Wentz Weekly Insights
Markets Not Buying Fed’s Projections, Expect Powell to Maintain Message

Stocks advanced again last week with the NASDAQ seeing its fourth consecutive weekly gain as growth continues to outperform value to start 2023. So far for 2023, the NASDAQ is up 11.04% while the Dow is up 2.51%, due to blue chip and more value oriented companies that make up the index. At the same time, the 10-year U.S. Treasury bond is yielding 3.52%, a sizeable drop after starting the year with a yield of just under 4%.
The reason is easing inflation data and the market’s expectation the Federal Reserve will not raise rates as much as what they are saying, and the expectation rates will actually end up moving lower in the second half of the year, also differing from the Fed’s message that rates will stay at peak levels for at least all of 2023. We will get more details when the Federal Open Market Committee meets this week with its policy decision on Wednesday at 2:00pm and Chairman Powell’s press conference to follow.
With the markets seeing such strong gains and yields falling in the first month of the year, we will be focusing on how aligned Powell stays with his message from the December meeting. A rise in asset prices, such as stocks, and a fall in interest rates throughout the economy, for example the average 30-year mortgage rate falling over 1% from the highs in November, may be an unintended easing in financial conditions that makes the Fed uncomfortable given the inflation environment.
The fear for the Fed is an easing of financial conditions like this could lead to a reacceleration in inflation and make the Fed’s job more difficult. This is the reason Powell and company have maintained their higher for longer message (rates going higher and staying high for a period of time). Sticking with its message is meant to tighten financial conditions and keep them tight until there is clear evidence and policymakers are confident inflation is moving back down to its target of 2% annual inflation. Any easing in financial conditions could reignite inflationary pressures and complicate the picture.
We also expect Powell to touch on the “long and variable lags” of monetary policy – it taking time for tighter monetary policy like higher rates to affect the economy and show up in the data. This is a reason markets have moved higher and yields have moved lower – they anticipate a slowdown and inflation moving back to target because the Fed already raised rates to a level high enough (in “restrictive” territory). With this being the expectation, markets expect a cut in rates later this year due to a slowing demand environment.
While we will not see an updated summary of economic projections, which shows where all policymakers see economic data as well as interest rates over the short and medium term, we think the press conference will be used as an opportunity for Powell to reiterate his message of the past several months.
What is more uncertain is the earnings picture for 2023, a picture that is not any more clear than where it started the year, despite about a quarter of the market having reported results since then. Even with having seen these earnings reports, where forecasts are sometime given that typically give us a more clear picture of the year, markets are still uncertain how the earnings picture shapes up for the year.
One thing that is known is earnings estimates continue to move lower. Before the quarter started, earnings were expected to have declined 3%, and two weeks into earnings season the updated estimates stand at -5.0% due to 17 of the 19 companies that have given guidance so far, giving guidance to the downside, the weakest since 2011. It appears consumers might be starting to push back against higher prices with profit margins falling half a percent from the previous quarter to 11.4%, the lowest since 2020.
We still think it is too soon to say we are out of the woods yet, and with the uncertainty and where the economic clock/market rotation is, value and income producing investments are what we prefer in this environment.
Week in Review:
Following a strong rally on the Friday prior, stocks opened last week in the green with another strong session on no catalyst in what was a more quiet day. One thing that may have helped continue the rally was a weekend article from the WSJ Fed correspondent Nick Timiraos that said the Fed is likely to go with smaller 25 basis point rate hikes and could start debating when to pause rate increases this spring, though not expecting this at the February 1 FOMC meeting. The S&P 500 finished just off session highs, closing above 4,000 and above key resistance levels with a 1.19% gain on the day.
Tuesday began with a massive trading halt on a large number of stocks on the New York Stock Exchange due to pricing issues at the open (many trades will be busted as a result). Stocks were mostly lower in an uneventful day, with earnings remaining the concern after several disappointments overnight (3M, Johnson & Johnson, Union Pacific, Verizon). Value stocks outperformed growth for the first time in several days. The Dow gained 0.31% while the S&P 500 fell 0.07%.
Microsoft earnings after the close Tuesday sent bond yields and stock prices lower after hours and that led to a lower open for Wednesday’s session. Slower growth in almost all segments and caution on the macroenvironment from Microsoft drove the weakness in markets. However, around mid-morning stocks made a reversal and turned positive on no real catalyst. The Bank of Canada raised rates by 25 basis points and indicated it was done with its rate hike cycle, which could have played a role in the reversal. By the end of the day, the S&P 500 fell just 0.02%.
Thursday morning was packed with economic data and earnings reports. Tesla received most the attention, rising about 10% over its optimistic production and sales targets for the year, helping push growth stocks higher. Economic data included jobless claims falling again back near the lowest levels of the year, very strong durable goods orders (driven by aircraft orders which are large orders and drive a large portion of that index), and GDP which was slightly better than expected thanks to consumer spending growth and government spending. There were mixed earnings results but optimism from some notable names led the markets to a 1.10% gain on the day with another outperformance in growth stocks thanks to Tesla.
Personal income and consumer spending data came in exactly as expected Friday morning, with income still growing but spending slowing and declining in the month. The more important figure was the PCE price index, the Fed’s favorite inflation measure, which was exactly as expected with core prices up 4.4% from a year ago (while improving, still over double the Fed’s target). Then, the consumer sentiment report was inline with expectations while consumers’ inflation expectations cooled. This helped stocks move 0.25% higher on the day.
For the week stocks moved mostly higher while Treasury yields moved slightly higher and gold snapped its five week winning streak. Crude oil was relatively stable on no news, falling 2.0% on the week with the OPEC meeting upcoming. Treasury yields move a little lower mid-week before moving back to where they started the week finishing relatively unchanged. Stocks were higher with growth back to outperforming value, helped by several notable names (like Tesla), with the major indices finishing as follows: NASDAQ +4.32%, S&P 500 +2.47%, Russell 2000 +2.36%, Dow +1.81%.

Recent Economic Data

  • Money supply, measured by M2, fell to the lowest level since October 2021, dropping $147 billion to $21.207 trillion, after peaking at $21.739.7 trillion in March 2022 right before the Fed began shrinking its balance sheet. It was the fifth consecutive monthly decline, and a 2.4% decline from the peak levels, however still 37.7% above pre-pandemic levels (famous economist Milton Friedman school of thought is inflation is caused by increasing the money supply).
  • The number of unemployment claims filed the week ended January 21 was 186,000, falling 6k from the prior week, for a very low level – actually the lowest since April this year, and excluding March and April this year (and a couple weeks in 2019), was the lowest since 1969. The four-week average fell almost 10k to 197,500. Continuing claims were 1.675 million, up 20k from the prior week, with the four-week average at 1.664 million.
  • Durable goods orders showed a strong increase of 5.6% in December, double expectations, which follows a 1.7% decline in orders in November, and the best month since mid-2020 when we were coming out of the Covid lockdowns. Looking at the details, transportation equipment was up 16.7%, and within that category nondefense aircraft orders were up 115% which drove just about all of the increase in durable goods orders. Goods orders excluding the volatile transportation category were down 0.1% and core capital goods orders, a better proxy of business investment, was down 0.2% as expected.
  • In the first estimate of fourth quarter economic growth, GDP rose at a 2.9% annualized pace in the quarter, slightly better than the 2.8% expected. For all of 2022, GDP grew 2.1% (2022 annual level vs 2021 annual level), compared with 5.9% in 2021. Running through the details – by far the largest category, consumer spending, rose 2.1% and contributed 1.4% to the quarterly GDP number. Spending on goods rose 1.1% while spending on services rose 2.6%. Residential investment fell 26.7% due to the slowdown in the housing market and new home builds, contributing a negative 1.3% to GDP, while non-residential fixed investments rose 0.7% and contributed 0.1% to GDP. Inventory growth picked up, contributing 1.5% to GDP, mostly from manufacturing (mainly petroleum, coal, and chemicals), while government spending rose 3.7% and contributed 0.6% to GDP. Finally, exports fell 1.3% while imports fell 4.6%, contributing a net 0.6% to GDP. The GDP price index rose 3.2%, down from 4.3% in Q3, while core prices rose 3.9%, down from 4.7% in Q3.
  • Personal income and consumer spending for December:
  • Personal income rose 0.2% in December, exactly as expected, but is the slowest increase since January 2022. The important wages and salaries component rose 0.3% in the month, with real wages rising 0.4% when accounting for the 0.1% decline in inflation, and are up 6.0% from a year ago, which means real wages on a year-over-year basis are not keeping up with higher consumer prices as inflation adjusted wages (“real” wages) are down 0.5% over the past 12 months. Disposable income, income after taxes that consumer have available for spending and saving, rose 0.3% in the month and is up just 4.1% over the past year, giving consumers real disposable income growth of -2.4% over the past year.
  • Consumer spending fell 0.2%, matching the disappointing retail sales report and the weakest monthly change since February 2021, showing consumers have slowed their spending over the last several weeks of the year. As has been discussed several times, the level of spending on goods is really decelerating, declining by 1.6% in the month, and the y/y pace slowing to a 6.2% increase. Spending on services continues to pick up pace, rising another 0.5% in the month and now 10.1% higher than a year ago.
  • With the income and spending levels, personal savings grew, but that comes off low levels from the past several months, with the personal savings rate at 3.4%, the highest since May’s 3.4% after several months of being at 17 year lows.
  • The PCE price index, the Fed’s favorite measure of inflation, rose 0.1%, slightly more than the expectation of no growth, while core prices grew 0.3% as expected and are up 4.4% from a year ago, as expected and slowing from 4.7% in the previous month. The report was mostly as expected report, but some will focus on the weaker consumer spending numbers as another sign of a faster slowdown in the consumer and spending.
  • Sales of newly built single family homes rose 2.3% in December to a seasonally adjusted annualized rate of 616,000, but 26.6% below the sales rate from December 2021. For 2022, there were 644,000 new homes sold, 16.4% below 2021 figures. The median sales price of a new home was $442,100, a 3.7% decline in the month, but still rising y/y at a 7.8% rate. On supply, there were 461,000 new homes for sale at the end of the month, representing a supply of 9.0 months at the current sales pace. Strong sales growth was seen in the Midwest and South, while declines were seen in the West and Northeast.
  • The University of Michigan’s Consumer Sentiment survey index level was 64.9 for January versus the 64.6 expected and improving from 59.7 in December. The current situations index was 68.4, up from 59.4 last month while the expectations index was 62.7, up from 59.9 last month. Consumers’ expectation on inflation over the next 12 months, which is what the market and Fed has been focused on over the past year, declined slightly to 3.9%, down from 4.0% and the high of 5.4% in March (the highest since the 1980s), while the 5-10 year inflation expectation was 2.9%.
  • The Freddie Mac weekly mortgage survey shows the average 30 year mortgage rate for the prime borrower fell 2 basis points to 6.13%. The peak of this cycle was 7.08% in November.

Company News

  • Salesforce received additional attention after activist investor Elliot Management added a multi-billion dollar investment in the company. It was in October that activist investor Starboard Value disclosed a significant stake, pushing for efficiency and higher margins. Reports from the Financial Times say activists have made it clear that a sale of either Slack or Tableau should be explored as they believed the company overpaid when it acquired the companies.
  • The Department of Justice began a criminal investigation of conduct at an Abbott Labs facility that produces baby formula. The facility was temporarily shut down in 2022 after it recalled its baby formula due to illnesses that led to concerns of baby formula shortages.
  • Bloomberg reported the U.S. is expected to file an antitrust lawsuit against Google over its dominance in the digital advertising space. Google responded saying the lawsuit is without merit and it will “defend itself vigorously.”
  • The earnings report from Microsoft was a market moving event, pushing bond yields and stock prices lower after Tuesday’s market close and into Wednesday’s session. Last quarter’s results were decent, however growth in its fastest growing segment, its cloud services, really slowed toward the end of the quarter and its guidance suggests a faster slowdown in its growth rate (low 30%’s growth). The PC segment has been more disappointing, after two years of very strong growth during the pandemic, with its guidance well below analysts’ expectations. Cyclical segments like ads, gaming, and its LinkedIn portfolio show a continued slowdown. One of the bright spots was the continued strength in its Office segment.
  • Intel’s earnings report was another major disappointment, with one analyst calling the results “stunning,” and some now more worried about its cash position and whether its dividend is safe. Revenue and earnings missed estimates and it provided a steep downside forecast compared to consensus estimates with revenue guidance of $11B compared to the $14B consensus estimate and EPS of -$0.15 vs +$0.25 expected. The PC segment saw more declines, this was a trend that started about a year ago, but the bigger issue with Intel is they’re losing significant market share to competitors like AMD, and this continued in the quarter. The company announced cost cutting targets of $3 billion for 2023, and $8B-$10B by the end of 2025. Its newer foundry business was a bright spot, growing 30% y/y.
  • Chairman and CEO of News Corp Rupert Murdoch has called off the idea of re-combining News Corp with Fox, determining a merger is not optimal for shareholders at this time.
  • Walmart said it will raise the minimum wage for its store employees to $14 per hour, starting in March. It said the increase will bring the average hourly wage to about $17.50/hour.
  • Chevron announced a new $75 billion stock buyback program as well as a 6% increase to its quarterly dividend to $1.51, for a dividend yield of 3.3%. The buyback represents over 20% of the company’s market cap and is now receiving attention from the White House.
  • CVS and Walmart will cut pharmacy hours as two of the country’s largest pharmacies deal with an ongoing pharmacist shortage. CVS is reported to cut operating hours at two-thirds of its 9,000 pharmacies while Walmart plans to close nearly all of its store’s pharmacies two hours early – at 7pm instead of 9pm. Another major U.S. pharmacy, Walgreens, has previously announced a cut to operating hours due to shortages.

Other News

  • Bloomberg reporting Republican leaders are thinking about extended the debt ceiling to September 30, but unsure if Democrats will agree to the short term delay.
  • There are increasing worries that the recent support for Ukraine (several nations, including the US, sending their best tanks to Ukraine ahead of an expected Russia offensive) will risk a more serious escalation of the war by Russia.
  • In a continued effort by the U.S., Japan and Netherlands have agreed to join the U.S. in protecting the semiconductor supply chain by creating an alliance to limit China’s ability to produce its own domestic chips, as China has made efforts to produce its own advanced chips. The nations will restrict the exports of advanced chipmaking equipment to China to help cut China’s access to more advanced technologies. It was just in October that the Biden Administration imposed wider export restrictions by U.S. companies of advanced chips as well as equipment used to manufacturer chips.

WFG News

Updates on 2022 Tax Documents

Please note tax documents will not start mailing until January 31. Most retirement accounts will see 1099-R and form 5498 mailed on January 31. Retail accounts will see 1099 and related documents mailed by February 15. Certain accounts with more complex securities may have 1099’s mailed as late as March 15. Please see this email for more details. If there are any questions on tax documents, please reach out to us at 330-650-2700.

Introducing Our Newest Team Member!

We would like to welcome one of our newest members of our team, Tori Riggs. Tori will be working as the 401k Client Service Administrator for Wentz Financial Group. Tori graduated from Kent State University in May 2022 with a Bachelor’s degree in Business Management and began working for the company in September 2022. Before starting at WFG Tori held a management position at Bath and Body Works. What she has enjoyed most about WFG so far is beginning to build relationships with all of WFG clients along with her coworkers! We are excited to have Tori’s youthful enthusiasm on the team.

The Week Ahead

This week will be a very busy week for the markets. Likely to make most headlines will be the Federal Reserve’s first FOMC meeting of the year Tuesday and Wednesday with a policy decision on Wednesday at 2:00pm with a Chairman Powell press conference to follow. The FOMC is widely expected to raise rates one-quarter of a percent to a new range of 4.50% to 4.75%, however the bigger question will be the message Powell gives on upcoming rate hikes and how long they expect rates to stay that high. Other central banks around the globe with policy meetings include the Bank of England and European Central Bank. Fourth quarter earnings will take up a lot of the attention as well with nearly one quarter of S&P 500 components reporting fourth quarter results this week, the busiest week of the quarter, and a large number of those giving forecasts for 2023. Some of the largest companies will report including Facebook parent company Meta on Tuesday along with Apple, Amazon, and Google parent Alphabet on Wednesday. A few other notable reports coming this week include Sofi, Whirlpool, GE Healthcare on Monday, Exxon Mobil, GM, AMD, Caterpillar, Pfizer, UPS, McDonald’s on Tuesday, Altria, T-Mobile on Wednesday, Ford, Merck, Eli Lilly, Qualcomm, Starbucks on Thursday, and Cigna on Friday. The economic calendar has several key labor market reports including the employment cost index for the fourth quarter on Tuesday, job openings and the ADP employment report on Wednesday, jobless claims on Thursday, and the Department of Labor’s employment report on Friday where the current consensus expectation is for payroll growth of 185,000 in January. Other data releases on the calendar include Case-Shiller home price index and consumer confidence Tuesday, the ISM and PMI manufacturing indexes and construction spending on Wednesday, fourth quarter productivity and costs, factory orders, and January vehicle sales on Thursday, and the ISM services index on Friday. Other events on the schedule include OPEC’s committee meeting to discuss oil output where it is expected to keep output unchanged from current levels. We expect the debt ceiling to continue to be in the headlines, with House Speaker Kevin McCarthy expected to visit President Biden at the White House to discuss the issue on Wednesday, but no quick resolution.