‘Tis the Season

Jan 23, 2023

By Pete Biebel, Senior Vice President
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Wait. Don’t you mean “’Twas the season?” Christmas, Hanukkah, Kwanzaa and Festivus were all a month or more ago.

Holidays schmolidays! The season ‘tis the new earnings season that’s cumin, and a couple big weeks of reports are right around the coriander. Earnings season is always a big dill for the market, but this thyme, how the market reacts to reported profits and guidance could tell us a lot about the market’s course going forward. That’s at least parsley because the market’s focus has shifted from anticipating the Fed’s future actions to concerns about slowing earnings growth and a potentially slowing economy.

I know it’s not a very oregano thought to point a ginger at the importance of earnings season. For many successive years, the quarterly reports brought anise increase in the market’s overall profits and helped to sustain the long-term uptrend in stock prices. Now, for the first time in a long time, the potential for little or no earnings growth has to be considered.  This is the first big week of the new season. We won’t have to wait oolong for earnings announcements from market-leading companies. This week alone, we’ll get reports from 12 of the 30 component companies in the Dow Jones Industrial Average (DJIA) and 84 of the 505 component companies in the S&P 500 Index (SPX). So, this will be the first week with earnings data and forward guidance from companies across a wide spectrum of industries.

Just as important as the reported revenues and profits will be each individual stock’s reaction to the news. Working hand in clove with the actual data will be the market’s implied bullishness or bearishness that is signaled by how the stock responds to the report. Last week brought several examples of bullish reactions to seemingly bearish news and vice versa.

Last week also brought the first sign that the post-Christmas rally could no longer cut the mustard. Both DJIA and SPX had losses on the first three days of the four-session week. Only a big rebound on Friday kept the losses for the week at a moderate level. DJIA got the wurst of it largely due to negative earnings reactions in a few of its component stocks (GS, TRV, PG). The average lost 2.7% for the week, nearly wiping out its year-to-date gain. SPX lost just 0.66% last week and is still up about 3.5% for the year.

Echoing a recent phenomenon in which last year’s biggest losers are seeing the strongest gains, the NASDAQ Composite Index (COMP) was able to post a small gain for the week, +0.55%. That index, which lost more than 30% in 2022, is now up nearly 6.5% year-to-date. That phenomenon was repeated on the sector level. Only three of the 11 U.S. equity sectors had net gains last week. The top two were Communication Services (+1.43%) and Technology (+0.65%), two of 2022’s weakest sectors.

Another recent phenomenon in the market, and one that seems to have potentially more staying power, is the outperformance of international stock indices. Thanks partly to how depressed values were in some of those markets and partly due to the weakening U.S. Dollar, international markets, both developed and emerging, have seen gains of double or triple what their U.S. counterparts enjoyed. Echoing that phenomenon, companies with more foreign revenue exposure have been among the better performers in the U.S. markets.

Contributing to the market declines early in the week were several disappointing economic reports. Several salt of the Earth statistics including Retail Sales, Industrial Production and Manufacturing Output came in significantly weaker than the consensus expectations. The report on Retail Sales ex-Autos and Gas came in at -0.7% when just a 0.1% decline had been anticipated. The same was true of Industrial Production: -0.7% versus a -0.1% consensus. On Monday afternoon, the New York Fed reported that its Empire State Manufacturing Index dropped sharply in January. Following December’s reading of -11.2, the index was expected to come in at about -4.5. Instead, it plunged to -32.9, its lowest level since mid-2020 and the fifth worst reading in the survey’s history.

One troubling allegation caught my eye last week. An article stated that $1 million dollars of purchasing power one year ago would now buy less than $900,000 of goods. I called this an allegation because I don’t know how truthful or precise it is. No one would argue that purchasing power hasn’t decreased, but, if the report is even close to accurate, the size of the decrease in just one year really drove home the impact of inflation over time. The allegation was a jarring reminder that putting money into assets that have a strong probability of at least keeping up with inflation over the long run is critical.

SPX ended last week (3972.61) at roughly the same level at which it was trading two months ago. Over that time, the index has oscillated between about 3800 and 4100. I suspect that the key to the market’s direction over the next few months will be which of those levels is broken first. Climbing above 4100 would clearly break the long-term downtrend that has been a barrier to past rebound rallies. It would also lift SPX to the largest gap above its 200-day moving average since March and greatly reduce the probability of any test of the October low. However, caution will be warranted if instead SPX takes out the 3800 level. Doing so would strongly suggest that the rebound rally was history and lower lows were again on the table.

Again last week, comments from various Fed officials were credited or blamed for some of the market moves. Hawkish comments early in the week likely contributed to the weakness. A more optimistic note from another official late in the week probably increased Friday’s bullishness. FOMC members are now in a media blackout period in advance of next week’s meeting.

We’ll get a respectable list of economic reports this week, though earnings news and the reaction thereto will likely dominate conversation. The one measure of inflation that will be reported is the PCE Price Index. That report comes on the fennel trading day of the week.

Date Report Previous Consensus
Monday 1/23/2023 Leading Indicators, December, M/M -1.0% -0.7%
Tuesday 1/24/2023 PMI Composite Flash, January 46.5
Richmond Fed Manufacturing Index, January 1 -3
Wednesday 1/25/2023 No Reports Scheduled
Thursday 1/26/2023 Durable Goods Orders, December, M/M -2..1% +2.8%
Durable Goods ex-Transportation, December, M/M +0.2% -0.2%
Gross Domestic Product, Q4, SAAR +3.2% +2.7%
Initial Jobless Claims 190K 202K
Continuing Claims  1,647K 1,658K
International Trade – Trade Deficit, December $82.9B $88.5B
New Home Sales, December, SAAR 640K 614K
Friday 1/27/2023 Personal Income, December, M/M +0.4% +0.2%
Personal Spending, December, M/M +0.1% -0.1%
PCE Price Index, Y/Y +5.5% +5.0%
Pending Home Sales, December, SAAR -4.0% -0.1%
Consumer Sentiment, January 64.6 64.6


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