by Bryan Perry

January 24, 2023

The first two weeks of January were “up, up, and away” for all 11 S&P 500 market sectors, fueled by the grand reopening of China, a rally in bonds, a sell-off in the dollar, and crude oil catching a fresh bid.

The third week of January, however, had the market giving back most of those gains, save for Friday’s rally that smacked of options expiration manipulation and short covering on strong earnings from a video streaming company and news of tens of thousands of techies losing their jobs to slash costs.

The New Year’s opening mood of optimism turned to despair as the narrative radically changed. Wall Street took to heart negative reports on retail sales, manufacturing, and industrial production and the Fed’s relentless drumbeat that short-term rates are headed to 5.0%, regardless of the alarm bells going off along the yield curve. The 10-year Treasury yield is now down to 3.48% from 4.34% three months ago, but the short-term 6-month T-Bill is paying 4.83%. The 1-year T-Bill is 4.69% and the 2-year T-Note 4.18%.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

We’re talking serious yield-curve inversion, as “provisions for credit losses (PCLs) at the U.S.’s top four lenders ballooned to $6.2 billion in the fourth quarter of 2022 – the most in over a decade, barring the Covid-19 pandemic’s earliest months. PCLs collectively booked by Bank of America, Citi, JP Morgan, and Wells Fargo were up 35% compared with the previous quarter and marked the third-largest amount since Q4 2012.” The 10/2 spread closed Friday at -66 basis points, off the high of -84 set on December 7, but nowhere near a level that suggests the bond market isn’t highly worried about the Fed overtightening.

On the flip side, some of the root causes responsible for the spike in inflation, namely supply chain disruptions, soaring commodity prices, and elevated shipping costs, have all eased materially from a year ago. In supply chain circles battered by more than two years of upheaval, the word “normal” is creeping into the outlook for 2023. In the latest Logistics Managers’ Index, for instance, we read: “September’s future predictions hint at normalization and a return to business as usual over the next year.”

Another indicator: Analysis from Sea-Intelligence, gauging the amount of bogged-down shipping capacity, shows: “All three models suggest we should be back at the ‘normal’ 2% capacity loss baseline by early 2023.” The year-to-date improvements in New York Fed’s Global Supply Chain Pressure Index “suggest that global supply chain pressures are beginning to fall back in line with historical levels.”

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

It has also been reported that ‘someone above’ must give a hoot about Europe, because that region has effectively skirted tough winter conditions that were as warm as any in recent memory, bringing huge relief from the threat of gut-wrenching heating and power bills for businesses and consumers alike.

What was a highly anticipated inflationary hyper-catalyst (frozen Europe) never really materialized.

Although still high, inflation across Europe dropped for the second consecutive month in December, according to preliminary data from Eurostat, the European statistics agency. Eurozone annual inflation was down to 9.2% year-on-year last month from 10.1% in November, finally dropping from the realm of double digits, reached for the first time in October, when it surged to a 41-year high of 11.1%.

In yet another positive development, commodity prices are easing off the peak levels of May 2022. Although up from the low of September 2022, due to the anticipated reopening of China, prices for most commodities, especially in the agricultural sector, have stabilized, even as the Ukraine war continues.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Against this backdrop of a lower-trending PPI, PPI, industrial production, retail sales, and personal savings, with a counter lever of a rebounding China economy driving demand for U.S. goods and services, one can argue that the S&P 500 maintaining a trading range is reasonable. But this assumption comes with the fact that investors are flying blind into earnings season, where evidence of cautionary spending by both consumers and businesses could call into question the soft-landing narrative that has been touted by the Fed and embraced by a growing read on investor sentiment based on recent surveys, like that of American Association of Individual Investors (AAII) weekly bullish/neutral/bearish polls.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Stock indexes could be weighed down by underperformance by the mega caps that rule the major indexes. At the same time, one out of five companies will likely beat expectations and raise guidance, making this a quintessential stock picker’s market, at least for the next few months, until the economy proves it can avert a recession and effect a soft landing that results in a broad revenue and earnings recovery that will be accompanied by the Fed lowering rates amid lower inflation with the yield curve normalizing.

Again, this market is driving into the thick fog of earnings season. In the last month, the market went from a very downtrodden finish to 2022, to a euphoric first half January 2023, followed by a sharp pullback last week, mostly based on a reality check, in that bad economic news isn’t good news for inflation and for stocks – but instead is bad news for corporate profits.

Nothing can spoil a party on Wall Street more than P/E contraction, which hammers valuations and stock prices. So, welcome to fourth-quarter earnings season. In the words of head risk manager, Eric Dale, played by Stanley Tucci in the movie Margin Call, based on the 2007-2008 mortgage meltdown on Wall Street as he is handing a zip drive to his protégé after being fired. It simply says, “Be careful.”

I couldn’t agree more.

Navellier & Associates does not own Bank of America, Citi, JP Morgan, and Wells Fargo, in managed accounts. Bryan Perry does not personally own Bank of America, Citi, JP Morgan, and Wells Fargo.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
China’s Global Leadership is Slowly Slipping

Income Mail by Bryan Perry
U.S. Stock Market Enters a Fog of Uncertainty

Growth Mail by Gary Alexander
Davos Dreamers vs. Mont Pelerin’s Principles

About The Author

Bryan Perry

Bryan Perry

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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