Wentz Weekly Insights
Earnings So Far Better Than Feared With Big Week Ahead

The next several weeks will be dominated by a rush of quarterly earnings reports. This week is the busiest, with at least 150 S&P 500 companies reporting results, including some of the largest in the world. We will see results from the big five; Amazon, Apple, Meta (Facebook), Alphabet (Google), and Microsoft. The trend over the past several months has been declining earnings estimates. For example, since the start of the third quarter on July 1, earnings estimates for Microsoft have declined 8%, while estimates for Meta and Amazon have declined 30% and 40% respectively.

It’s not just the largest companies seeing large downward revisions. In fact, earnings for the S&P 500 were expected to be $228 per share over the next 12 months in early summer, the peak in earnings projection. This has moved lower since second quarter results were released three months ago and now stand at $220 per share, a 3.5% decline, and the lowest forward projection since the end of 2021.

However, the start to third quarter earnings have not been as bad as feared, something that has helped the market with its recent 7% bounce from the lows. About 18% of S&P 500 companies have reported quarterly results so far, with 75% reporting profits that were above expectations. Typically, using data since 1994, about 66% of companies beat earnings estimates, but the 75% beat rate so far is below the more recent one-year average of 78%.

If we dig deeper and see where most the downward revisions are coming from, it is larger sized and growth companies. Smaller sized companies and value style stocks have not seen as large of a revision. This could be due to several things – the easiest answer is the strong dollar. Those that export and do business overseas have to convert back to the strong dollar which makes overseas profits look smaller, while growth companies are having a hangover from the Covid-induced surge in spending that investors and analysts thought would continue as well as higher costs as interest rates increase.

Meanwhile, market participants are still trying to assess how high the Fed will push interest rates and how long they will keep rates above a neutral level. A WSJ article late in the week by Fed correspondent Nick Timiraos noted policymakers have essentially agreed to a 75 basis point increase in the Federal Funds rate at its November 2-3 meeting, but will now debate how to signal smaller moves beginning in the December meeting or first meeting of 2023.

It appears the Fed is preparing and debating how it will tell market participants that it is done with the abnormally high pace of rate increases and that it will take smaller steps, or even pause. It faces the difficult task of giving this message without causing an overreaction. It was just several weeks ago markets rallied over the hopes of a “Fed pivot” – where the Fed goes from raising rates to pausing or cutting rates to prevent a recession. This will not be the message. The message will be how the Fed plans to raise rates to around 4.75% to 5.00% and hold them there and give it time to assess how higher rates have affected the inflation picture. Remember, it typically takes 12 months or more for higher rates to work through the economy.

The uncertainty around how high rates will go and for how long they will stay high, as well as an uncertain earnings picture, tense geopolitical issues, an upcoming Midterm election, and recessionary risks will keep markets on a volatile path as we head into the end of the year. With sentiment being depressed and earnings so far better than expected, a short-term bounce looks more than likely, but we will remain cautious until we have more certainty.

Week in Review:

Markets opened the week seeing the third consecutive day with a move of at least 2.3%, and the sixth day in October (there have only been 11 trading days so far), with stocks closing 2.65% higher. There was no clear catalyst, but it may be due to a squeeze from short sellers covering positions and improved confidence in the markets after seeing UK markets stabilize after its government scrapped plans for its minibudget.

For the third time in four days, stocks saw strong buying as volatility (as measured by the VIX) remained above 30 for the ninth consecutive day. The technical backdrop plus better than expected earnings again helped stocks, but making headlines was Apple telling supplies to halt production as it reassesses demand. Stocks had a good day but finished off the highs with all sectors higher for the day and the S&P 500 gaining 1.14%.

Equity markets took a breather on Wednesday, opening in the red. In central bank news, Fed policymakers said the Fed Funds rate may have to rise above the current 4.75% projections if core inflation does not come down while the Bank of England said it would begin quantitative easing (selling bonds) November 1 as UK inflation hit another high at +10.1% y/y. Oil was 3% higher after President Biden announced the release of an additional 15 million barrels of oil from the SPR. In fixed income markets, the 3-month treasury yield briefly topped the 10-year yield with all maturities above the 4% level. It was another solid day of earnings reports, but markets still closed down 0.67%.

Equity markets opened flat Thursday with a mixed round of earnings reports overnight. Rates received attention with the expected terminal federal funds rate moving over 5% for the first time, about 35 basis points above the Federal Reserve’s projection, which coincided with the 10-year Treasury yield moving as high as 4.23%. Stocks saw early morning gains but were unable to hold on with the S&P 500 closing down 0.80%.

It was a relatively uneventful overnight and trading day on Friday. Snap received attention from an earnings perspective after it refrained from providing guidance and reported revenues lower than already low expectations, leading to a selloff in advertising names like Facebook. A morning WSJ article from Fed correspondent Nick Timiraos said the Fed is preparing for a 75 bps increase in its November 2-3 meeting and ready to debate how to signal smaller moves starting in its December meeting. After red pre-markets, stocks ended up having a solid day, closing 2.37% higher.

Volatility remained elevated last week with the VIX (volatility index) going no lower than 29.24 (versus the 2021 average of 19.66) with October seeing seven days with at least a 2.3% move (there have only been 15 trading days!). Oil was relatively unchanged despite the White House talking about releasing another large amount of oil from the Strategic Petroleum Reserve. Yields rose across the curve, with the largest moves on the short-end, as the 10-year Treasury yield ended the week at 4.21% after starting the week at 4.01%. For the week the major U.S. stock indices finished as follows: NASDAQ +5.22%, Dow +4.89%, S&P 500 +4.74%, and Russell 2000 +3.56%.

Recent Economic Data

  • The index of Leading economic indicators dropped 0.4% in September versus the 0.3% decline expected. Outside of February, every month this year has been negative which is extremely rare.
  • The Empire State Manufacturing Index was -9.1 for October, worse than the -2.5 expected and falling from -1.5 from September, suggesting a decline in business activity for the second month. New orders, unfilled orders, and shipments were little changed in the month, while input prices picked up for the first time in three months. About 32% of respondents said conditions had worsened while 23% said conditions improved, with more respondents less optimistic about the future six months.
  • The Philly Fed Manufacturing Index was -8.7, below consensus and near September levels. The survey results indicated another month of contracting conditions in manufacturing with general activity and new orders declining again and shipments weakening. Employment improved again, but prices increased again. The future general activity index declined again.
  • Industrial production, which measures factory activity, increased 0.4% in September to another record high, above the 0.1% increase expected following a small drop in August, and 3.4% above pre-Covid levels. Manufacturing output, which is industrial production excluding mining and utilities, was solid, rising 0.4% which was double expectations and follows a decent 0.4% increase in August. Businesses are operating more efficiently with capacity utilization at 80.3%, the highest since 2000.
  • Unemployment claims for the week ended October 15 was 214,000, a decrease of 12k from the week prior and about 20k below expectations. The four-week average increased slightly to 212,250. Continuing claims were 1.385 million, up 21k from the week prior with the four-week average unchanged at 1.365 million.
  • Home builder sentiment fell 8 points to 38 in October (50 is breakeven between positive and negative) from 46 last month and is down 50% in just six months for its lowest since August of 2012. Sales conditions fell 9 points to 45, expectations down 11 points to 35 and traffic down 6 points to 25.
  • The number of housing starts was 1.439 million on a seasonally adjusted annualized basis in September, a drop of 8.1% from August and 7.7% below a year ago. The drop in starts was mixed between single family homes and multifamily buildings. The number of homes authorized but not started was 291k, consistent with recent months suggesting homebuilder remain behind on construction. Completions improved to 1.427 million annualized, rising 6% from August and 16% from a year ago. The number of permits filed to start a newbuild was 1.564 million on a seasonally adjusted annualized basis. This is slightly above the level from August and 3.2% below September a year ago, however, permits for single-family homes fell to the lowest levels since 2018.
  • Sales of existing homes declined 1.5% in September, compared to a 2.1% decline expected, to a seasonally adjusted annualized rate of 4.71 million homes for the eight consecutive month of declines. Compared to a year ago, the sales rate is down 23.8%. Remember existing home sales are based on closings, not signings unlike the other housing reports, so this data lags several weeks. Inventories declined again, now 1.25 million units on the market, down 2.3% in the month and 0.8% from last year, with unsold inventory at 3.2 month supply at the current sales pace. Prices are moderating, but still up 8.4% y/y to $384,800. More than 25% of homes sold above listing price due to limited inventories but some are beginning to sit on the market longer now.

Company News

  • Salesforce moved higher after activist investor Starboard was reported to have taken a significant stake in the company. The chief of Starboard made remarks saying the company should focus on driving higher margins and how it is trading at a discount to its peers due to its subpar mix of growth and profitability. He also mentioned the company hasn’t generated meaningful operational leverage versus peers and its long term targets are less ambitious than peers.
  • Netflix is introducing Profile Transfer which will allow users to easily export things such as personalized show recommendations, watch lists, history, and saved games as a new setting so they can easily transfer it later if they want to create a new membership.
  • The Information reported Apple is cutting production of its new iPhone 14 Plus. The report says Apple has told at least one manufacturer to immediately halt component production as it reevaluates demand. This follows several other reports that Apple told suppliers to cut production plans and comes just two weeks after the new iPhones debut.
  • A WSJ article reported Fox Corp CEO Rupert Murdoch is exploring a recombination of Fox and News Corp, which would bring the media companies together after 10 years of being separated. The two companies have formed a special board committee to study to financials of combining the companies, but it is still in early stages.

Other News

  • Chaos in the UK continued after incoming Chancellor Jeremy Hunt scrapped plans for a mini budget, which was introduced by ex Chancellor Kwarteng who was dismissed after just 38 days. The plan originally called for lower taxes and increased spending that would have required more government borrowing. As a result, government bonds sold off with yields spiking, leading to collateral calls on pension funds and causing the Bank of England to step in to support market functioning. Later in the week, Prime Minister Liz Truss officially announced her resignation, after just 6 weeks in office in which she faced pressure over her failed mini-budget of higher spending and lower taxes and forced cabinet changes. This led her to lose a lot of support and confidence from her Conservative party and members of Parliament were beginning to consider removing her from office. Next step is the Conservative member of Parliament agreeing on a new leader or holding another general election. Markets are of course supporting the move with government yields lower and stocks slightly higher.
  • The Bank of England said it would start quantitative tightening – reducing its balance sheet by selling government bonds – on November 1, but will hold off on selling longer dated gilts this year. This comes days after the central bank was forced to buy bonds under an emergency program to support market functioning after a sharp sell off in government bonds.
  • Biden, as was expected, advised officials to prepare for the release of another 15 million barrels of oil from the Strategic Petroleum Reserve in December in effort to reduce gas prices. The reports note the White House says this is a bridge until output picks up from the U.S. and other oil producing nations, but U.S. supply growth is not expected to pick up and remains 1 million barrels/day below 2019 peak production. The reports are also saying the White House is looking at “significantly” more releases over winter. At the same time, the Administration said it would look to refill the reserve by purchasing oil when the price is at or below the $67-$72/barrel range. He also called on oil companies to increase domestic output. Separately, the Administration has contemplated restricting fuel exports, but mixed opinions across the oil industry and within the administration has this on hold.
  • China and U.S. tensions could heat up as U.S. Secretary of State Antony Blinken said China is planning to annex Taiwan on a much faster timeline under the leadership of President Xi. This comes after China held its 20th National Congress of the Chinese Communist Party where President Xi advocated for a peaceful reunification of Taiwan but pledged to not renounce the use of force.
  • Federal Reserve News:
  • NY Times reporting Fed officials are in agreeance on a 75 bps increase at the next Fed meeting at the beginning of November.
  • Atlanta Fed President Bostic reiterated comments about inflation being too high and added without stable prices it is difficult to get the economy on a long-run growth trajectory because when there is high inflation the psychology of producers and individuals changes where they focus more on the short-term which risks longer-term economic growth.
  • Minneapolis Fed President Kashkari said the Fed might need to raise rates over 4.75% (where the current projections are for peak rates) if there is no improvement on core inflation and said he does not believe we are ready to pause rate hikes. Kashkari in another appearance added headline inflation may have peaked but core inflation still hasn’t with consumer prices showing no signs of receding. He added that monetary policy and adjusting interest rates usually takes a year to work through the economy, but the bigger risks to the Fed is to undershoot and keeping inflation high, rather than doing too much.
  • The New York Times had a report that Fed officials have been in contact with Wall Street contacts about Treasury market risk, which follows the meltdown in UK’s government bond market.
  • Philly Fed President said he expects the fed funds rate to be “well above 4%” by year end and sometime next year it will stop raising rates which is when he thinks the Fed will hold at that level to let the higher cost of capital work its way through the economy. He continued, if needed based on the data, the Fed can tighten further.
  • A WSJ article from Fed correspondent Nick Timiraos reported Friday morning the FOMC is preparing to raise rates 75 bps in its November 2-3 meeting, but likely to debate how to signal smaller moves beginning its December meeting. This is of course nothing new, based on the Fed’s “dot plot”/interest rate projections, but it appears the bigger matter is how to signal to the markets without an overreaction.

Did You Know…?

Market Volatility
The equity market has seen wild swings in both directions multiple times this year. According to a technical note by Raymond James, the stock market has seen nine swings this year with five legs lower and four legs higher. The average move lower was -14.56% while the average move higher was +12.51%. Currently, the S&P 500 is in a leg higher, and as of Friday’s close is 4.9% higher off the closing low and 7.5% higher off the intra-day low.
Social Security 2023 COLA Adjustments
The Social Security Administration announced the largest cost-of-living adjustment to benefits since the early 1980s for 2023. More than 65 million Americans will see an 8.7% cost-of-living adjustment in their payments beginning January 2023 amid the highest inflation we have seen since the late 1970s and early 1980s. The adjustment raises the average retirement benefit by $144.10 to $1,656. The increase comes after a 5.9% adjustment in 2022. In addition, the maximum amount of earnings subject to Social Security tax increases to $160,200, up from $147,000.
Other 2023 COLA Adjustments:
The IRS announced new 401k and IRA contribution limits, as well as new tax brackets for 2023, as it adjusts for inflation. See below for the new limits:
  • 401(k): Individuals can now contribute up to $22,500 to their 401k, 403b, and other select qualified retirement savings plans, up from $20,500 this year. The catch up contribution, which allows those over the age of 50 to contribute an additional “catch up” amount, increases to $7,500 from $6,500.
  • IRAs: Individuals can now contribute up to $6,500 in earned income to Individual Retirement Accounts (traditional or Roth), up from $6,000 this year. The catch up contribution for those over 50 remains at $1,000.
  • The income ranges that determine whether an individual’s contribution is tax deductible (for traditional IRAs) or not if covered by a workplace retirement plan as well as phase out limits for Roth contributions moved higher as well. The income phase out range for Roth IRAs single taxpayers is $138,000 to $153,000 up from $129,000 to $144,000.
  • The IRS also released tax inflation adjustments for tax rate schedules. The standard deduction increases $1,800 to $27,700 for married couple and $900 to $13,850 for single filers. To see the updates to the tax tables, you can view this IRS link here.
Medicare Open Enrollment:
Runs from October 15 to December 7 each year
During this period, individuals are able to make changes to their current Medicare coverage. Individuals on Medicare should receive an Annual Notice of Change and/or Evidence of Coverage for Medicare Advantage or Part D plan. This is a good time to review coverage, as medical needs, benefits, and premiums may have changed over the year. During this time here are some things to consider:
  • Will your primary doctor still accept you Medicare Advantage Plan?
  • Have your medical needs changed? Different plans offer different benefits and different costs
  • Are there comparable, lower cost plans available? Don’t forget to consider out-of-pocket costs when comparing options
  • Are you medications still on your plan’s list of covered medications?

WFG News & Events

Coffee Day!

Friday, November 18th – 7:30 am to 9:30 am

Come visit Wentz Financial Group for a complimentary cup of coffee on Friday, November 18! We will be hosting a barista truck on the morning of the 18th from 7:30 to 9:30.
No RSVP necessary and all are welcome.

Career Development Day

Thursday, December 22, 2022 – All Day

Do you know someone in high school or college looking to get real life work experience from the finance industry? Wentz Financial Group will be hosting its 2nd Career Development Day at our office on December 22nd. The day will not only be for those looking to get a first look into financial services field but is open to any student wanting to get their feet in the door of the professional world. Don’t forget to RSVP by responding to this email or calling the office at 330-650-2700.

The Week Ahead

This week’s calendar will be mostly centered on the busiest week of third quarter earnings releases that involves many of the largest companies in the world and tech giants like Alphabet (parent company of Google), Microsoft, Meta (parent company of Facebook), Apple, and Amazon. There will be at least 30% of S&P 500 companies reporting results this week including notable reports from: Packaging Corp on Monday; Alphabet, Microsoft, Texas Instruments, GE, 3M, General Motors, UPS, Visa, Coca-Cola, Chipotle on Tuesday; Meta, Ford, and Boeing on Wednesday; Apple, Amazon, Intel, Caterpillar, McDonald’s, T-Mobile on Thursday; and finishing with Chevron and Exxon Mobil on Friday. The economic calendar is lighter at the beginning of the week, with the Case Shiller Home Price Index and Consumer Confidence on Tuesday, along with new home sales on Wednesday. Thursday will see the first estimate of third quarter GDP where it is expected to show the economy grew at a 2.3% annualized rate after declining in the first and second quarters. September durable goods orders and unemployment claims are also released Thursday. The week wraps up with personal income and outlays, the employment cost index, and the University of Michigan consumer sentiment index on Friday.