I was pleased when last week the markets rose. We’ve now had a second week of appreciation which suggests markets went into the end of the year oversold. Of course, we can attribute some of the rise to optimism for the coming year, as well as the reversal of some “window dressing” at the end of last year. Investors are hopeful that the Federal Reserve may be a few months away from ending the interest rate hikes, with the bulk of those hikes already done. We’re looking at another 0.75% in hikes before we believe the Federal Reserve pauses to see how the economy reacts. We’ve already seen inflation fall and anticipate it will continue to decline throughout the year. What we haven’t seen yet is a lowering of earnings expectations as the economy slows. With earnings season upon us, I expect we will see guidance lowered which may cause some investor indigestion for a bit. At the end of the day, it will come down to if the Fed has raised rates enough to bring inflation under control, or if it has overdone it and slows the economy too much. This will be the recurring theme for at least the first half of the year.
One indication things are slowing is that companies are moving beyond hiring freezes to ramp up layoffs. Among the companies looking to reduce headcounts are Goldman Sachs, Amazon, Meta (Facebook), and Twitter. Among the other shifts, will be a return to the office as employers become increasingly uncomfortable leaving employees to work from home. Disney announced this week it expects employees to return to the office at least four days a week. Seeing as Disney touts itself as being the “happiest place on earth,” I imagine employees will happily return.
What is happening as the economy slows is that consumers are increasingly turning to credit cards. The savings rate has dropped precipitously to 2.4% which is at the low end of the historical range. We’ve noticed credit card balances grow to the tune of approx. $28B per month and the total outstanding consumer credit top $4.75 trillion. To a large extent food and shelter inflation are causing people to spend more on the basics which is putting a strain on household budgets. Revolving credit, which includes credit card debt, increased at a seasonally adjusted annual rate of 16.9%.
However, not all is doom and gloom. There are several indicators that suggest the markets could head higher this year. In fact, some analysts believe the S&P 500 has an 83% probability of rising during 2023. The Stock Trader’s Almanac, which tracks the first five trading days of the year as an indicator, says that since 1950, the S&P 500 rose for the year as a whole in 39 of the 47 years when the First Five Days Indicator came in positive. Furthermore, in the 39 years when the indicator correctly predicted good times ahead, the S&P 500 rose 14% on average. Our compliance department will undoubtedly like me to add, past performance is no guarantee of future performance, and yada, yada, yada… correlation does not imply causation. But like I said, the year is early and I am not prepared to unleash my pessimism just yet.
In company news, we had a bit of a rough start for several industries. The airlines were literally grounded as a critical FAA system shut down unexpectedly due to file corruption. Automobile manufacturers continue to struggle with the chip shortage resulting in shrinking profit margins, and in a surprising move, FedEx decided to cut back on Sunday deliveries. FedEx hopes to save $3.7B by reducing Sunday deliveries beginning mid-March to parts of the country that aren’t densely populated. Additionally, the financial sector began reporting earnings this week with several of the largest banks announcing increases to credit loss provisions in anticipation of a recession later this year. So, there’s that I suppose.
In closing, I came across one of the more interesting stories in some time. I don’t know how many of you listen to AM radio, but it seems its days may be numbered. For nearly 100 years, people have been listening to AM radio for news, traffic, weather, and sports. But like your car's manual-crank windows and ashtrays, it may soon succumb to progress. It seems electric vehicles may be to blame. Carmakers say that electric vehicles generate more electromagnetic interference than gas-powered cars, which can disrupt the reception of AM signals and cause static, noise, and high-frequency hum. Some manufacturers believe that rather than frustrate customers with inferior reception and noise, the best solution is to leave it off completely. Tesla, Audi, Porsche, and Volvo have removed AM radio from their electric vehicles, as has Volkswagen from its electric SUV. Ford also said it will be dropping AM radio from its 2023 F-150 Lightning. I guess like many things that came before, it too will soon be something to reminisce about with the grandchildren. Now you know.Bruce J. Mason, MBA