02/06/2023 Market Strategy
- February 6, 2023
Should I Stay or Should I Go?
A too-large-to-ignore global stock market rally ran into an air pocket last Friday
Key Takeaways
- With 251 or half of the firms in the S&P 500 index having reported, earnings are off 3.7% from a year ago on revenue growth of 5.1%. Results have been mixed with five sectors showing double-digit earnings growth from a year earlier and six showing declines.
- Earnings season continues this week with 94 firms scheduled to report. With a light calendar of economic data this week investors will likely lean on corporate results for signs of economic strength or weakness.
- Last week’s economic data showed resilience in the labor market with a surprisingly strong jobs gain and a softening in wage gains. Meanwhile the ISM purchasing managers index surged back into expansionary territory on the strength of new orders.
- Economic data that points to resilience of the economy even as the Fed remains committed to curb inflation suggests “Don’t Fight the Fed” may have new meaning this cycle.
A larger than expected (517,000) January jobs gain number last Friday curbed investor enthusiasm and hit the pause button for stocks ahead of the weekend. While an easing in the hourly wage gains helped offset the surprisingly strong jobs number, worry prevailed on the day that inflation risk may prove sticky enough for the Federal Reserve to hang tough against inflation for longer than some of Wall Street’s denizens would like to see.
With stocks in broad rally mode around the globe pretty much from the start of the year we see Friday’s downdraft as an opportunity for market participants to curb their enthusiasm and to ponder whether stocks (and even bonds) had gotten somewhat ahead of themselves. We see it also as an opportunity to seek out any “babies that got thrown out with the bathwater” in the downdraft.
After all, 2023 has been showing the earmarks of a recovery year for the global economy and equity markets with signs of improvement across the landscape alongside what remains significant levels of uncertainty as to the when, what and how of hurdles to be traversed will be met.
Perhaps “Don’t fight the Fed” is finding a new meaning this cycle as at least some market participants appear to be grasping an idea that the Fed’s commitment to place inflation in check might actually be a good thing.
Recovery years in our recall typically don’t come with stock markets that go up in a straight line and bond yields that ease consistently as bond prices rise. Recovery years or “do over” years from our historical perspective on the market radar screen are work-out years presenting opportunity along with commensurate risk as economies and markets navigate uncertainties on the landscape.
In our experience such work-out periods require from investors prudent portfolio diversification, patience, discipline, self-knowledge and the courage of one’s convictions. The latter statement should not be taken as daunting as it may sound considering that there never has been nor is there likely ever to be a period that arrives announced by the sounding of an all-clear signal over the world’s economies or markets.
Don’t Fight the Fed
Perhaps “Don’t fight the Fed” is finding a new meaning this cycle as at least some market participants appear to be grasping an idea that the Fed’s commitment to place inflation in check might actually be a good thing.
Consider that at least for now we have moved away from a period of “free money” (historically low interest rates as a result of emergency efforts during the COVID19 pandemic by monetary and fiscal policy makers) as interest rates have moved higher toward a “next new normal” regime in which bond issuers pay for the privilege of borrowing money, bond buyers find yields that offer at least some protection against inflation and stock market participants giver greater consideration to fundamentals over momentum and highly leveraged bets.
In our view from our perch on the market radar screen the Federal Reserve is doing its job without malice toward investors as it seeks to bring down inflation with a methodology that remains highly sensitive to the effects of its policy on the economy while it provides high levels of transparency and communication to Main Street and Wall Street.
Recent economic data in our view suggests that the Fed’s actions since Q4 of 2021—when it announced its policy pivot towards addressing inflation that was getting out of hand—have had a positive effect thus far in taking the economy off of a “free money” boil while enabling the resilience of the US economy to remain intact.
With the Fed’s February FOMC meeting and the January jobs number now in the rearview mirror, market participants will likely focus on negotiations in Washington to raise the debt ceiling, the weeks that remain in the S&P 500’s Q4 earnings season and the challenges that exist in the realm of geopolitics.
John Stoltzfus
Title:Chief Investment Strategist, Oppenheimer Asset Management Inc.
John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.
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