by Bryan Perry
January 18, 2023
Halfway through the month of January, the market landscape is much more constructive, after the last half of December saw a flood of selling pressure that was a huge disappointment to what was a down year for the major averages. Now, 2023 is off to a strong start, with the S&P higher by 4.15% as of last Friday’s close. The Dow is ahead by 3.49%, Nasdaq up 5.85%, and the Russell 2000, the big winner, is up 7.14%.
In addition to the “damn the Covid virus, full speed ahead” for China’s reopening, there are several key developments contributing to the sudden change in sentiment and stock performance.
Here are some of the catalysts for an improving outlook:
2023 Cost of Living Adjustment (COLA) – Based on the increase in the Consumer Price Index, there will be an 8.7 percent Cost of Living Adjustment (COLA) for Social Security recipients and for most retired pay and Survivor Benefit Plan annuities effective December 1, 2022. Retirees will see the change in their December 30 payment and annuitants in their January 3, 2023, payment. The increase was set right at the peak of CPI and will be a big net positive to retirees with the rate of inflation falling fast. It’s the largest increase since 1981, which saw a hike of 11.2% in the COLA (source: ssa.gov/cola/).
Rate of Inflation Moving Lower – The CPI declined 0.1% month-over-month in December (vs. the Briefing.com consensus of 0.0%), paced by a 9.4% m/m decline in the gasoline index. Core CPI, which excludes food and energy, increased 0.3% month-over-month, as expected. On a year-over-year basis, total CPI was up 6.5%, which was the smallest increase since October 2021, versus 7.1% in November. Core CPI was up 5.7% versus 6.0% in November (source: bls.gov).
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Dollar Weakness Reflects Risk-On Sentiment – The U.S. Dollar Index (DXY) contains six component currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. The DXY has broken key technical levels and is now in a protracted downtrend as investors that were seeking super safe havens in 2022 are taking on more risk in stocks and other currencies.
It’s interesting to see that the DXY was breaking down in mid-November just as year-end selling of equities was accelerating. The steep correction in the dollar is a boon to multinational corporations that should show up during the current fourth-quarter earnings season. What was a major forex headwind (strong dollar) is now a solid tailwind (weak dollar) and looks to extend the sell-off in the near term.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Housing Market Is Resilient – The market for available homes remains undersupplied even as mortgage rates hit 20-year highs. Housing listings are down 29% nationwide in the five years ending in October, according to Realtor.com data. Policy experts and economists estimate that the nation’s total housing shortage ranges from 1-5 million homes, a shocking number during a time of soaring mortgage rates (source: marketwatch.com).
Based on the Fed’s likelihood of hiking rates at least once more before a pause, one can argue that mortgage rates should land at around 5.5% for 30-year fixed rate in late 2023.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Margin Debt Is Way Down, after peaking at more than $1 trillion in December 2021, when the market hit historic highs. It’s a healthy sign that investors have solid buying power, but with margin rates up considerably, they are likely to use margin more for short-term trading purposes as opposed to buy-and-hold strategies when rates were super low, and the bull market in full motion.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
High Yield Market Shows Bullish Price Action – The largest Junk Bond ETF is the iShares iBoxx USD High Yield Corporate Bond ETF HYG with $18.49 billion in assets. In the world of investing, bonds trade out of fear and stocks trade out of greed. High-yield bonds have been in rally mode and are piercing an overhead technical level as of last week on pretty good volume.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Lastly, the S&P 500 closed barely above its 200-day moving average, and that is getting a lot of technical chatter. But the prior four attempts to break out failed, making this attempt off of a higher-low somewhat encouraging. I think it will take a wave of companies providing assurance about business conditions for this quarter and further out to see a clean break above this key trend line to send bears back to their caves.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Coming into this week, most sectors and stocks are technically overbought on a short-term basis. There were impressive upside moves in the small caps, airlines, bitcoin, gold, and high-yield debt, all of which reflect a 180-degree flip in the risk profile of market participants, buying into the soft-landing narrative.
There is a growing amount of data to get more optimistic about, but the Fed isn’t done raising rates, the yield curve remains very inverted, and personal savings are at a pre-pandemic low. The latest data shows Americans are saving just 2.3%, or $23 of every $1,000 they earn after paying taxes, down from 7.5% as of year-end 2021. Historically, 2.3% is very low. From 2015 to 2019, this rate averaged around 7.6%.
As of the third quarter of 2022, Americans hold $925 billion in credit card debt, a rise of $38 billion since Q2’22. The Federal Reserve of New York says this is a 15% year-over-year rise – the biggest jump we’ve seen in over 20 years. How this all plays out will be intriguing, given the U.S. is a consumer-driven economy. But for now, unemployment is 3.5%, inflation is coming under control, and the market is voting with both feet that a recession will be averted. Now it’s up to earnings season to keep the party going.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
A Flat CPI Points to the End of Rising Rates
Income Mail by Bryan Perry
Swift Change in Sentiment Sparks Hot Start To 2023
Growth Mail by Gary Alexander
Immigration is Vital in Promoting Long-Term Growth
Global Mail by Ivan Martchev
High Yield Spreads Show No Recession in Early 2023
Sector Spotlight by Jason Bodner
What’s New (So Far) in 2023
View Full Archive
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Bryan Perry
SENIOR DIRECTOR
Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
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