Economic Market Summary

Market Down and Dirty

Last Week’s Economic/Market Summary

Data

• U.S. equities finished the week mostly positive as participants continue to bet on a soft landing.
  • S&P 500 +1.64% Dow -0.15%, Russell 2000 +3.91%, Nasdaq +3.31%1
    • The All-Country World Index rose +0.80%.1
  • S&P 500 sub-sectors were mostly higher last week.
    • Technology & Consumer Discretionary once again led to the upside. 1
    • Energy & Utilities led to the downside. 1
  • The CBOE Volatility Index (VIX) declined a percent to finish at 18.33. 1
• US Treasury bond yields were little changed last week as the yield curve inverted further.
  • US 2yr +0.11% at 4.30%, 10yr +0.01% to 3.53%, 30yr -0.01% to 3.63%.1
  • Stock & bond markets have moved in the same direction much of the year like in ’22. 1
• Commodities as an aggregate asset class were lower last week.
  • WTI Crude sank -8.17%.1
  • Gold was down -3.28%.1
  • The US Dollar index rose +1.04%.1
• In our opinion, U.S. economic data was mixed last week.
  • US Payrolls jumped +517k jobs, 3x the expected amount as the jobless rate fell to 3.4%.1
  • The Federal Reserve raised rates by 0.25% and Chair Powell gave no indication of pausing. 1
  • ISM Manufacturing PMI dropped for the 5th straight month. 1
• An index of equities outside the US (FTSE All-World ex-US) declined by 1.17%.1

Conclusion

• US Equities ended the week higher in a choppy week full of economic data releases.
  • Growth oriented equities led to the upside with the Nasdaq & Russell 2000 rising over 3%.1
  • We believe the collective bet of traders seems to be that rate hikes have been priced into stock and that the Fed will actually be able to pull off a soft landing.
    • In this scenario, the Fed would tame inflation while the economy continues to grow.
  • We are not currently in agreement with this sentiment, but if the data were to confirm, we’re in a position to not “miss the party.”
• S&P 500 sub-sectors were higher outside of 2 sectors.
  • The biggest decliners of ’22 continue to lead higher as money has flowed into Tech & Consumer Discretionary on the economic soft-landing thesis. 1
    • Historically, consumer discretionary & tech have outperformed in the early stages of bull markets.
  • The better performers of ’22, Energy & Utilities, were the only negative sectors. 1
    • We believe a large chunk of this price action has come from the unwinding of long/short equities funds that were long energy/utilities and short tech/consumer disc last year.
• US Treasury yields were mixed as the 2yr rose and the 10yr/30yr issues were flat. 1
  • The inversion of 2/10yr yields increased last week and now stands at 0.77%.1
  • Fed Chair Powell dismissed traders’ expectations for the Federal Reserve to cut rates this year. 1
    • Even so, consensus is building that the Fed’s peak rate will settle around 5%.
    • This has helped smooth out volatility in the bond market which was in turmoil last year over policy uncertainty.
• The volatility index (VIX) declined slightly last week but closed above the lows. 1
  • The gauge remains firmly settled below the key level of 20 and is not far off the lows of ’21. 1
  • Interesting to note that the cost of downside protection (hedging) is currently near 2 year lows. 1
  • We believe this lack of “fear” has helped drive the volatility index lower and structurally drive equity indices higher.
• With 50% of S&P 500 companies reporting earnings for the 4th quarter, 70% of them have reported positive earnings per share while 61% have had positive revenue surprises. 1
  • The earnings growth rate currently stands at -5.3% which is slightly worse than expectations. 1
• While the profit outlook for companies in the S&P 500 is rapidly deteriorating, analysts can’t raise their stock price targets fast enough.
  • We consider this a major stock-market disconnect of 2023.
  • The two incompatible trends seem to reflect how much equity prices are being driven by speculation that the Fed is nearing the end of its tightening policy.
  • 4th quarter reporting season has done little to support optimism about the fundamentals.
    • Earnings have been coming in below pre-season estimates and companies are dialing back outlooks based on expectations growth will slow.
    • In fact, Bloomberg Intelligence’s model shows that such earnings guidance for the first quarter has been cut by the most since at least 2010. 1

Ryan A. Mumy, CFP®,

AIF® – Chief Investment Officer

Contact: 828/855-9400
info@CIASonline.com or rmumy@bloomberg.net 

 1 Source: Bloomberg – 2/3/2023 

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