January 15, 2023
Weekly Market Outlook
By Keith Schneider and Donn Goodman
Hello Gaugers. It was a good and profitable week for those long in the market these past 5 and even 9 days since the beginning of the year.
I have read one article and commentary after another stating that we’re surely in the beginning of a new bull market. Here are just a few of the comments (and charts) I have seen that state the S&P is behaving better and “this time is different”…
Actually, I could go on and on because in a decent up trending market, similar to what we have experienced in the past 9 trading days, everyone wants to get on board.
It feels nice, and for a change, the positive bias is welcome.
Plus, most of our algo-based strategies are ripping higher, and we are thrilled about that.
Investors feel a sense of relief, and positive market daily closes put a smile on our faces and a little more energy in our step.
However, it most likely will not last. And I have no desire to be negative or be “Donny Downer”.
There are still too many potential economic issues in the way for a full out bull market. We think these short reprieves are clearly bull rallies in an extended bear market. At least, that is our opinion. Let me share with you just some of the issues that we are faced with currently:
Inflation is still high, and this is a continued negative for the stock market.
Note: I spent the last week doing business in Phoenix, and their media reported yesterday that the YoY inflation for Phoenix was NOT 6.5% but instead 9.5%. Eggs in the valley went up 20% over the past 2 months alone. I suspect that this is pretty consistent with big cities around the U.S. Now that is PERSISTENT Inflation!
The above commentary and chart is the truest definition of STAGFLATION. Stagflation and persistent inflation have been the mantra that our own Mish Schneider has been discussing and sharing with our readers and on National T.V. shows for better than 18 months. It is also what she discussed in her most recent 2023 Market Outlook that just came out. You can download Mish’s 2023 Outlook here.
Mish also walked through much of her 2023 Outlook in an appearance on Benzinga last week in which the Benzinga host closed the interview with a shout-out to Mish as being the “best interview of the week.”
Because of these hot numbers, not only does the Fed have a way to go folks, but they also have stated unequivocally that they do not see any reduction of interest rates in 2023 (no pivot).
They have projected that their Fed lending rates may only come down to 4% in 2024. More importantly, they continue to drain liquidity from the system (selling bonds), and that will continue to create pressure on the bond market.
They remain steadfast in their hawkish desire to slow the economy and bring down inflation.
In fact, there is such a hawkish tone coming from the Fed, that this past week the CEO of JP Morgan, Jamie Dimon said he would not be surprised to see the Fed raise rates well past their projected target and all the way to 6.0% or higher.
These factors continue to put pressure on the stock market and may be negative for investors.
If you read some of our Market Outlooks during 2022, we spent a great deal of time discussing easy ways to calculate stock market values using earnings, interest rates and multiples of P/Es.
Earnings estimates are falling quickly. See chart below:
Original earnings looking out into 2023 were estimated to be around $220 a share. Then towards the end of 2022, the consensus opinion was we might see them go as low as $200 a share and just this past week a number of analysts revised them downward, yet again, to a possible $190 a share.
We don’t know what they will come in as, but you should consider this: raw materials, labor costs and higher interest rates burden along with cost of distribution (trucking gas costs) and sluggish sales have all contributed to less profits and earnings being adjusted downward.
If you take an even $200 a share (for the year of 2023) which the market is currently pricing in and assign different multiples, here is what might be fair market valuations:
$Earnings x Multiple = S&P 500 Price
$200 x 15x (P/E) = 3,000
$200 x 17x (P/E) = 3,400
$200 x 20x (P/E) = 4,000
The higher interest rates rise, typically, the lower multiples will go, especially if higher interest rates actually cause a mild recession in the first half of 2023. Your guess is as good as mine about where the market is priced. However, let me say that Mike Wilson, the Chief Investment Strategist for the behemoth Morgan Stanley, came out this week and did the same arithmetic as we did above, and his conclusion was that the market could (and should) get to 3,000 before it gets to new highs. (We don’t know if he is right, but he sure nailed where the market was headed in 2022)
Recently, one of our avid readers (Thank You!), told me that I am too negative. I get it. However, I have friends and clients of other money management firms that are down more than 20% in 2022. I hope our warnings, cautionary commentary and overall suggestions may have saved YOU from being hurt in 2022. If not, or if you would like to discuss the MGAM optimal investment blends that beat their respective benchmarks by 2x or more over the past 5 years, please email Keith (Keith@MGAMllc.com or me DGoodman@MGAMLLC.com) and let’s have a friendly discussion about your investment goals and objectives.
At the Tipping Point
The “experts” on television are endlessly debating about whether or not we are going to have a “recession” this year, and meanwhile, economic activity is imploding all around us. The number of homes being sold in this country each month has already fallen by a third. The number of job cuts in November was 417 percent higher than it was during the same month a year earlier, and at this point, even Amazon is laying off thousands of workers. The Federal Reserve has declared war on inflation, but prices continue to spiral out of control. In fact, vegetables are 80 percent more expensive now than they were 12 months ago.
The following are a few signs that the economic “tipping point” that everyone has been waiting for has now arrived…
Baltic Dry Good Index is a measure of global shipping and economic health. The overall index, which tracks rates for capsize, Panamax, and Supramax shipping vessels carrying dry bulk commodities, plunged 17.5% to $1,250, the most significant daily decline since 1984.
Remember, this is all sanctioned and endorsed by the Federal Reserve who needs to see continuing signs that the economy is slowing and layoffs are a necessary part of the damage higher interest rates cause.
This is by design. These actions and reactions are part of the Fed’s effort to slow down inflation and get it close to the target of 2% annual inflation.
FOLKS, this is not a recipe for a bull market. The stock market historically has bottomed when we enter a recession. We are not yet in one and it may be some time before the aforementioned economic weakness actually results in a recession.
Be careful out there!!!! This may only be a short-term rally!!
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