01/09/2023 Market Strategy
Rock Steady Revisited
Markets are in work-out mode as investors parse data, news and earnings day to day
Key Takeaways
- This week a brace of economic data and the unofficial start of the Q4 earnings season will keep investors busy looking for new signposts in data and quarterly results that could define the direction of the market this year.
- The big banks begin reporting results for last quarter on Friday this week with economic data covering a wide range of factors important to investors related to business and the consumer.
- Last week’s economic data showed employment growth still solid while slowing. Wage data released last week pointed to a slowing in wage growth that in our view underlined the effectiveness of the Fed’s policy to slow the pace of inflation.
- The performance of the S&P 500 energy sector and that of the price of crude oil point to a disconnect that is likely to be addressed by the markets sooner than later.
Last week saw stocks bounce between gains and losses as traders and investors sorted through economic data and “Fed-speak” in a busy holiday abridged first week of the New Year to ponder which direction the economy and the markets are likely to favor.
Inflation risk and monetary policy concerns seemed to capture the most attention over the course of the week. Market participants fretted whether or not the Fed was having a positive effect over inflation and—if indeed it actually was—would the central bank prove to be so “trigger happy” this rate cycle to raise rates too high for too long and push the economy into a recession.
The S&P 500 last week fell on Wednesday and Thursday and advanced Tuesday and Friday. Among the pressure points to the downside over the course of last week were the minutes from the Fed’s FOMC November meeting indicating there would be no rate cuts in 2023; persistently hawkish commentary from several Fed officials and better than expected jobs numbers.
The boosts to stock and bond prices came from a number of areas including ISM data which showed slowing in both services and manufacturing as well as a report on Friday that showed slowing in the pace of wage growth in December as well as wage growth that was revised lower for the prior month (November).
For the week the Dow Jones Industrials, the S&P 500, the S&P 400 (mid-caps), the S&P 600 (small caps), the Russell 2000 (small caps) and the NASDAQ Composite (some 40% weighted in technology and tech related names) respectively advanced 1.46%, 1.45%, 2.45%, 2.44%, 1.79% and 0.98%.
This week will offer a brace of data providing traders and investors further opportunity to weigh the condition of the consumer, business (wholesale inventories and small business sentiment), mortgage activity, import and export prices and the consumer price indexes.
On the last day of the week the big banks will unofficially kick off earnings season providing insight as to how several of the largest US financial institutions have been navigating the current economic and market environment.
From our perch on the market radar screen we suggest investors right-size their expectations as data reports bring more clarity on the economy and Q4 earnings season gets underway.
Stock selection and diversification in our view remain keys to success in an environment which remains highly transitional with the Fed likely to continue raising its benchmark rate but at a modest pace while it maintains vigilance on inflation. We are not expecting a pause or a pivot from the Fed at this point in the hike cycle.
We continue to suggest that investors keep an eye out for “babies that get thrown out with the bath water” (when investment-worthy stocks get sold off in downdrafts), diversify across market capitalizations and styles with an emphasis on cyclical sectors over defensive sectors.
In our view we are not yet “out of the woods” but we feel confident that the light at end of the proverbial tunnel is not a fast moving train about to bear down on us but rather the “light of day.”
We reiterate our call favoring “growthier” value stocks and “GARPier” (growth at a reasonable price) growth stocks that pay dividends in an environment that favors “getting paid while you wait” for the potential of capital gains.
With bond yields this year significantly higher than they were at the start of last year diversification opportunities appear attractive within fixed income while favoring laddered maturities and keeping duration at levels that take into consideration that the Fed likely stays in rate hike mode for now
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