The Transition from the primary market driver no longer being the expectations of what Fed interest rate policy will be and instead turning to tangible, evidence-based economic growth and inflation levels officially began last week with stocks trading on the back of growth and inflation perceptions rather than just reacting to Fed rhetoric like obedient lemmings.
That’s something that will likely continue and intensify moving forward into 2023, as investors search for the answers to the two key questions:
1) How fast will inflation decline?
2) How bad will the economy get?
The whole key to stock market performance in the first half of 2023 is starting to shift from whether the Terminal Rate (the prevailing interest rate on the day the Fed ends its policy of interest rate hikes) ends up being 4.9% or 5.1% or whatever, to an assessment of whether the damage to growth and earnings from these higher interest rates, wherever it is they peak, is too much for stocks to bear, or whether they can actually withstand the inevitable economic weakness that is around the corner.
Last week’s news cycle was absolutely pivotal and there’s a lot to get to, so let’s dive right in.
The Consumer Price Index (CPI) measure of retail inflation for November came out on Tuesday morning before the market opened. While the year-over-year data is useful for taking a snapshot of where we stand (it was up 7.1% annualized for November), it is less useful when it comes to trying to figure out inflation’s current trajectory as it is so heavily dependent on whatever base level is used from twelve months previously.
What is far more instructive to focus on if you are trying to assess inflation’s present glide path is the month-to-month change and that rose just 0.1% from October to November (below the expected 0.3%) after having risen 0.4% in the September to October timeframe. This was the smallest monthly increase this year. Excluding more volatile food and energy prices, the Core CPI climbed a touch less than expected at 0.2% month-to-month (up 6.0% year-on-year if you must know), down a bit from October’s reading of 0.3%.
The market’s initial reaction to this better-than-expected CPI print was to furiously buy everything, following what had been a pretty impressive gain on Monday as well. However, reality cast its inevitable shadow over proceedings later in the day as it dawned on investors that perhaps a frenzied rise of 1400 Dow points in the space of 24 hours was a slight upside over-reaction to some respectable, but not exactly spectacular, retail inflation data and the bulk of the price gains had been given up by the close.
The next day, Wednesday, was Fed Day and there was no surprise at all when a half a percent increase in interest rates was announced at 2pm ET. Everyone knew that was going to happen. What the market was really focused on was the closely-watched 2023 median dot on the Fed’s quarterly “dot-plot” chart, which shows its own expectation of the Terminal Rate. Fed Chair Jerome Powell said in late November that the median dot would be “somewhat” higher than the previous projection in September, which had been 4.6%.
Now we have a better idea of what he meant by “somewhat”. The median dot this time was at 5.1%, considerably higher than that September projection and way higher than June’s, which had been 3.8%. This was viewed as a big deal and disturbed the market, even though everyone kind of suspected that this is where the dot was going to end up (the Wall Street Journal had even said as much the day before). Sometimes, even when you know a piece of bad news is coming, it can still be something of a shock when it is confirmed.
Stock marketsended the day lower as investors digested the dot plot and Powell’s observations in his press conference that current policy is still not sufficiently restrictive and that the likelihood of any rate cuts in 2023 was remote. The market also seemed disappointed that Powell gave no tip of the hat to the previous day’s CPI report showing that inflation appears to be in decline, he chose to pretty much completely ignore that in his comments.
Six other global central banks around the world, including the European Central Bank, the Bank of England and the Swiss National Bank, also hiked interest rates in the space of 24 hours. Again, none of this was unexpected, but still weighed on sentiment nonetheless.
In a classic example of the Wall Street adage “buy the rumor, sell the fact”, what had been a steady decline late on Wednesday intensified into something of a bloodbath on Thursday and Friday, wiping out all the intense gains of Monday and Tuesday and then some, partly due to the release of Retail Sales, showing a decline of 0.6% in November, the biggest monthly fall of 2022 and one that confirmed that American consumer budgets are now (finally) under some pressure.
Interestingly, however, it seems that many traders don’t seem to fully believe the Fed’s pronouncements as futures markets still have the Terminal Rate estimate at 4.9% and below 4.5% by the end of 2023, in spite of what the dot plot showed. In further evidence of The Transition, they seem to be looking more closely at the hard data showing cooling inflation rather than listening to the Fed’s threats about what might happen.
The outcome of the next scheduled Fed meeting will be announced on February 1st, 2023 and will be heavily influenced by economic data released in the interim, particularly December CPI which will be released in January.
Going forward, the two biggest threats to stock prices are now either a resumption of higher inflation or economic growth suddenly falling off a cliff or, in the nightmare scenario, both of those at the same time (the dreaded “stagflation” that I talked about in a Weekly Report way back in October 2021).
Stay tuned.
OTHER NEWS
"One of the biggest financial frauds in American history”, U.S. Attorney Damian Williams .. So-called “financial terrorist” and ex-FTX honcho, Sam Bankman-Fried had a rough day last Tuesday, as it became clear that no-one (apart from Kevin O’Leary, it seems) appears to be buying his increasingly desperate attempts to manufacture a phony narrative of himself as a well-meaning nice guy who just got in a bit over his head.
He was finally arrested, denied bail and is now awaiting extradition from the Bahamas to the US on a number of serious civil and criminal charges relating in part to him directing the use of customers’ money to pay the expenses and debts of Alameda Research, his own affiliated hedge fund and whose CEO happened to be his now ex-girlfriend.
The SEC filed civil charges against him, alleging that he"built a house of cards on a foundation of deception" fully intending to defraud both investors and customers. The US government filed eight different criminal charges against him, ranging from securities fraud (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) to wire fraud to illegal campaign contributions to both parties, alleging that his criminal conduct started as early as 2019. The bankruptcy-imposed successor at FTX, John Ray, told Congress that what he discovered upon taking the helm was "plain, old-fashioned embezzlement". SBF faces serious jail time if convicted.
The inconvenience of being arrested torpedoed SBF’s plans to cap his frantic media-round schedule by testifying on a video link to Congress last week. Reuters obtained his prepared statement to the congressional panel and it seems that he he planned to open with the line, "I would like to start by formally stating, under oath: I fucked up". A pathetic, lame attention-seeker right to the bitter end.
Talking of which ..
As Josh Brown told us last week, we need to talk about Tesla (TSLA) .. The stock is down about 60% since the spring (including a fall of over 16% just last week alone) vs. down just 12% for the S&P 500 index of which it is a part. It is almost impossible to get your head around how large the loss of market capitalization is here. Tesla has now lost about $700 billion (!!) in value since April 4th, the day Elon Musk revealed his stake in Twitter and the eventual purchase was funded in no small part by loans using Tesla stock as a form of collateral. Those lenders ain’t happy right now to put it mildly, as their collateral is now worth less than half of what it was when they agreed to make the loans in the first place.
The shocking fact is that the $700 billion in Tesla’s market cap that has been incinerated since April is bigger than the market value of every single publicly traded company in the US, beyond the top five. The stock price crash has also now knocked Musk off his perch as the world’s richest man, pushing him down to second place, according to both Forbes and Bloomberg, behind businessman and art collector, Bernard Arnault.
It would be an understatement to say that a lot of Tesla shareholders are pissed off at Musk’s erratic and distracted behavior over the last few months as he seems to be focusing entirely on managing (as well as initiating) conflict at Twitter, with some now openly calling for him to step away from the car company.
This negative opinion was probably not helped by the fact that we also learned from the Wall Street Journal that he sold $3.5 billion of TSLA stock over the course of just two trading days last week with the price already at two-year lows. This takes him to over $40 billion worth of TSLA stock sales in the last thirteen months, over which time the stock price has fallen from above $407 down to $150.
In related news, self-proclaimed free-speech champion Musk suddenly, and without explanation, shut down the Twitter accounts of a number of journalists from The New York Times, Washington Post and CNN among others, including some who frequently debunk some of the brain-dead online conspiracy theories frequently promoted by Musk and people like him. The “freedom of expression absolutist” also permanently shut down @Elonjet, the account set up by a University of Florida student that used publicly-available data to track the movements of Musk’s private jet.
Also swiftly taken down from Twitter last week were videos showing Elon being heavily booed last Sunday night, when he somehow found the time between jobs to put in an ill-advised and characteristically awkward appearance on stage at a Dave Chappelle show in Silicon Valley - at one point manically yelling at the audience; “I’m rich, b***h!!”. It’s still up on YouTube, though, if you feel the need to cringe.
UNDER THE HOOD:
One of the key elements of technical analysis is that the market discounts all information available. It does that through the actions of investors and traders, who leave their footprints in the data, and by extension, in the indicators that we watch.
The bottom line is that news can create short-term interest in stocks and even set off short-term buy programs. However, in the context of months-long deterioration in market internals and recent improvements in only a handful of indicators, selected news should be treated as noise most of the time as it mostly obscures the continuation of major downtrends in key technical indicators.
Small cap stocks are now noticeably exhibiting worse technical behavior than the market as a whole and this is the opposite of what should be happening in a market that is primed to turn around for the better. Small Cap stocks were the first to fall and lead us into this mess and should be at the forefront of pulling us out.
Signs of a major market bottom, as defined by broadly oversold conditions, total capitulation and the simultaneous combination of exhaustion of Supply and vigorous return of enthusiastic Demand, are still missing. The market has yet to show the classic signs of a sustainable bottom.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
Investors will be kept busy by more economic data and a few notable earnings releases before things finally get to slow down for the holiday.
The Consumer Confidence Index, the Personal Income and Expenditures report (both income and spending are expected to rise by 0.4%) and Durable Goods report (expected to decline by 0.7%) all come out this week.
In housing-world, we’ll see the release of the latest Housing Market Index, Residential Construction data and Existing Home Sales.
Nike, FedEx, General Mills, Paychex, Micron and CarMax will all announce quarterly earnings.
Central bank watchers will be awaiting a policy decision by the Bank of Japan on Tuesday, which is expected to leave interest rates unchanged at -0.10%.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
* ↑Bullish: 24% (25% the previous week)
* →Neutral: 31% (33% the previous week)
* ↓Bearish: 45% (42% the previous week)
* Net Bull-Bear spread .. ↓Bearish by 21 (Bearish by 17 the previous week)
Source: American Association of Individual Investors (AAII).
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
The highest recorded percentage of AAII bearish sentiment was 70% and occurred on March 5th 2009, right near the end of the Great Financial Crisis. The lowest percentage of AAII bears was recorded at 6% on August 21st 1987, not long before the stock market crash of October 1987.
Weekly sentiment survey participants are usually polled on Tuesdays or Wednesdays.
LAST WEEK BY THE NUMBERS:
Last week’s market color from finviz.com:
- Last week’s best performing US sector: Energy (two biggest holdings: Exxon Mobil, Chevron) - up 2.1% for the week
- Last week’s worst performing US sector: Consumer Cyclical (two biggest holdings: Amazon, Tesla) - down 4.0% for the week
- The NASDAQ-100 underperformed the S&P 500
- Once again, US Markets were bottom of the pile with Emerging Markets doing the least badly ahead of International Developed Markets
- Small Caps lagged Mid and Large Caps
- Growth stocks did worse than Value
- The proprietary Lowry's measure for US Market Buying Power is currently at 154 and rose by 3 points last week and that of US Market Selling Pressure is now at 163 and fell by 2 points over the course of the week.
- SPY, the S&P 500 ETF, fell back below its 50-day and 90-day moving averages but and remains below its long term trend line. The 14-day Relative Strength Index (RSI) reading** is 41. SPY ended the week 19.8% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, remains below its 50-day and 90-day moving averages. It is still well below its long term trend line. The 14-day Relative Strength Index (RSI) reading** is 42. QQQ ended the week 32.0% below its all-time high (11/19/2021).
** RSI readings range from 0-100. Readings below 30 tend to indicate an over-sold condition, possibly primed for a technical rebound and above 70 are often considered over-bought, possibly primed for a technical decline.
- VIX, the commonly-accepted measure of anticipated stock market risk and volatility (often referred to as the “fear index”) implied by S&P 500 index option trading, ended the week higher at 22.6. It remains below its 50-day and 90-day moving averages. It also remains below its long term trend line.
ARTICLE OF THE WEEK:
EXPLAINER: FINANCIAL TERM OF THE WEEK:A weekly feature using information found on Investopedia to try to help explain Wall Street gobbledygook (may be edited at times for clarity) .
Securities fraud, also referred to as stock or investment fraud, is a type of serious white-collar crime that can be committed in a variety of forms but primarily involves misrepresenting information investors use to make decisions.
The perpetrator of the fraud can be an individual, such as a stockbroker. Or, it can be an organization, such as a brokerage firm, corporation, or investment bank. Independent individuals might also commit this type of fraud through schemes such as insider trading.
The Federal Bureau of Investigation (FBI) describes securities fraud as criminal activity that can include high-yield investment fraud, Ponzi schemes, pyramid schemes, advanced fee schemes, foreign currency fraud, broker embezzlement, hedge-fund-related fraud, and late-day trading. In many cases, the fraudster seeks to dupe investors through misrepresentation and to manipulate financial markets in some way.
This crime includes providing false information, withholding key information, offering bad advice, and offering or acting on inside information.
Securities fraud takes on many forms. In fact, there is no shortage of methods used to trick investors with false information. High-yield investment fraud, for example, may come with guarantees of high rates of return while claiming there is little to no risk. The investments themselves may be in commodities, securities, real estate, and other categories. Advance fee schemes can follow a more subtle strategy, where the fraudster convinces their targets to advance them small amounts of money that are promised to result in greater returns.
Sometimes the money is requested to cover processing fees and taxes for the funds that allegedly await to be disbursed. Ponzi and pyramid schemes typically draw upon the funds furnished by new investors to pay the returns that were promised to prior investors caught up in the arrangement. Such schemes require the fraudsters to continuously recruit more victims to keep the sham going for as long as possible.
One of the newer types of securities fraud is Internet fraud. This type of scheme is also referred to as a pump-and-dump scheme, in which people use chat rooms and forums to spread false or fraudulent information concerning stocks. The intention is to force a price increase in those stocks—the pump, and then when the price reaches a certain level, they sell them off—the dump.
The FBI warns that security fraud is often noted by unsolicited offers and high-pressure sales tactics on the part of the fraudster, along with demands for personal information such as credit card information and Social Security numbers. The Securities and Exchange Commission (SEC), the FBI, and other federal and state agencies investigate allegations of securities fraud. The crime can carry both criminal and civil penalties, resulting in imprisonment and/or fines.
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