Based on the futures market, stocks look to open lower at the start of today’s trading. Early this morning, December-quarter operating results began rolling in from the leading domestic banks. At first glance, those results appeared mixed. Top bankers caution that the global economy continues to face significant monetary, supply-chain, and geopolitical challenges. Shortly, investors will see new data from the University of Michigan on consumer sentiment and near- and long-term inflation expectations. Economists are expecting a modest improvement in sentiment this month over the prior month. We believe the view on inflation will be about flat or slightly more negative. As more earnings reports are released in the days and weeks ahead, managements’ outlook for 2023 will influence stock trading. The major market indexes will probably finish slightly higher this week.
We have noticed that, so far this year, market leadership has changed, with the technology-focused NASDAQ composite outperforming the broader Standard & Poor’s 500 Index, and the blue-chip Dow Jones Industrial Average lagging behind. Investors now seem more willing to buy into the beaten down tech issues. Though prices for services and goods are still significantly rising, a downward inflation trend is materializing. The Federal Reserve’s aggressing inflation-fighting strategy, comprised of hikes in short-term interest rates and quantitative easing (that is, reducing the amount of bonds on its balance sheet) is having an impact. Fed officials meet at the end of this month, and will decide on whether to again lift rates. The consensus on Wall Street is that a one-quarter percentage-point increase, to 4.50%-4.75% is coming on February 1st. Still, some officials have cautioned that a one-half point hike is not off the table. Ultimately, the federal funds rate range may rise above 5% by this spring, and then stay at that level through year end, before any possible cuts in 2024.
Lately, there has been more optimism on the Street, regarding achievement of a “soft landing” by the central bank. A soft landing refers to avoidance of a harsh recession, caused by monetary tightening. Corporate balance sheets are in decent shape. In recent years, company managers have refinanced debt at lower rates and/or reduced their obligations. Though raw material costs and wages are elevated, plans to boost operating efficiency are being put in place, auguring well for profit margins, even if a recession occurs. Consumers, who were protected by government stimulus support during the coronavirus pandemic, are still spending, given their reasonably healthy finances. Last year, spending had largely shifted from goods to services (e.g., those provided by restaurants, bars, and event venues). In recent weeks, exercising some caution, consumers have been more selective about outlays for now-higher-priced services. A strong employment environment, though, suggests continued solid spending, overall.
A favorable corporate earnings performance for the final quarter of 2022, along with a positive outlook for this year, would go a long way in supporting a stock market recovery. Firm demand, sticky goods and services pricing, and efforts to boost productivity and efficiency will underpin bottom lines. From a macroeconomic viewpoint, an apparent end to U.S. dollar gains against other major world currencies points to a stabilization in the competiveness of offerings from domestic companies, versus those of foreign competitors. Also, the suspension of COVID-19 lockdowns in China, if sustained, likely would further ease supply-chain bottlenecks, bringing some inflation relief to companies and consumers.
Last year, value/defensive stocks had a nice run, outperforming growth equities. The story might well be different this year. Investors are selectively committing to technology issues, favoring industry leaders. Such a reversal could prove beneficial to portfolios. The June 2022 market bottom was tested last October, and there was no additional serious deterioration of share prices. There’s no guarantee that 2023 performance will be good, considering the possibility of unknown negative “black swan” geopolitical and economic events. A barbell approach to investing, that is weighting portfolios in favor of both value and growth stocks, may be the best strategy in the short run. – David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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