Markets Shake Off Earnings Season as Fed Prepares Economy for Final Approach
January 27th, 2023
Stocks rebounded sharply this week even as earnings season continued to be lackluster. In what has truly become a “bad news is good news” mindset, markets rallied on hopes that the weakening trend in earnings, layoffs, and data will encourage the Fed to pivot to a more accommodative posture when they meet next week. On the earnings front, corporate results this week were truly a mixed bag. Interest-sensitive financial stocks generally beat estimates and guided higher, while notable old school tech names, such as Intel and Microsoft, disappointed. With eyes on the Fed, investors have welcomed recent layoff announcements and news that companies are in cost cutting mode to contend with slowing demand. Economic data this week reinforced the slowing trend as both the Q4 GDP and the personal income and spending reports posted softer prints. With investors eagerly awaiting next week’s FOMC meeting, the S&P 500 managed to add 2.47% for the week.
Past Performance is No Indication of Future Performance
GDP managed to stay in the green in the fourth quarter, growing at an annualized 2.90%. That was down from Q3’s 3.20% reading. Consumer spending, which accounts for about 68% of GDP, accounted for much of the rise, increasing 2.10% in the quarter. This was just slightly below Q3’s 2.30% rise. Economic growth also got a lift from increases in private inventory investment, government spending, and nonresidential fixed investment. Housing, on the other hand, remained a drag on growth where residential fixed investment plunged -26.70% in the fourth quarter. The Fed’s aggressive rate hikes have put a freeze on the once hot housing sector by eliminating demand. Exports also slumped during the quarter, falling -1.30%, as the world pulled back on their goods spending. Topline results show that consumers were spending at a healthy clip during the quarter even with higher prices. How this plays out longer term remains to be seen, however. The results were skewed by strong spending early in the quarter, but high prices have been blamed by retailers for the poor holiday shopping season late in the quarter. Irrespective of whether the pull back was simply exhaustion or lack of affordability, the consumer is unlikely to remain the driving force in GDP that they were previously with the Fed maintaining higher rates and layoff announcements becoming more widespread.
Rate Hikes Cool Consumer Spending
Consistent with the quarterly GDP report, rising credit cost and higher prices caused consumer spending to fall -0.20% in the month of December. The drop in spending comes despite a 0.20% month-to-month rise in personal income. Consumers opted to boost their savings due to concerns over a potential recession in 2023. The personal savings rate rose to 3.40% in December from 2.90% in November. This is the biggest monthly increase in the savings rate since July 2021. Inflation showed additional signs of cooling as the Fed’s preferred inflation gauge, the core PCE Index, eased to 4.40% in December from November’s 4.70% annual pace. December’s print marks the slowest annual rate of increase since October 2021. Although the decline in prices is welcome, inflationary pressures still persist. Month-to-month, the core PCE Index was up 0.30%, driven by continued services inflation. It seems inevitable that services will soon cool, but the Fed is likely to still be uncomfortable with the most current reading.
Final Thoughts
Next week should be interesting with the FOMC’s meeting on tap. It is clear that quantitative tightening is having its intended effect and the economy is now leveling off for its final approach. This week investors expressed renewed confidence with having the Fed in the cockpit, as they now get set to throw the flaps, flare the nose, and orchestrate a soft landing. Investors should expect another 25-bps rate hike to be announced on Wednesday, but it will be the central bank’s guidance on future monetary policy that will be determinative of whether the recent rally continues to roll or stalls altogether.
The Week Ahead
It will be a big week for markets next week with investors looking towards the Federal Reserve’s FOMC meeting. The central bank is widely expected to raise interest rates by 0.25%, pushing the benchmark target range to 4.50% to 4.75%. Traders also look set to parse through the Fed’s post-meeting comments for guidance on future policy moves. Economic reports have trended lower in recent weeks as high prices and a slowing jobs market weigh on consumer spending. We’ll see if the trend continues as January nonfarm payrolls and manufacturing and service numbers are released.
Out with the Old, In with the New
This past week marked the start of Lunar New Year that is celebrated among different cultures in China, Korea, Vietnam, Japan, the Philippines, Tibet, Mongolia, Singapore, Thailand, Malaysia, Indonesia, and around the world. It is estimated that up to 25% of the world’s population celebrates the holiday which is also called Spring Festival in China, Losar in Tibet, Tet in Vietnam, and Seollal in Korea.
The holiday is tied to the lunar calendar which is based on the cycles of the moon, so the date of the holiday varies slightly from year to year, beginning some time between January and February with a new moon and continuing until the following full moon arrives 15 days later, depending on the culture celebrating it. The weeks-long celebration commemorates the end of winter and the beginning of spring. This year, Lunar New Year began on Sunday, January 22nd, and will last until Sunday, February 5th.
Each culture celebrates Lunar New Year differently with various foods and traditions that symbolize good fortune and prosperity. Some will eat long noodles that are believed to ensure a long and prosperous life. Tradition dictates that the longevity noodles can’t be cut by the chef, and it is believed that the longer the noodles you eat, the longer, healthier, and wealthier life you’ll have. Dishes made with sticky, glutinous rice symbolize togetherness and family unity. In certain Chinese dialects, the word for “fish” sounds like abundance or surplus, so many people eat fish as part of their New Year celebrations. Losar celebrations in Tibet involve meat or vegetarian dumplings called momos, Losar cookies called khapsay, along with hand-pulled noodles and other dishes. In Korea, a soup called tteokguk made with sliced rice cakes is traditionally consumed, as it is often said that eating it is what enables one to age another year.
In preparation for the Lunar New Year, houses are cleaned to remove any bad spirits which might have collected during the old year and to open space for good will and good luck in the new year.
Legend says that “Nian,” a half-dragon, half-lion monster, comes out of hiding and attacks people and sometimes children during Lunar New Year. Nian can be frightened off by loud noises, so fireworks are traditionally set off to scare away the monster.
This year welcomes the Year of the Rabbit as we say goodbye to the Year of the Tiger. The 12-year Chinese zodiac calendar cycle is represented by 12 different animals: Rat, Ox, Tiger, Rabbit, Dragon, Snake, Horse, Goat, Monkey, Rooster, Dog, and Pig. A person’s zodiac animal is determined by their year of birth. Additionally, the Chinese calendar has a complex 60-year cycle with 10 heavenly stems and 12 earthly branches. Every year, a heavenly stem, one of the five elements of earth, water, fire, wood, and metal, is paired with an earthly branch – one of the 12 zodiac animals. That makes 2023 the Year of the Water Rabbit specifically. In Vietnam, 2023 is the year of the cat. This is because Vietnam and China share 10 of the zodiac calendar’s 12 signs, but the Vietnamese honor the cat instead of the rabbit, and the buffalo instead of the ox.
Some households offer food and paper icons to ancestors in celebration of the Spring Festival. Others post red paper and banners inscribed with calligraphy messages of good health and fortune in their homes. A tradition of giving out envelopes containing money to children is also practiced.
While people celebrate Lunar New Year in many different ways, one common thread is setting an intention for a lucky, prosperous, and fulfilling year and sharing positive greetings with friends and family. In this spirit, we wish everyone much happiness, good fortune, and prosperity in the year ahead.