Quite the turnaround from Microsoft’s# earnings and guidance that showed a more dramatic pullback for cloud and office spending than expected. The stock opened down $10 (4.5%), as Jim noted in Wednesday’s update. It ended the day basically flat. In fact, the entire market opened down around ~1.5% before gradually climbing its way back to breakeven and added even more gains yesterday. Eight of the 11 S&P sectors reversed early losses on Wednesday to finish in positive territory. Financials were strongest. Now that most bank and money manager earnings reports are out of the way, their stock buyback programs can ramp back up, adding more fuel to the rally. This is not the 2022 bear market anymore!
We have often quipped that it is not the news that matters as much as the reaction to that news. Stocks are discounting vehicles. Sellers of Microsoft last year (at much higher price levels) were expecting a slowdown in revenue growth, margins and earnings per share as they looked ahead 6 – 12 months. Reactions like Wednesday’s, where investors came and “bought the dip”, implies that the bad news is more than priced in. From here, things can start to recover over the coming year. Buyers today do not care about the first quarter, they are expecting much better market conditions further down the road. We know that the economy is slowing and EPS are coming down. So far, January’s action portends a greater chance of a soft landing in 2023. For now, this means that bulls are still in charge of this market. Many beaten down growth companies are retaking the leadership role for now. Make sure that you own the ones that will survive higher interest rates, and are focusing on real, not financially engineered earnings.
January Barometer:
No indicator is 100% correct, especially during such a wild ride with Covid lockdowns, money printing, aggressive Fed actions and supply chain dynamics going on. However, one indicator that has a very successful track record implies that as January goes, so goes the year. When we have a strong January, this indicator is even more accurate. The average return for the final 11 months following a 5% January is +14%. Even better, it has shown positive gains 86% of the time. As you can see, a negative January, like the one we had last year, has a much worse track record. We would not take this as gospel, but recognize there are a lot of reasons for this to hold true (bad news priced in last year). As of yesterday’s close, the S&P is up 5.8% year to date.
Source: @RyanDetrick
Earnings season:
After last night, about 140 S&P companies have reported fourth quarter earnings. So far they are not great, but this was not unexpected. In total, revenues are up ~6%, while earnings are down 2%. As usual, lowered analyst estimates are making “beats” achievable, albeit at a lower level than prior quarters. It is getting harder to surprise markets with revenue, margin and EPS gains when an economy slows and belts tighten. The only sectors expected to show positive growth on the bottom line on a year-over-year basis are Energy (oil prices are still up from 2021), Industrials (recovery play due to Covid lockdowns and still catching up on orders) and Utilities (normally a GDP grower). Taking out the Energy sector pushes earnings down 9% instead of just 2%. Consumer Discretionary (Tesla and Amazon dominate), Basic Materials and Real Estate (interest rate sensitive) are expected to show greater than 20% declines in earnings relative to last year.
Next week will be a big one for earnings, not to mention the Fed Meeting and January Jobs reports. Some well-known names are due to announce 4th quarter earnings and give forward guidance next week: Exxon Mobil#, McDonald’s#, UPS#, Amgen#, Facebook#, Merck, Honeywell#, Google#, Qualcomm#, Apple# and Amazon#. Fasten those seatbelts!
Checking and Savings Accounts:
We have mentioned this before, but the questions and shocks from looking at checking/savings account statements keep coming. For years now, cash in savings or checking accounts have been earning next to nothing. Even worse, there were minimal alternatives as the Fed cut rates to zero. This damaged the saver’s ability to stay liquid, risk-averse and earn any type of a return on their cash. Furthermore, banks have been very slow to increase the interest rate offered to customers. There are alternatives now, but safety remains priority #1. With interest rates back to levels not seen in 15 years, it behooves one to make sure your cash is working for you.
In closing, the bulls are clearly in charge at the moment and will attempt to press this market towards the upper boundary of our 5-month trading range, which is 3,600 – 4,300 on the S&P (currently at 4060). Safety stocks, such as staples, utilities and even healthcare are starting the year off with relentless profit-taking. However, quite the opposite is true for growth and beaten down high multiple stocks as they take a leadership role for now. It is possible that the most expected recession in history does not come to fruition in 2023. Excess pent-up savings, the recovery in travel spending, lower mortgage rates supporting the housing market, and years of unsatisfied auto demand could create a positive GDP environment while inflation subsides.
With a 25bp increase in Fed Funds all but guaranteed next week, it will be Fed Chair Powell’s press conference and Fed economic forecasts that determine if the next 5% rally can lead to a breakout on the upside. The Fed would like to see slowing labor markets, but that is not happening yet. Higher stock prices, solid employment and elevated housing prices will not make their job any easier in their quest to get to 2% inflation.
Go Birds!!!
Mimi Rogers turns 67 today, and Bridget Fonda is 59. James Cromwell turns 83. I really hope that Cris Collinsworth, who hits 64 today, is not announcing this Sunday’s Eagles game! Lastly, Steve Wynn is now 81.
James Vogt, 610-260-2214