February 10, 2023
Bull Stocks recorded their worst weekly performance for 2023 as investors finally took the time to digest last week’s blowout nonfarm payrolls report and as Fed Chairman Jerome Powell and other Fed speakers continued to make the case for maintaining a restrictive posture despite signs of slowing inflation and weakening demand. In remarks at The Economic Club of Washington, D.C. on Tuesday, Powell reiterated that “disinflation has begun but is going to take time.” He also mentioned the Fed could also be forced to hike more aggressively if labor markets remain strong and inflation moves higher. “The reality is we’re going to react to the data,” Powell said. Investors initially only heard the “disinflation has begun” message, quickly bidding up stocks. The “higher for longer” portion of the message, however, seemed to sink in as the week progressed and additional Fed speakers reinforced Powell’s comments. Economic news was light this week which meant Fedspeak received most of the attention. December’s trade data surged higher, helped by a strong rise in passenger cars and automotive parts. Consumer sentiment also moved higher with The University of Michigan sentiment index increasing to 66.4. This is the index’s highest reading in a year, and it coincides with evidence of increasing consumer activity. After what had been a very strong start to the new year, this week bulls were forced to reassess if perhaps they might have gotten ahead of themselves, sending the S&P 500 down -1.11%.
Downing of Spy Balloon Might Help Pop China Trade Bubble
Easing supply chain constraints helped increase the flow of goods into the U.S. in December, pushing the trade deficit up 10.50% month-to-month to $67.4 billion in December. Imports rose 1.30% to $317.6 billion, while exports dropped -0.90% to $250.2 billion. Passenger cars, automotive parts, and cellphones helped drive much of the rise in imports as the supply chain crunch continued to show signs of easing. A fresh supply of cars was welcomed by dealers who have struggled to maintain inventory amid high pandemic buyer demand. An important thing to watch over the coming month will be whether the previous dip in car demand was entirely a function of higher interest rate costs, or if it was also negatively influenced by the lack of desirable models and options available. As imports surged, the value of U.S. exports declined due to both cooling global goods demand and a decline in crude oil prices. Even with Covid largely behind us, the pandemic set in motion a supply-chain reorganization, or “nearshoring”, that is now more pronounced in trade deficit data. In December, the U.S. recorded a higher trade deficit with key trading partners, Mexico, Canada, and India, while for 2022 in its entirety, the U.S. trade deficit grew strongly with Mexico, Canada, India, South Korea, and Vietnam. Between the pandemic and political tensions, the U.S. is increasingly expanding its trading partnerships away from China. The fallout from the spy balloon, forthcoming sanctions, and domestic pressure on corporations are likely to amplify that trend.
Feeling Good Again
Inflation and a slower economy were not enough to weigh on the consumer’s mind in February. The University of Michigan sentiment index, a measure that tracks how consumers feel about the economy, rose to 66.4 in February from 64.9 in January. February’s reading was a one-year high and the third consecutive monthly increase. Despite signs of slowing economic activity and high profile layoffs, consumers are feeling pretty good about their financial situation. The subcomponent within the index that measures what consumers think about their particular financial situation climbed to 72.6, also a one-year high. Inflation still remains a hot topic with consumers expecting inflation to rise to 4.20% for the year. This is higher than the 4.00% level they estimated in January and well above the Fed’s 2.00% target level. Consumers, however, remain confident the central bank will ultimately prevail on taming inflation, with their long-run inflation expectations averaging at 2.90%.
A light week in economic news put the focus back on the Federal Reserve and whether the central bank will continue to maintain its restrictive monetary policy. Markets have been priced for perfection lately under the theory that slowing demand would cool growth and inflation, but not so much that employment would erode materially. This week the Fed continued to stress the “higher for longer” party-line, which along with signs that economic data is beginning to inflect positive, had traders reassessing whether their rate expectations are too optimistic. As we spoke about last week, the jobs and wage figures were far stronger than expected. This week we got a sentiment reading that supports the rebound in consumer demand seen elsewhere (used car prices, mortgage demand). Also, while S&P’s operating earnings are roughly 11% lower YOY, company margins are still holding strong at the 11.20% level. This is good news until you consider that consumer spending and the subsequent wealth effect could slow the progress on inflation, which is the very thing the Fed has been warning. The S&P 500 was off approximately -1.11% this week, which may have been its lowest weekly performance for the year, but which is hardly indicative of a paradigm shift. At best you might say the market may have awakened to the possibility of “higher for longer” but it still has yet to fully accept it.
The Week Ahead
Due to the upcoming Presidents Day holiday, stock and bond markets will be closed on Monday, February 20th. Week in Review will not be published on Friday, February 17th. Our next edition returns on February 24th with the latest existing home sales, consumer spending, and producer price figures. We hope everyone enjoys the long holiday weekend.
Sibling Rivalry, the God of Sod, and Bringing RiRi Back
In this weekend’s Super Bowl LVII, the Philadelphia Eagles will face off against the Kansas City Chiefs at the State Farm Stadium in Glendale, AZ. The Roman numerals “LVII” mean 57 since the game has been played continuously since 1967. The use of Roman numerals began with the fifth Super Bowl and was retroactively added to the first four games to clarify any confusion that may occur because the NFL Championship Game is played in the year following a chronologically recorded season. In other words, calling it Super Bowl 2023 could cause confusion for the game being played this Sunday because the majority of the season took place in 2022.
This weekend’s big game will make history when brothers Jason Kelce and Travis Kelce play against one another on opposing teams. Big brother Jason has been playing center for the Eagles since 2011, and younger brother Travis has been a tight end for the Chiefs since 2013. Their parents, Ed and Donna Kelce, will also make history as the first mom and dad with sons playing against each other in the Super Bowl. When asked who he would talk to first after the game, Ed Kelce quipped, “probably the loser.” Donna Kelce would not share which of her sons she hoped would win but told one media outlet which son she prefers a little more off the field, disclosing that her son Jason is “a little ahead of Travis because he has given her grandchildren,” but she expects Travis to “take over the favorite spot soon one of these days.” One has to appreciate their honesty. Fortunately, both brothers play offense so they won’t be on the field at the same time.
The God of Sod
While the Eagles will be donning green jerseys, the other green to be seen on Sunday will be the incredible grass on the field. It’s been declared the second-best field ever for a Super Bowl by legendary groundskeeper George Toma who turned 94 last week. Toma has been tending the grass at every Super Bowl ever played. Some call him the God of Sod, and the NFL gifted him a sweatshirt that says The Sodfather. Toma shared that in the first 27 Super Bowls, the league never spent more than $1,000 on the field, but this year’s turf cost around $800,000. The grass has been growing for the past 18 months at a sod farm. Since being installed about two weeks ago at the stadium, the grass, a mix of Bermuda and Rye, is moved in and out of the stadium daily by a mechanical platform to get daytime sun and to be protected from the cold desert temperatures at night.
The Music Line-up
The NFL announced the highly anticipated line-up of pre-game performers a few weeks ago. Music artist Babyface will be singing “America the Beautiful,” television star Sheryl Lee Ralph will perform “Lift Every Voice and Sing,” and country music star Chris Stapleton will perform the National Anthem. The NFL announced last September that Rihanna, a nine-time Grammy award winner, will be the halftime performer. In August 2021, Forbes announced that Rihanna was the wealthiest female musician in the world, trailing only Oprah Winfrey as the world’s richest entertainer. Forbes estimated Rihanna is worth $1.7 billion, with $1.4 billion of her fortune coming from her 50% stake in Fenty Beauty, a cosmetics brand she launched in 2017, and with much of the rest of her wealth coming from her apparel brand, Savage x Fenty, that was worth an estimated $270 million at the time. Affectionately known as RiRi by her fans, the singer famously turned down the NFL halftime gig in 2019. This will be Rihanna’s first live TV concert in five years with her last performance occurring at the 2018 Grammys.
When and Where to Watch
Sunday’s game will start at 5:30 p.m. Central time and will be broadcast on FOX. We hope you enjoy the game!