street, USA would like to express their collective gratitude for the eight times a year "blackout period" that leads into each and every FOMC policy decision. That FOMC policy decision. Hmmm.
Markets... Equity markets, in glory to be precise, have found reason enough to defy announced job losses at such household names as Spotify (SPOT) , 3M (MMM) , and Microsoft (MSFT) , etcetera. Microsoft for that matter, disappointed in its guidance, as did Texas Instruments (TXN) .
Ahh, the semis. The lifeblood of technology. The lifeblood of everything else because everything else now relies upon technology. The lifeblood of the US and global economies. You all heard from Lam Research (LRCX) and KLA Corp (KLAC) , as they tiptoed ever so gingerly around their outlooks for the next few quarters. It was not those semiconductor equipment providers, but former powerhouse Intel (INTC) that stole the show last week. Stole the show in anything but a good way.
Earnings season !! How's it going? The market is red hot. Earnings on the whole, to be honest, this season are off to a sloppy start. According to FactSet (my earnings related go-to), with 29% of the S&P 500 having already reported Q4 2022 numbers, 69% of companies have beaten earnings expectations, while just 60% of companies have reported revenue generation ahead of estimates. Staying with data provided by FactSet, the blended (results & estimates) year over earnings decline for the S&P 500 is now -5.0%, down from -4.6 a week ago and -3.9% the week prior to that. That, while markets soar. Revenue growth is now running at 3.9% for the quarter, flat from 3.9% two weeks ago.
Consensus view is now for year over year earnings contraction for Q4, Q1, and Q2 all in succession. Oh, but keep paying more for US equities because the Fed may pause. Eventually. For calendar year 2023, Wall Street now sees earnings growth of 3.4% - Q4 2023 better be a real doozy - on revenue growth of 2.6%.
"It is quality rather than quantity that matters."
- Lucius Annaeus Seneca (1st century Roman philosopher)
From a macroeconomic perspective, the week past was dominated by the BEA's (Bureau of Economic Analysis) first estimate for Q4 GDP on Thursday and Fridays data for Personal income and Outlays, as well as year over year data for PCE inflation, which is what the FOMC focuses on, when it talks about inflation.
The fourth quarter actually printed at decent enough headline growth of 2.9% (q/q SAAR). The problem with this "deceptive" impressive growth would be that sans the positive impacts of inventory building and a narrower trading balance due to decreased demand, the print for Final Sales to Domestic Purchasers - or what economists sometimes see as real growth - hit the tape at growth of 0.2%. Not joking. The US economy has hit stall speed in the fourth quarter. Nobody seems to see it. Or wants to see it.
As for Core PCE inflation, the December print on Friday showed year over year growth of 4.4%, which was in-line with estimates and down from 4.7% for November. Q4 Core PCE inflation (part of Thursday's data), printed at year over year growth of 3.9%, which was a shade below expectations for 4% and down from Q3 growth of 4.7%. The death of inflation? Huzzah !!
The Whistle
The whistle blew at close to 07:30 local time on the morning of 1 July 1918. Due to the German attack on Verdun, the British army would take the lead this day, leaving a lesser, but still awful role for the French army to fulfill. There had first been a week's worth of artillery bombardment in order to "soften" up German defenses and perhaps cut some wire with shrapnel.
They went over the top en masse that morning, many of them members of the British "Pals" battalions. The Battle of the Somme would rage on for four months. On that first day, though... While charging mindlessly into well-placed, well-stocked and well-prepared German machine gun positions, the British army suffered 57,470 casualties and at least 19,240 battlefield deaths.
Equity markets broke out late last week from that range-bound situation that we were discussing here last week. Of course, forward positions had already been pounded with algorithmic artillery. The Nasdaq Composite made that run that we commented on at its 200 day SMA (simple moving average), and having exceeded the level, closed both above that spot as well as above its long-term upper trendline that had been in place since November 2021.
The S&P 500, as readers can see here, has not only pulled away from its 200 day SMA, it has also broken out of that running triangle that we had seen as potentially bearish last week. As I mentioned a week ago, this sure will be an easier story to tell in hindsight. I am still not sure that I trust what I am seeing.
For the past five trading days, the S&P 500 gained 2.47% after picking up 0.25% on Friday. The Nasdaq Composite rallied a whopping 4.32% last week after gaining 0.95% on Friday. The Philadelphia Semiconductor Index, which readers know is something that I always watch closely, screamed 5.39% higher last week, despite giving back 0.72% on Friday. That leaves us with the Russell 2000. The R2K rallied 2.36% for the week after moving 0.44% higher on Friday. Breakout? Sage at last? Maybe. Maybe not.
Eight of the 11 S&P sector-select SPDR ETFs shaded green for the week past, as only two defensive sectors, the Utilities (XLU) and Health Care (XLV) showed losses for the five day period. Consumer Discretionaries (XLY) absolutely ran higher (+6.41%) on strength in the autos (EVs to be precise) lifted the whole group. Communication Services (XLC) and Technology (XLK) both gained more than 4% for the week, finishing in second and third places on the sector performance tables.
According to FactSet, the S&P 500 now trades at 17.8 times forward looking earnings, up from 17.0 times last week. This ratio now stands only moderately below the S&P 500's five year average of 18.5 times, and has once again moved higher than its ten year average (17.2). Why would valuations be on the rise? In such an aggressively overt manner? January Effect? What could go wrong?
The Charge of the Light Brigade (excerpt)
Stormed at with shot and shell.
Boldly, they rode and well,
Into the jaws of death,
Into the mouth of hell
Rode the six hundred.
- Alfred, Lord Tennyson (1854)
On Friday the Atlanta Fed published their first Nowcast for first quarter US GDP and all of that awful macro-economic data for January finally made itself felt. Though, this is a snapshot and there are two months of data still to be released, the growth of 0.7% (q/q, SAAR) appears jarring. What if this number is somewhat artificially bloated as was the BEA's 2.9% estimate for Q4? Easy. The FOMC can just ease policy in order to get growth back on track. Right?
No. Not so fast, my friends. The Cleveland Fed Nowcast for inflation for January gets murky. Right now, Cleveland sees month over month CPI growth of 0.58% and Core CPI growth of 0.46%. That would be up from month over month December prints of -0.1% for CPI and 0.3% for Core CPI. Hmm.
On a year over year basis, Cleveland sees headline CPI for January slowing to 6.39% from December's 6.5% and Core CPI slowing to 5.58% from 5.7%. More... Hmmm. Will only barely slowing year over year numbers pacify a Federal Reserve Bank as the month over month data appears to reheat? Was there maybe a reason that Cleveland Fed Pres. Loretta Mester has been perhaps the hawkiest of policy hawks? Again... Hmmm.
The Week Cometh
The coming week will be another exceedingly heavy week of Q4 earnings, this time with more of a focus upon the mega-caps. For the week coming, investors will hear from Caterpillar (CAT) , Exxon Mobil (XOM) , McDonald's (MCD) , United Parcel Service (UPS) , Advanced Micro Devices (AMD) , Meta Platforms (META) , Alphabet (GOOGL) , Amazon (AMZN) , Apple (AAPL) and Starbucks (SBUX) among many, many others.
The week ahead is also a heavy macro week, as this will be January Jobs Week. Can labor markets continue to show survey-based strength, even as headline risk appears to be ever-weaker? That said, before we even get to Friday, we have to get through the Fed this Wednesday.
There were no Fed speakers out there impacting the high-speed, keyword reading algorithms that skew price discovery last week as the central bank had entered into its pre-policy meeting media blackout period. That blackout ends with this Wednesday's official statement and press conference.
Concerning that policy decision, Fed Funds futures trading in Chicago are currently pricing in a 98% probability for a 25 basis point increase being made for the Fed Funds Rate at that time. Futures show that this hike will be followed by an 85% likelihood for another 25 basis points on March 22nd that gets the Fed to 4.75% to 5%, which would be the terminal rate.
The terminal rate, if you ask a Fed official, might be well over 5%. Markets see the rate around 4.9%. Futures also now show only a 50/50 chance for a first rate cut in November and have pushed out any expression of certainty over that initial cut into December 2023.
Readers well know that I have felt that the FOMC should have paused and taken a data-driven approach for several months now. It would appear that the level of aggression of our central bank has brought about economic weakness earlier than it might have appeared more naturally had the quantitative tightening program been allowed to take the lead over interest rate manipulation as a policy tool sooner.
Now, we reap what we sow. The post-peak flare in consumer level inflation appears to be possible as the US dollar has weakened and as commodity prices seem to be rebounding. Can the Fed hike short-term rates into that environment? Time will tell. Not much time though.
Oh, over the past 25 years, February has posted a mean return of -0.41% for the S&P 500, making it the second worst month (to September) of the year for equity markets over that time frame.
"Never let the future disturb you. You will meet, if you have to, with the same weapons of reason which today arm you against the present."
- Marcus Aurelius (121-180, AD)
Economics (All Times Eastern)
10:30 - Dallas Fed Manufacturing Index (Jan): Expecting -11, Last -18.8.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (GEHC) (1.06), (SOFI) (-.08)
After the Close: (NXPI) (3.63), (WHR) (3.29)
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