The Fed’s statement, along with Chair Powell’s presser, followed expectations, but offered some minor hope for the bulls, intended or not. As soon as he spoke the word “disinflation”, markets started to rebound, especially in growth and cyclical sectors. In another answer to reporters, he noted “There is a difference in perspective by some market measures on how fast inflation will come down. We will have to see. I mean, I am not going to try to persuade people that I have a different forecast, but our forecast is that it will take some time and patience, and we will need to keep rates higher for longer, but we will see.” Those who believe inflation will go down as fast as it went up took this as a change in sentiment. Clearly, the Fed’s forecasting track record is suspect. If they are wrong (again) and inflation does start to come down faster, this whole “higher for longer” will revert to what the market really wants, which is rate cuts later this year. Consider this possible, not probable, at the moment.
Bond yields also dropped further, adding more fuel to the P/E expansion rally. Fed Fund futures are pricing in one more rate hike in March, then a pause, going against the Fed’s stated comments. If economic data continues to show lower inflation, lower wage gains and a slowdown in hiring, the Fed will have to follow the market’s lead. Today’s jobs report will be another important one to say the least.
Facebook, AMD and a few other technology reports helped the Nasdaq continue its leadership change for 2023, with the index already up ~16%+ this year. The S&P, Nasdaq, Small-Cap and Mid-Cap indices all broke out of near-term trading ranges and are posting multi-month highs. The U.S. Dollar is at a 9-month low, which helps our multinational mega caps. Semiconductor, Housing, Transportation and Discretionary sectors are showing real strength, which is much more bullish than having Staples, Utility and Defensive stocks leading like in 2022. Is this relief rally from oversold conditions leading to a new bull market? Time will tell, and stocks are very overbought right now. Busting through the 4,100 level on the S&P was a big first step. Now we attempt to break out of the yearly range that tops at 4,300.
Brief Review of Important Earnings Reports:
UPS#: Delivery of packages is one tough business. While navigating gas price inflation, UPS also ran into rising employee pay demands. Following a slower holiday season, earnings came down relative to last year, but cost controls by a stellar management team helped the bottom line. Consumer spending demands clearly shifted from goods to services in 2022, and are continuing into this year, lessening the demand for packages at our doorsteps. Fortunately, the slowdown was more than priced in as the stock finished +4.5% following the report. UPS trades at 15x forward earnings and carries a growing 3.5% dividend yield.
Facebook#: Talk about a 180-degree turnaround. Recall that last quarter investors were hoping for some semblance of cost controls in Facebook’s massive spending on the metaverse. They got the opposite and META stock cratered below $90. Fast forward just three months and management is cutting expenditures substantially, helping drive a 23%+ increase yesterday and putting the stock back over $180, more than double its price just a few months ago. They are lapping the Apple data control headwinds, expanding time spent on Reels, and continuing to control massive screen time from consumers. The company earned nearly $14/share a couple of years ago and is now expecting over $10 in 2023 with upside possible from stock buybacks and further cost cutting.
Apple#: A rare miss from the largest public company in the world. Revenues fell year-over-year but would have been positive if currency effects were not included. Supply issues remain as Covid lockdowns in China damage production volumes. iPhone revenues, still the company’s main driver of earnings, missed expectations by over $3 billion. Do not feel bad for Apple though, as they generated ~$30 billion in net income for the quarter. The stock trades at 24x this year’s estimates with a minimal dividend yield.
Amazon#: After a 31% rally to start the year, investors had high hopes for a blowout quarter from the retail and cloud hosting leader. Revenues were handily ahead of estimates at $149 billon. Operating income was also ahead of their projections as well. However, as we saw with Microsoft, cloud hosting demands are slowing, as clients have to match sketchy end markets with cost discipline for internal data needs. Amazon continues to be very expensive based on today’s earnings; however, they are investing heavily and not exactly focused on profits right now. Including advertising, they are in a leadership role in three markets that have over $1 trillion in revenues to chase after. A recent move into healthcare could be the fourth pillar, along with delivery, small business lending, online groceries and other projects. The future is bright, but they need a Facebook moment with real cost controls being implemented.
Google#: The last of the mega, mega-caps and probably one of the more disappointing. Earnings were down 31% and missed estimates by 11%, a rare occurrence for this conglomerate, though some of this was due to mark-to-market accounting on investments. However, revenues were close to expectations, and backing out currency, they were up 7%. That is a pretty solid quarter considering the industry-wide advertising collapse they encountered. The stock was down 4% last night and now trades at 22x forward estimates. They also have $114 billion in cash on hand.
Credit Card Companies: The major providers have reported and consumers continue to spend, spend, spend. International travel (which carries higher margins) rebounded substantially this quarter as Americans continue to tour the world. Even with slower spending during the holidays, we continue to diminish the need to carry around physical cash. These companies are expensive, but offer consistent, above-market growth with a solid forward trajectory.
Markets are getting frothy here and valuations are getting stretched for many. Now may be a good time to reassess asset allocations and make sure one is positioned properly.
Nathan Lane is 67 today. Elizabeth Holmes, of the now defunct Theranos, turns 39.
James Vogt, 610-260-2214