Stocks mark time
Year to date, stocks have benefited from the January effect. That period is just about over and with it, investors will need to face several unknowns, few of them good.
For this who don't know, there is a tendency for stock prices to rise in the first month of the year following a year-end sell-off for tax purposes. It is called the 'January Effect.' As such, the stocks that rose the most over the last two weeks were those that were sold off the most in 2022. They were heavily shorted stocks that traders bought back (covered) simply to bank profits. There was no real buying involved.
No one, for example, was buying stocks because they were cheap, or their earnings were great, or because the overall economy was perking up. No, in fact, over in the options market, speculation is running rampant. Most options trades are limited to day trades where buyers buy or sell in the morning and are out of their positions before the close.
I guess that is understandable since there is no real confidence in the market's next direction. There are as many predictions of an imminent market swoon as there are forecasts for further upside. The bulls and the bears immediately jump on the latest macroeconomic data point to bolster their case. This week, for example, the latest Producer Price Index (PPI) for December 2022 was weaker than expected (-0.5% versus estimates of -0.1%). That gave the bulls ammunition that inflation has not only peaked but is coming down faster than expected.
However, retail spending during the same month fell at the sharpest pace all year, marking a dismal end of the holiday shopping season. Consumers decided to spend less as higher interest rates, inflation, and concerns about a slowing economy chilled their holiday spirit.
U.S. industrial production fell as well as manufacturing in the country continued to decline. Both hiring and wage growth also moderated in December painting an overall picture of economic malaise that many economists believe will worsen in the months ahead. I noticed that for the first time in weeks, bad economic data was bad news for the stock market. Usually, the bad news was good news for stocks because the worse the data, the higher the chances the Fed would stop tightening. We may have reached a turning point where weaker data equals a higher risk of a hard landing in the economy.
An economic soft landing, hard landing, or no landing at all continues to make the rounds of Wall Street, and where it stops nobody knows. Stocks and bonds jump and gyrate. The dollar continues to decline, as do yields on the benchmark Ten-year, U.S. Treasury. Economic stagflation, inflation, or disinflation all have their proponents, but the simple truth is that it is too early to declare the winner if there is one.
Meanwhile, the Fed remains steadfast despite the data, insisting that tight monetary policy will remain until the central bank sees concrete evidence of a deep decline in inflation. That frustrates the market. Investors and traders alike, conditioned after years of getting what they want and getting it now, demand the Fed stop tightening or tightening even more, whichever—just get it over with.
As for my outlook, nothing has changed. I am sorry I missed most of the last three weeks in the markets. After three years of dodging the bullet, I finally succumbed to the newest variant of COVID, XBBB1.5, nick-named 'Kraken'--not fun. And before you ask, I had been vaccinated, boostered, and masked up but got it anyway. At least I am in good company. I understand Fed Chairman Jerome Powell has also been struck down by the same malaise.
In any case, the S&P 500 Index did bounce higher than I expected, hitting as high as 4,015 intraday when my target was around 60 points lower.
Remember, I am expecting markets to sour and turn south in February with new lows a real possibility. Until then, corporate earnings will occupy our attention. Thus far, they have been a mixed lot with some companies beating lower expectations, while others still couldn't match lowball estimates. The large-cap banks' earnings were sloppy at best. Netflix missed big on earnings, but since their subscriptions jumped, traders bid up the company's stock price by 6%. FANG earnings begin on January 24 with Microsoft up first. There should be enough fuel to keep markets in at least a sideway 100-point range over the next week or two.
Bill Schmick is registered as an investment advisor representative of Onota Partners, Inc., in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or e-mail him at bill@schmicksretiredinvestor.com .Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.