Things you need to know –
– Stocks rallied into the weekend – but are under pressure this morning.
– It’s a big week for earnings….20% of the S&P to report.
– It’s a big week for economic data.
– It’s a big week for the FED, the ECB and the BoE
– Oil retreated but is holding steady at $80….Countdown to Russian has begun
– Try the Lemon Chicken
Chevron posted RECORD quarterly ($35.5 billion) and annual ($246.3 billion) revenues. The 4th qtr. revenues though – huge as they were – were ‘short of analysts’ estimates – so the trader types that had been buying the stock on the expectation of higher results – decided to stamp their feet and sell stock – sending the name down 4% on Friday – which in my opinion was a buying opportunity for the long term investor….….This as they also announced a massive $75 billion stock buyback program and an increase in their divvy.
US consumers turned cautious – as consumer spending fell by 0.2% in December, while the FED’s favored inflation gauge also eased (as expected) – giving some hope to consumers that inflation is cooling – but let’s be honest here….. The PCE Deflator Core reading which EXCLUDES food and energy rose by 4.4% y/y – but the topline PCE Deflator that includes FOOD and ENERGY rose by 5% y/y – still down from the prior month, but still well above the FED’s 2% target…and remember – the inflation rate that matters to American’s is the rate that includes the everyday items that we need – specifically food and energy and it’s still ‘too dam high….’
INTC reported a miss to earnings blaming a weakening economy, ‘stiff competition’ and a very expensive turn-around plan, the stock which is down 57% from the March 2021 high – fell $5 (or 10%) on the opening before recovering just a bit to end the day down –6% or $1.93 at $28.16/sh and that helped drag the semiconductor index a bit lower….and – the board at Goldman Sachs clearly not happy with CEO Davey Solomon sent him that message by slashing his annual comp by 30% to $25 million….I don’t see many shedding a tear over this – but it does speak to the difficulty in running an investment bank during an industrywide slowdown that saw the bank ROE (Return on Equity) fall to 10.2% – well below their 14%-16% target. Now on the bright side (according to Davey) – the shares fell 10% in 2022 – ‘handily beating’ the 12% decline in the XLF etf! So far this year – they are trailing that index by 3% pts as the stock is up 3% and the sector is up 6%
At the end of the day – the Dow added 29 pts, the S&P gained 10 pts, the Nasdaq rose by 110 pts, the Russell added 9 pts and the Transports gained 192 pts.
Stocks went higher for one reason….recall what I said on Friday –
“Many will use today’s weaker (better) PCE report to demand that the FED stop raising rates…they will say that the FED has done enough and that they need to pause now….something that JJ and the others do not seem to agree with…and don’t forget – the more the market climbs the more the FED will dig its heels in….remember – Joey said that if stock and bond prices continue to rise – it would make his job more difficult – suggesting ongoing rising rates so anyone who thinks they are going to pivot anytime soon, better think again”.
There is this group think out there that the FED will crawl off the ledge and stop the rate hikes….not slow them, but stop them and eventually (later 2023) CUT them….which makes zero sense….right now – partly because they have all told you that they are not prepared to do any such thing and partly because the ongoing strong labor market threatens to keep upward pressure on wages and prices….think 1981 wage/price spiral inflation – …And we’ve seen this very fact in some of the recent commentary….…..DAL – while negotiating with the union – revealed the pressure that union is putting on them for higher wages and that’s but one union, we saw the same with the rail union, just wait until the negotiations come around for others… WMT & AMZN, are just 2 more major companies to announce wage increases to offset the rising price increases that plague us and we are also seeing that people who change jobs are getting a nearly 15% pay increase vs. those that remain…..And while we have seen lots of layoff announcements over the past 3 months – it has done nothing to slow the labor market or wage pressures at all and the FED reminds us that pricing pressures in the ‘services’ part of our economy – is RISING not falling – and remember – the US economy is a 75% SERVICES economy. So, expect this data point to remain very relevant in the discussions ahead.
Now the hawkish stance is causing some to worry that the FED has already gone too far – with them suggesting a 65% chance of a recession sometime this year…..Well, if the inverted yield curve holds true – then the recession should be officially recognized sometime between April – June 2023 (12 – 16 months after a yield curve inversion)…..The other 35% are betting the ranch that the FED can achieve a soft landing – typically defined as cooling inflation without a surge in unemployment…..which is a tough call – right? Consensus is that the unemployment rate will have to hit at least 5% before the FED is successful – others suggest a much higher number – north of 6% -and considering that the current unemployment rate is 3.5% – a move up to 5% or 6% would be anything but ‘soft’.
So let’s look at sector performance…..The best performing sectors this year in the S&P are – Communications – XLC + 15%, Consumer Discretionary – XLY + 14.5%, Tech – XLK up 9.5%, Real estate – XLRE + 9.2%….and that makes the most sense if you buy into the pause/pivot camp – these were last year’s biggest losers – due to the aggressive monetary policy….but, if you remain in the current camp of higher rates – at slower increments then I think – these groups are just a bit ahead of themselves…and we are about to find this out on Wednesday when the FED releases their statement of the future path of rates….remember – they are expected to raise rates by 25 bps on Wednesday and then again in March and May – to get us to the 5% – 5.25% range…and then pause…the way the market is acting suggests that this hike will be their last one (for now) – an argument I do not subscribe to. But let’s see…….
I would be surprised if the JJ changes his narrative on Wednesday…..My sense is that he will reiterate the slower push higher, but it is a push higher…..Expect all the journalists in the room to push him to say definitively when the FED will stop – something I do not expect him to say with clarity….and that’s just so he can keep the door open….
It’s a big economic week ahead…..we’ve got the Dallas FED survey, Housing Price Index, Chicago PMI, ADP employment, S&P Global Manufacturing PMI, Construction Spending, ISM employment and manufacturing….but there are two data points that will steal the show this week – Wednesday’s FOMC announcement and Friday’s NFP (Non-Farm Payroll) January report….and that is expected to show an increase of 185k ‘restored’ jobs…..and an unemployment rate of 3.6% – which would be an uptick over last month…….and remember – so many of the layoffs that have happened have taken place in January – so it makes sense that this is the month that shows a reversal in trend….but it is still far below where so many economists tell us it has to go to…. Think 5+%.
In addition the earnings train continues to roll on….We will hear from more than 100 S&P companies this week…..look for reports from GM, PFE, CAT, UPS, MCD, XOM, AMGN, MO, LLY, MRK, BSX……and on Thursday – we will hear from the big 3 A’s – Apple, Amazon and Alphabet… So, expect a very busy week on the earnings front that could cause heightened volatility.
Oil while moving higher all week – ended the week a bit lower at $79.68 on strong Russian supply comments (that will be met with strong Chinese demand). Additionally – the Saudi’s made it clear that they may reduce the selling price of their light crude by about 20 cts/gal for March sales to Asia to combat increased Russian supply….and that caused many of the trader types to hit the sell button and lock in profits after the recent spike higher.
This morning oil is trading just a hair below $80 /barrel as RBC puts out a report saying that they expect oil to trade at an average price of $92/barrel this year….which means it has to trade substantially higher to bring that average up…Remember – February 5th is the day that the Eurozone will start a ‘near absolute ban on all imports from Russia’ and is on top of the price caps imposed by the EU and the G7.
Gold is holding steady at $1945/oz and is biding its time until Wednesday at 2 pm….when we hear from the FED. Remember that gold has rallied on the idea that the FED will have to become less hawkish as inflation recedes – and that has helped the dollar decline – offering support to the whole commodity complex – recall the inverse relationship between the dollar and commodities.
The dollar index- DXY is down 11% from the September high of 115 and is now trading at `101.76…a level that did find support in June of 2022 – before the spike higher that took the dollar to 115, so let’s see if it holds or it corrects further based on what we hear on Wednesday.
US futures are significantly lower at 6 am as traders investors and the algo’s brace themselves for what could be a volatile week of data and earnings and loads of speculation surrounding what JJ says vs. what he means. I am in the camp that what he says is what he means while others will try to find a way to suggest that he is changing the narrative and becoming more dovish yet this morning’s action suggests that the majority (at least for today) are expecting some pretty hawkish commentary from the FED as well as the ECB and BoE. Dow futures down 240 pts, S&P’s down 40, Nasdaq down 160 and the Russell down 20.
European markets are lower as well…..markets across the region are down between 0.2% and 1%. Spanish inflation rose – which was a surprise to analysts – is causing many to suggest that the ECB is not caving in Thursday’s announcement. We know that Christine Lagarde – Pres of the ECB will remain hawkish -she was very clear about that in her last commentary and remember – they are far behind the pace of hikes we have seen in the US. Both the ECB and the BoE are expected to raise rates by 50 bps. The surprise will be if it is any different from that. Investors there are also bracing for a slew of European earnings.
The S&P closed the day at 4070 – up 10 points. Last week we broke out and up through the trendline at 4000 as the excitement builds….Today’s weakness will likely begin a test of that trendline – The question is – Will it hold? My gut says only if JJ changes the narrative…..something I do not see happening – but even if it fails my sense is that there is plenty of support down to the 3950 range.
Remember, you are a long term investor – build it and stick to the plan….trying to pick tops and bottoms is NOT what you do….it’s about building that strong foundation….dollar cost averaging into it and reinvesting all the divvy’s (unless of course you need the divvy’s as income…if not -put them back to work). Don’t’ be afraid to buy your names on weakness (as long as the weakness is not a fundamental shift in the sector or the name).
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
Lemon Chicken
This is a great dish if you are planning a party….it is easy to prepare and goes along way. You can make it ahead of time and just heat it up in the oven when ready. Served with another entree in a buffet style along with a large mixed green salad, Rice Pilaf and some sautéed broccolini – it makes a great presentation.
You will need to start with boneless/skinless breasts, and thighs. rinse, drain and pat dry….
To prepare – you need: – 4 lemons – sliced into 1/8 inch slices….seasoned flour (s&p), beef broth, butter and bit of olive oil.
Cut the chicken breasts/thighs into bite size pieces – dredge in seasoned flour and set aside. Next – in a large sauté pan – melt the butter and a bit of olive oil to prevent the butter from burning – make sure it is hot before adding chicken. Add enough to fill the pan – but do not overcrowd. Keep the heat on high. brown the chicken all over….it will take on a golden hue…..should be about 5 mins or so……
Next add enough beef broth to bathe the chicken pieces – lay lemon slices on top of chicken and cover. Turn heat to med and allow the lemon and broth to permeate the chicken. About 3 / 5 mins more. Keep your eye on it and turn the chicken so that it does not burn. The broth will begin to thicken so make sure to not overcook. Transfer to a baking dish and repeat process for the balance of the chicken. You can cover and keep warm in the oven until complete.
Serve with a large mixed green salad. Simple.
Buon Appetito
