01/17/2023 Market Strategy
As the World Turns
What a difference policy, economic data and earnings results can make
Key Takeaways
- Last week’s earnings reports from the big banks contributed to an equity market rally along with constructive reports on inflation and price data.
- This week a brace of economic data and earnings reports should provide more insight on economic and corporate health.
- Uncertainty remains on the landscape as a number of key impediments related to geopolitical events, COVID variants, and the Fed’s efforts to curb inflation continue to drag on.
- As of last Friday the health care, utilities, materials and consumer staples sectors of the S&P 500 showed forward multiples that were above their respective five-year averages.
Investors and traders return to the markets stateside in a Martin Luther King holiday abridged week.
Among the key items that likely will be factored into market action this week are economic data pertinent to the condition of the US economy including: the housing market, retail sales, manufacturing, unemployment, inflation and the Federal Reserve’s Beige Book report.
Q4 earnings season for the S&P 500 ramps up with 27 companies reporting this week representing a number of sectors including widely followed names in the financial, consumer discretionary, consumer staples, communications and energy sectors.
Last week saw a powerful rally in stocks across sectors, market capitalization and style as economic data and earnings results provided enough good news to transcend a level of bearishness that had initially gripped the market at the start of the year. Thus far the S&P 500 has closed higher in six of nine trading sessions this year.
Last week the Dow Jones Industrial Average, the S&P 500, the S&P400 (mid-Caps), the S&P 600 (small- caps), the Russell 2000 (small-caps) and the NASDAQ Composite (some 40% weighted in tech or tech related names) respectively advanced: 2.34%, 2.75%, 3.63%, 4.46%, 5.07% and 4.17%.
From the start of the year through last Friday’s close those same indices are up respectively: 3.49%, 4.16%, 6.19%, 7.03%, 7.14% and 5.85%. Not too shabby.
As is our custom we won’t “count our chickens before they hatch” but we won’t “look a gift horse in the mouth” either.
Earnings Season Gets Underway
The big banks that unofficially kicked off earnings season last week provided enough upside surprises to offset mixed guidance and increases in loan loss provisions (in case the economy should slip into recession). Overall economic data, Q4 S&P 500 corporate earnings (see pages 7 to 8 of this report for details) along with some tempered opinions coming from a number officials at the Fed have provided if not a boost to market sentiment at least some relief as prospects for further progress against inflation improve and fears that the Fed might go too far in raising rates and push the economy into recession ebb some.
This week’s Producer Price Index data will provide a further look under the hood of the economy for investors to ponder along with a host of other data releases scheduled this week. A better than expected number in the PPI could provide a further improvement to market sentiment. More will be revealed fairly quickly in this holiday shortened week.
Last week’s stock market rally was global in nature as markets stateside got a boost from the aforementioned items and foreign markets resonated to stateside action benefiting as well from some regional improvements including warmer weather than initially expected in Europe and prospects that China’s economic reopening could potentially boost global growth as it pivots away from its zero tolerance to COVID policy, which had shuttered cities key to that nation’s economic growth and well-being.
From our view on the market radar screen, uncertainty remains an issue on a number of fronts near term. With the Fed’s job to curb inflation having further to go, no resolution to Russia’s incursion into Ukraine, the infectious nature of COVID variants, and prospects for a heated battle in Congress related to raising the debt ceiling, market volatility is unlikely to leave the landscape. That said, we are reminded over the course of nearly four decades in the markets that there never is “an all clear signal” sounded over the markets. Experience tells us that with opportunity comes risk and with risk comes opportunity whether in everyday life, businesses on Main Street, or in the Canyons of Wall Street.
In the markets we have found diversification, emphasis on quality, some dividend income and with the recent change in interest rate regime—some fixed income opportunities (always with consideration of one’s mandate, tolerances, goals and objectives) can serve one well to navigate markets and economic conditions in transition
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