Recession Risk Fades and Stock-Market Speculation Returns

The risk of recession is fading, the economy appears strong enough to handle a 5% federal-funds rate, and money is coming off the sidelines from fear of missing out. The same thing is happening in Europe; the FTSE hit a record high today after interest-rate increases there.

The bears are in full retreat. With six weeks until the next Fed increase, and stocks trading up after misses, being underinvested appears to be the risky strategy for now.

Louis Navellier

Powell’s Big Blunder

RBA Fixed Income Insights

Richard Bernstein Advisors
Feb. 3: Although this week’s Fed decision to hike rates by 25 basis points was far from a surprise, Fed Chairman Jerome Powell certainly provided some shock and awe during the press conference. Unfortunately, the shock and awe was on behalf of those market participants expecting hawkish language. Rather than try and nip the speculative fervor in the bud (crypto, speculative technology to the moon), the Fed instead made one thing crystal clear: It doesn’t care about the loosening of financial conditions and hence the re-inflation of asset bubbles if inflation is falling.

What the Fed seems to be missing is those loose financial conditions will likely start to contribute to inflation. As high-multiplier sectors like housing take off again, credit loosens, and capital markets allow for a misallocation of capital, the Fed risks undoing much of the progress it has made since hiking rates and starting quantitative tightening. One could credibly make the argument that this week’s press conference was as big a blunder as any since Covid—mostly because it wasn’t a miscommunication. Powell’s intent was clear: “Risk on, mission almost accomplished. We’re not going to get in the way of markets, so have at it.”…

It’s clear to us the Fed was prematurely overconfident, risking more equity volatility, a more inverted yield curve, and an ever-higher chance of a hard landing.

Michael Contopoulos

Q4 Earnings Snapshot

Earnings EDGE: 4Q22 Reporting Season

Evercore ISI
Feb. 3: Ninety-seven S&P 500 companies (11% market cap) are scheduled to report quarterly earnings next week. Among them, Walt
Disney
(ticker: DIS) on 2/8, following the “magic” results of fellow entertainment heavyweight
Netflix
(NFLX) include
Abbvie
(ABBV) and
PepsiCo
(PEP).

To date, 203
S&P 500
companies (50% market cap) have reported 4Q results. Reported sales growth has been 6.1% and earnings 0.9%—surprising by 1.2% and 1.7% respectively—putting overall sales growth on pace for 4.2% and earnings for -4.9%. Extrapolating Evercore ISI expected 2.2% surprises to the balance of companies reporting suggests earnings -3.9%. The average stock price rose 0.8% postresults. Companies beating on both the top and bottom line (“double beats”) are higher by 1.7% on average versus 1% five-year average, and “double misses” are lower -0.8% versus -2.9% average.

Julian Emanuel, Michael Chu, Barak Hurvitz

Transports’ Bullish Message

Momentum Strategies Report

Clif Droke Market Analysis
Feb. 2: There have been a growing number of potentially bullish leading indicators for the broad market in recent days. Among them are the reemergence of strength in the broad transportation industry group. This can be seen in the bullish breakout of the
Dow Jones Transportation Average
(DJTA) on Wednesday (up nearly 4%) to a new six-month high.

Not only is DJTA leading the
Dow Industrials,
but the breakout in the former average is encouraging from a Dow Theory perspective and suggests leadership in the Transports will pave the way for further industrial sector strength.

The semiconductors are also beginning to show exceptional strength, which in itself tends to be a leading indicator for the
Nasdaq.
Witness the new multimonth high in the
VanEck Semiconductor
exchange-traded fund (SMH) on Wednesday, which bodes well for the overall tech sector.

Finally, the token new high registered in the
NYSE Securities Broker/Dealer Index
(XBD) is yet another instance of encouraging leadership from a highly sensitive industry group that typically leads the major averages at key turning points.

Clif Droke

Ukraine Grain Trends

January 2023 Market Letter

Third Street AG Investments
Jan. 31: By recent standards January was a relatively quiet month for agricultural futures. Volatility trended lower for corn, wheat, and soybeans and their monthly trading ranges were near the lowest of the past year. The top three global issues were the same as last month: 1) dryness in Argentina and the U.S. Plains, 2) Black Sea shipments, and 3) China’s emergence from its Covid lockdowns….

Fighting continues in Ukraine, but Black Sea shipments continue (mostly) uninterrupted. Russia is using the vessel-inspection process as a means of slowing the number of vessels moving into Ukraine to load. That has held total Ukrainian exports about 30% below last year. Russia, meanwhile, is exporting at a near-record pace. This, combined with strong wheat shipments from Australia, Canada, and the European Union, has helped keep a lid on world wheat prices. Unfortunately, because of a shortage of manpower, equipment, and inputs, Ukrainian new crop acres will be even lower than last year. Early production estimates are roughly half of their pre-war levels.

Chad Burlet

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