Things you need to know ~

• Happy New Year…. Let’s hope for better performance
• Big data week – ADP, NFP, Factory orders, Durable Goods, Manufacturing and Services PMI’s and more
• Oil is now trading in the $80 range – Reuters poll suggests an avg price of $89.30 this year
• Gold busts up and thru all trendlines – $1900 is in the line of sight
• Try the Pasta Faggioli

It was a brutal year….for some, while not so brutal for others…..Starting with January 2022 that saw the S&P fall by 11%, only to attempt to rebound before Vlad invaded Ukraine – helping to send oil to $130/barrel.  Then, the FED rate hikes that began slowly (25 bps) in January weren’t helping only caused more angst as economists, analysts and strategists all predicted a more aggressive rate tightening cycle (50 bps which then became 75 bps moves) as inflation at the consumer level ticked as high as 9.1% and the producer level top ticked at 11.3% in July….all while JJ, Yellen, Brian Deese, Jared Bernstein and Joey all told us that it was all Putin’s fault and that we needed to understand that it wasn’t going to stay high forever….but they were on it, as they passed massive spending bills, telling us that they needed to spend the money to bring inflation down! 

We had and have ongoing covid concerns (think new strains), ongoing supply chain issues and political unrest.  We have global inflation and global central banks that have also made it very clear that rates are going higher to fix a problem that all of them created!

JJ reminded us that he and the FED were focused on one thing – the sticky inflation and how to bring it down to 2% and that would require the FED to remain aggressive – and that sent stocks careening for most of the year, but even more so in late summer into fall as investors/algo’s/traders priced in a more aggressive FED than many had hoped for – sending the S&P down 27% before it found a bottom at 3490 – only to hobble into year-end closing down 19% on the year….Not a good showing by any stretch.  And then we got some of our favorite bankers from GS and MS to tell us to brace for another 20% move lower from here – taking the S&P to 3000 before this would be over…and then we heard about all the coming layoffs to the financial services industry….GS, JPM, BAC, MS, C as they join announced cuts out of Silicon Valley (CA), Silicon Alley (NYC), and Silicon Hills (Austin, TX).  Don’t forget the retail industry, the home builders and many more.

All of the drama caused the Nasdaq to get whacked – falling 33.1%, individual names in the tech sectors getting whacked even more….TSLA -65%, ZM – 63%, AMZN -50%,  META – 65% – shall I go on, or do you get the picture?  The Russell (Small and Mid-Caps)  lost 22%, the Dow Transports off 19% while the Dow Industrials only shaved off 8.8%!  That’s a win!  The value trade handsomely outperforming the growth trade by a 24% margin – SPYV – 5.3%, while the SPYG lost 29%.

Of the 11 S&P sectors –Energy (Fossil Fuels) was the clear winner – surging by 59%, followed by Utilities – 1%, Consumer Staples -3.6% and Healthcare – 3.6%…all sectors I was screaming about all year long….these represent the STPN trade – Stuff that People Need! – Things you need no matter what…recession, no recession, soft landing or hard landing…either way you need this stuff…and so they held in  there….while other parts of the market got slammed.

Communications, Tech, Real Estate and Consumer Discretionary down 40.4%, 29%, 28% and 37.6% respectively.

Caught in the middle were Financials – 12%, Basic Materials – 14%, and Industrials down 7%.

Further down the line – we witnessed deeper losses in Semi’s -36%, Cybersecurity -26%, Artificial Intelligence – 42%, Retail -31%, Renewables – 15%, Homebuilders – 28%  and the list goes on there as well.

Sectors that did well (considering the destruction) included – Aerospace and Defense + 10% with individual names up even more…LMT +40%, NOC +42%, RTX +20% & GD +22%.  Coal stocks also benefitted from the demand for energy – BTU +162%, CEIX + 195%, NRP +73%, ARCH +83%.  Oil service stocks did very well – the group +66% on the year – includes names like HAL + 74%, SLB + 81%, BKR +26%.   Metals and Miners also scored in 2022 – XME + 13% NUE + 17%, STLD + 60%, X +6%….and we could go on, but the point is that there was plenty of opportunity in 2022, it was not the complete disaster that the indexes paint.

And do not forget the contra ETF’s that got you short different parts of the market that offered protection and upside.  The PSQ (Nasdaq short) rose 38% on the year, the SH (S&P short) gained 19% while the DOG (Dow short) added 6.5%…. but again – those are NOT for a long term investment and do not belong in your account for any extended time period. They are strategic and meant for actively managed, dynamic portfolio’s. 

Bonds got whacked as well….the AGG (Core US Aggregate Bond Fund) lost 14% after being down closer to 20% in the fall leaving many to wonder if the historic 60/40 portfolio was officially dead….(Hint – It is not…..).  Junk bonds – otherwise known as ‘hi-yield debt’ represented by the HYG ETF – was also down by 20% by October – only to rally into year end closing down a solid 11%.

Treasury yields rose most of the year as it became even clearer that the FED is not about to pivot….The 3 month note now yielding 4.24%,  2 yr. treasuries yielding 4.42%, while the 10 yr. is yielding 3.87%, I mean you can get a 12  month CD at your local bank and get 4.5% guaranteed with many banks offering rate ‘upgrades’ if rates keep rising – giving investors something to consider other than stocks –

And the inverted yield  curve now suggesting that not only is a recession ‘possible’ but is expected to start in earnest sometime late winter/early spring – it just depends when the NBER (National Board of Economic Research) decides to have the guts (I would have chosen another word but decided ‘guts’ was clear enough!) to call it.  Estimates range from late winter to sometime in the fall…..Which is ridiculous – since I along with many others – believes that it is already here….but let’s move on.

They tell us that the labor market remains strong – so therefore we can’t be in a recession – to which I would say – let’s watch the data….Now this Friday – brings us the December NFP report and it is expected to show that unemployment remains at 3.7%……and that will cause the administration to tell us ‘not to worry’.

But here is the story –  We need to wait until February – when we get the January NFP report and then March to get the February report and so on…. – that is when it will start to show rising unemployment – recall all the layoff/firing announcements across a range of industries that we heard in December,  they will start to show up in the January report…  and remember – that many economists expect to see unemployment rise to somewhere between 5% – 7%  and then stay elevated for a long period of time in order to get inflation back to the 2% target- that’s if they don’t change the target – which I think they will do – My gut says that 3% will be the new FED target – when it becomes even more obvious that 2% is a pipe dream – unless they continue to raise rates to levels that brings the economy to a ‘crawl’.  Which they also might do….

And all this has to happen in 2023 – why? Because it is NOT an election year….which explains why JJ told us at the last FOMC meeting that it is ‘premature to think the FED will pivot in 2023’ (making it very clear that the committee is concerned that the ‘transitory inflation’ is now ‘sticky inflation’)–He expects rate cuts sometime in 2024  (Presidential election cycle)–  ‘when in 2024?’ That’s really undefinable – but expect all kinds of forecasts…

Ok – but today is a new day and a new year…the slate has been wiped clean – end of year statements will go out this week along with all kinds of tax and income statements – as we prepare for the coming tax season.

Oil is now trading back above $80/barrel – overnight it traded as high as $81.50 and as low as $79.30 – trendline resistance levels are at $80.50,  $82.30 and $87.30.  My gut says that we will pierce the first two and then struggle for a bit with the long term resistance trendline at $87.30 before we trade higher.  The IMF (Int’t Monetary Fund) is warning of a ‘tougher’ 2023 – suggesting demand destruction as major global economies go into recession…all while a Reuters 2023 oil price poll suggests that oil prices will AVERAGE $89.37/barrel – which means it has to trade substantially higher at some point during the year…So, get ready….

This morning US futures are HIGHER….at 5:30 am – Dow futures are rising by 290 pts, the S&P up 35 pts, the Nasdaq ahead by 110 pts and the Russell up 25 pts.  Recall – this is how we started 2022!

Eco data today includes S&P US Manufacturing PMI – expectations of 46.2 – contractionary territory, construction spending is also expected to be lower by 0.4%.  Later in the week – we’ll get ADP employment on Wednesday and that is expected to show an increase of 147k restored jobs….Thursday brings us S&P US services PMI and that is expected to be even lower than manufacturing – coming in at 44.4 – well into contractionary territory.  And then Friday – brings us the all-important NFP (Non-Farm Payrolls).  They expect to see 166k jobs restored, Unemployment to remain at 3.7% while Avg Hourly m/m and y/y earnings are up 0.4% and 5% respectively. We will also get Factory orders, Durable goods orders and Cap Goods ordered and shipped.

While it feels good and we may get an early new year rally– expect the markets and the economy to remain skittish, as every single concern out there is still out there – think:  Trade, FED, Interest Rates and Balance Sheet, a resurging covid variants, Slowing Global Growth, 4th Qtr. Earnings and the coming slowdown in those earnings for 2023.

Gold exploded higher into year end and this morning it is up another $17 at $1843/oz (after trading as high as $1856)…- Recall on Friday I pointed out that gold was trading above all 3 trendlines and appeared to want to test the June high at $1900/oz/.  I am still in that camp….leaving us in the $1780/$1900 trading range.

European markets are all up –  with the FTSE rallying better than 2% while Spain is up 0.8%.  The other markets all fall inside that range. Inflation figures for Germany are due out tomorrow, France on Wednesday and Italy on Thursday. On Monday – we learned that Eurozone Manufacturing suggested that the ‘worst’ just might be over for the continent and that good news is helping stocks on both sides of the Atlantic.

The S&P closed the day at 3839 – down 10 pts on Friday.  It’s a new year….Lets be positive….but let’s not be ridiculous….The path forward is full of potholes – so prepare yourself…..Remember – the pendulum swings too far – in both directions – all the time….so corrections and repricing’s are just part of the efficient mkt theory – We just need to decide if the pendulum is still swinging to the left or has it reached its arc and is preparing to swing to the right creating big opportunities for the longer term investor – while creating ‘trading opportunities’ for the traders. Keep your eye on the ball and as a long-term investor –eliminate the noise and stick to the plan.

Investing is dynamic, not static….Create a well-diversified portfolio that will weather the storm….Remain alert, because any sense of closure  on any one of THE issues facing the markets will create a positive headline and the algo’s will  eat it up……Capisce?

Take good care,

Chief Market Strategist
kpolcari@slatestone.com 

Pasta Fagioli

This was always considered a peasant dish – although you would never know it by the prices on the menu – today it is featured as a ‘specialty dish’ – so pay attention and you can make this classic Sicilian dish your own….

It is a great healthy vegetarian dish and you can make it GF (gluten free) so that all can enjoy.  it is full of protein, fiber and low in calories.
In a saucepan –  heat up some Olive oil.   Add 1 clove of crush garlic,  finely chopped (1) onion, (2) celery stalks  and (2) Lg carrots – sauté until tender – about 15 min or so.  When soft add 1 can of cannelloni beans, one can of crushed plum tomatoes.  S&P, and 3 cans of water.  Bring to a boil….then reduce heat to simmer and cook uncovered for 20 mins….you may have to add a bit more water to keep it a bit soupy.

In separate pot – boil half a pound of elbow macaroni in salted water…..when almost done – strain – reserving 1 mugful of pasta water – then add pasta to the tomato and bean mixture.  Add 2 handfuls of grated cheese – Parmegiana or Romano – adorn with chopped Italian parsley – stir to heat through and serve.    Great winter dish and very hearty.

Buon appetito