While still positive for the year, markets gave back some of the recent gains in the face of continued uncertainty. The Federal Reserve is doing a good job talking tough, which is unsettling to many investors who fear a hard landing later this year. Additionally, earnings announcements are starting to be released along with a message of uncertainty from many executive suites. For the next few weeks, all eyes will be on earnings announcements and forward guidance.
When it comes to prognosticating, I admit I am often skeptical of what I read. As with popular media headlines that end up being clickbait, it is the analysts that make the most implausible predictions that get the attention. One such analyst at Bank of America reported this week that we have entered the Twilight Zone of trading in that Wall Street narratives change quicker than a TikTok video. In this, I agree. He said, “investors are in the trickiest part of the investment cycle: tightening ending but easing far from beginning, inflation over but recession not yet begun, and China reopen vs U.S. recession.” We are in uncertain waters as he categorically points out. However, it is the following that is both interesting and perhaps pointless. He poses three scenarios that could lie ahead:
1. CPI troughs in Q1 – A super tight labor market along with a renewed rise in commodity prices could lead to higher-than-expected CPI reports that reverses consensus expectations for rate cuts ahead.
2. “Mission Accomplished” central banks unwittingly confirm a new era of inflation - Central banks are quietly accepting higher structural inflation, wittingly or unwittingly (maybe thinking low rates help to service government debt, higher inflation helps to debase nominal level of debt, or inflation cures wealth inequality.
3. Q2 recession marks a low in bond yields - Last year’s 17% loss in U.S. Treasuries was the worst since 1788 and there has never been three-straight years of U.S. government bond losses. “250 years of history says U.S. Treasury returns up in 2023. Higher U.S. unemployment coincides with a 2% personal savings rate, 15% growth in credit card debt, 19% APR credit card rates, and consumer finance companies increasing loan loss provisions.
As I said, the more outlandish the prediction the more attention they get. Will any of these forecasts come true? No one knows, but I can confidently say these predictions are outliers regarding market expectations and analysts’ consensus views.
What we do know is that the first earnings season of 2023 picks up significant steam in the final full week of January. A broad sampling of companies is set to report, including high-profile representatives of the transportation, defense, consumer staples, technology, telecommunications, and energy sectors. They include Tesla, Microsoft, AT&T, and Visa. Mastercard, Chevron, Intel, Verizon, Johnson & Johnson, 3M, and Lockheed Martin among many others.
One development we should expect is the announcement of further layoffs, particularly among companies in the technology sector. Today, we learned that Alphabet (Google) intends on eliminating 12,000 positions after years of ample hiring. The company stated, “these are important moments to sharpen our focus, re-engineer our cost base, and direct our talent and capital to our highest priorities.” This downsizing follows a wave of layoffs including Microsoft’s announcement to lay off 10,000 employees, as well as, Meta’s (Facebook) 11,000 and Amazon’s 18,000 job cuts. While these are large numbers, they represent only a small percentage of employees at these companies. Nonetheless, it signals companies are retrenching for what’s to come.
In closing, it is worth noting that the U.S. government has once again hit the “debt ceiling.” You may have seen this on the news or online. The Treasury is now using “extraordinary measures” to keep the lights on and the bills paid. However, this will become a greater issue if not resolved by this summer, when it is estimated the extraordinary measures will be exhausted. The last time this happened was in 2011, at which time the government shut down, and the credit rating of the United States was lowered for the first time in the modern era. Both sides reached a late deal to avoid the country going into default. We should all be prepared for a showdown much like 2011, and hope that they agree sooner rather than later. Now you know.Bruce J. Mason, MBA