Things you need to know –
-Earnings did not disappoint….beats on top and bottom lines
-Macro data offers hope
-Commodities – precious metals/oil continue to push higher
-2022 losers are 2023 winners!
-Try the Lemon Roasted Feta Chicken
Stocks ended the week on a plus tick…the Dow adding 112 pts, the S&P up 16, the Nasdaq added 80, the Russell tacked on 11 pts while the Transports took a breather and gave up 40 pts…..An optimistic read on the state of American consumers was just one reason for the algo’s to go into buy mode…The U of Michigan sentiment survey rising to it’s highest level since April – going to 64.6 up from 59.7, while the 1 year inflation outlook eased a bit to 4% down from 4.3%. And then we got earnings….and oh boy, was that exciting….
The banks did not disappoint….report after report revealing that the they beat on both the top and bottom lines! (Understanding that those top and bottom lines have been slashed from earlier estimates). Rising interest rates benefitting many of these banks because as rates rise, loan margins rise and that allows them to earn more from loans….Kiran Ganesh – a UBS multi-asset specialist telling the WSJ that this is a ‘Goldilocks scenario for the banks’! Not to hot and not too cold, but rather just right………. It also revealed that they are allocating more money to the ‘Loan Loss Reserve’ account – suggesting that they are expecting tougher times ahead and preparing for what they expect will be rising credit defaults….….They are also trimming the fat around the edges to help mitigate the tough environment….Goldman, Citigroup, Barclay’s, Wells Fargo, Blackrock, HBSC, Morgan Stanley, Plaid, Credit Suisse are just sone of the names that are laying people off.
But they remain mostly upbeat about the state of the union – all sitting right on the fence about the size and shape of the coming recession – Black Rock CEO Larry Fink puts it this way –
“There’s a high probability we’re going to be going into a recession…….. but if the pathway continues in this direction and I believe it will, we’re going to be in a mild recession and there’s absolutely no reason for us to be in a very deep recession. There’s too many things going on in our economy to be in a deep recession.”
I mean talk about talking out of both ends…..We’re not there yet, but we are going there, but don’t worry, it won’t be bad! – This as he lays off 3% of his workforce (other even more)….Yeah, Larry, it won’t be bad for you, but what about those that lose their jobs? What do they think about the coming recession? My guess is that they have a different view….but let’s move on…..
Kroger – the supermarket chain – warning markets that they are seeing more ‘headwinds than tailwinds’ – with the headwinds ‘outweighing the tailwinds..’ Morgan Stanley – suggests weaker y/y consumer spending, negative unit growth, disinflation and a ‘murky path’ for margin recapture… Hmmm – not sure that sounds like a mild recession…
Now the optimistic read on consumer sentiment is starting to convince some street analysts that the FED will pivot ‘sometime’ this year -which once again adds to the tug of war between hopes and dreams….and you know how I feel about that….I do not see a pivot (or rate cut) this year….Now, Bank America see’s the FED taking rates to 4.9% by June – even though nearly every FED member has disputed that and talked of rates in the mid 5’s….and then cutting those same rates to 3% by the time Santa comes again in 2023….which makes you ask – If that is the case and if there is no recession and if unemployment remains strong and IF inflation is cooling off – WHY would the FED have to cut rates? I mean strong employment and cooling inflation is what they want, right? So if that is what’s happening then why would cutting rates – which stimulates the economy – be necessary?
In any event – the financials – XLF rose by 0.75% – taking that group up 5.6% ytd…remember – the financials were off by 14% in 2022….The only other sector that outperformed financials on Friday were Consumer Discretionary – XLY rose by 0.9% – taking that group up 8.1% ytd,,,,,recall – they were down by more than 30% last year.
In addition have you been watching the mid/small caps? The Russell index is up a whopping 7.1% so far this year….again – this sector was off by 20% in 2022….once again suggesting that money is moving into the most beaten up sectors from last year – as it looks of opportunity.
Disruptive tech – the Cathie Wood ETF – ARKK rose 1.4% on Friday taking that ETF up 15% this year….remember it was off by 77% in 2022…so if you’ve owned it, you’re still under water, but if you just jumped in – congratulations! And do we need to highlight Semi’s and Artificial Intel? UP 11% and 9% respectively. Metals and miners – XME– which were in the plus column in 22, continue to trade higher…. up 13% so far this year…and that speaks directly to the precious metals – Gold +7%, Silver +3%, Platinum +6% and Copper +8%…
Now, let’s talk oil…..holding right there at $80/barrel….as it struggles to pierce the trendline at $81.20…Over the weekend – our friends at Goldman – who told us months ago to expect a decline in the price of oil due to a ‘surplus’ is now raising their forecast in the price of oil…as global demand rises….a re-opening China at the center of this change in outlook. It’s exhausting….I continue to believe that oil is going higher, I’ve been saying it for months and will continue to say it while the big banks change their minds on the price of oil day to day…If we pierce the trendline at $81.20 – then look for it to challenge the long term trendline at $86.50.
And the dollar index – which is helping commodities do better – remains in decline…the dollar is down 10% since the September 2022 highs and is now trading at $102.40 – levels last seen in June 2022….a failure here could see the dollar drop to par ($100) and that will continue to support the commodity complex – which includes, oil, precious metals and foods.
And yes – while treasury yields have come in – the curve is still inverted with the 3 month yielding 4.45%, the 2 yr. – 4.23% and the 10 yr. – yielding 3.54%.
Eco data today includes – the Empire Manufacturing read….expectations are for it to show a decline of 8.6. Later in the week – look for Retail Sales, PPI – which is THE most important data point this week…as it speaks to the cost of what manufacturers must pay for the raw materials….Expectations are for it to come in….m/m – 0.1% and Ex food and energy of +0.1% – down from 0.4%. Y/y reads should show PPI at 6.8% (down from 7.4%) and Ex food and energy of 5.5% down from 6.2%. And that is good….but remember – CPI on the top line looked better than it was until you looked at what was happening in the services component….(it was up). Later in the week – we’ll get Industrial Production, Capacity Utilization, NAHB Housing Index, Housing starts, building permits and existing home sales…all expected to be a bit lower.
Earnings look for reports from GS, MS, SCHW, SBNY, SI, UAL NFLX, PG, STT etc…
US futures are down – Dow futures off by 70, The S&P’s down 11, the Nasdaq down by 67 and the Russell lower by 12 pts…..Comments by ECB Chief Economist – Philip Lane – reveal that ‘they’ think rates need to move higher into ‘restrictive’ territory….to bring inflation down…and then Blackrock Vice Chair – Phil Hildebrand reiterates that point saying that he sees no chance of policy easing this year….which makes you ask – what does Bank America see that causes them to suggest a rate cut by the late fall…?
We’ve got a team of FED speakers this week….NY’s Johnny Williams today, Atlanta’s Bostic, Dallas Fed President Lorie Logan and Philly’ s Patty Harker all tomorrow, while Boston’s Suzie Collins and NY’s Johnny Williams appear on Thursday.
In addition – it is the World Economic Forum in Davos, Switzerland…so expect all kinds of commentary coming from there…Thursday and Friday bring us ECB President Christine Lagarde….along with the IMF’s Kristalina Georgieva….
European stocks are lower….all down about 0.2% across the board…It’s the downbeat tone in Davos that is driving the sentiment across Europe. Concerns over weakening eco data, persistent inflation and worrisome unemployment remain top of mind….
The S&P closed the day at 3999 up 15 pts and is now above all 3 trendlines…which sets us up for a further advance….that could take us to about 4100 before we see the next point of resistance….but until then enjoy the ride….
If it’s rallying – Don’t chase it, let it run, but if some of your names are backing off – then consider adding a ‘bit more’. A well-balanced core portfolio – is the goal – You can use cash to play around the edges and add alpha to your portfolio on names that become completely disconnected to current reality….
Again, I don’t think the FED’s narrative is going to change….…..I expect rates to continue to rise…until May. It’s now about what the earnings season is about to tell us….In any event – expect more volatility ….and then we can revisit…what the second half of 2023 might look like.
Remember, the tone can change on a dime (and usually does) – so be ready….
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
Lemon Roasted Feta Chicken
Start with thighs – I use skin on vs. skin off….it tastes so much juicier….
Start with 6 pieces of chicken, 2 cloves crushed garlic, 1 large sliced onion and 3 potatoes that you have either cubed, or quartered or sliced… whichever way you prefer works just fine...
Place chicken, garlic, onion and potatoes in a glass baking dish… season with S&P.
Preheat oven to 400 degrees.
Next whisk together: 1 cup of chicken broth, 1/8 cup of olive oil, about 1/4 cup fresh lemon juice and some dried oregano. Pour over the chicken, cover tightly and let marinate for 20 mins.
Place in oven and roast for about 30mins – then remove cover and roast for 20 more mins… basting occasionally with the pan juices. Now turn on broiler and broil the chicken on each side until nice and golden brown. Careful not to burn the potatoes.
After broiling – add crumbled feta cheese over the chicken and potatoes and return to the broiler for a couple of mins- just so the cheese softens really. Once completed serve on a warmed platter with Chicken in the center surrounded by the potatoes – serve juice on side. Enjoy this dish with a steamed green vegetable- like asparagus, or broccoli. Season with S&P and a dab of butter.
Buon Appetito
