Hope you are all doing well. For the third week in a row, the U.S. large-cap growth stock benchmark outperformed its value counterpart by a wide margin. The NASDAQ surged more than 4% for its fourth positive weekly result in a row while the S&P 500 and the Dow posted smaller gains, rebounding from declines the previous week. With a couple trading days left in January, the NASDAQ was on track to record its strongest monthly result since last July. Stocks are up roughly 6% so far this year. Strong January returns often accompany positive full year returns. The good start is welcome news after last year’s 19.4% drop in the S&P 500. Since World War II there have only been two instances of consecutive down years. 1973-1974 and 2000-2002. The Elvis bio picture got an Academy Award nomination for best picture this week. I have broken down the update using Elvis’ songs and lyrics.
A Little Less Conversation
If we are going to sustain this market rally, we need companies to give us a little less fight and a little more spark. Microsoft for example, reported decent earnings then dampened expectations on the post earnings conference call by talking up the economics headwinds they are fighting. We need more reports like Tesla’s. Tesla not only beat expectations, they expect to exceed their production guidance. The stock climbed 33% this week and provided a spark for the entire Nasdaq. At this point we are nearly one-third of the way through earnings season. The proportion of S&P 500 companies that have beaten analysts’ earnings expectations is slightly smaller than usual. About 69% had exceeded net income expectations as of Friday. This coming week’s earnings reports can either sustain or squash the market rally. Mega cap stocks Meta, Alphabet, Apple, Amazon, and Exxon all report earnings this week.
The economy posted very strong numbers this week, but we might be caught in a trap. U.S. economic growth remained in solidly positive territory in the fourth quarter of 2022, marking its second positive result after slightly negative numbers in the first two quarters of last year. For full-year 2022, GDP rose 2.1%. The markets rose as concerns are easing about the prospects of a protracted recession. Don’t let the numbers fool you, a recession is likely still coming. GDP grew by 2.9% in the year’s final quarter. However, the headline GDP figure was boosted by gains in the inventory and trade categories. If you remember when GDP fell at the beginning of last year, I said it was not concerning because it was in large part due to trade. Trade and inventory are smaller and less sustainable drivers of the U.S. economy. Consumer spending is roughly 70% of GDP and it was strong last year. It is now showing signs of fatigue, which means that the GDP figure is not as great as it seems. It takes time for restrictive Fed policy to curb consumer spending and we are seeing the start of that. It will produce an economic downturn this year. Markets can sustain a rally during a recession, if the downturn is better than expected, and I think that will be the case.
Always on My Mind
Fed Chair Powell doesn’t want to look back at this battle with inflation and think maybe I didn’t raise rates quite as often as I could have. Inflation continues to trend in the right direction, but the war is not won. The U.S. Federal Reserve’s preferred gauge for tracking inflation showed a further cooling of price increases. Friday’s report showed that the Personal Consumption Expenditures Price Index rose at an annual 5.0% rate in December. That’s down from 5.5% in November. Excluding food and energy, prices rose at a 4.4% annual rate. That is the lowest in 14 months. This coming Wednesday, the Fed is expected to lift its benchmark interest rate again. Many are forecasting that the Fed will soon pause with the rate hikes. I am not in that camp. The Fed has repeatedly said they are targeting 2% inflation and that they are willing to experience some economic pain to get there. The Fed has a dual mandate to pursue the economic goals of maximum employment and price stability. They view price stability as 2% inflation and if the labor market stays strong, I think they will continue focusing on inflation. The January jobs number will be released on Friday. We have had 24 months in a row with at least 200,000 jobs gained. I believe the labor market will start to soften in a few months but until that happens I see continued rate hikes.
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