Wentz Weekly Insights
The Big Five Disappoint, On to the Fed Meeting

Last week’s earnings reports gave an important update on the economy and markets, especially as it deals with some of the largest companies in the world. The big five tech companies all gave third quarter results last week with mixed results but more importantly, lower forecasts. These five companies are an important part of the market as they collectively make up nearly 20% of the S&P 500’s market cap.

Apple was the lone winner, when it comes to stock performance post-earnings, on iPhone demand that was not as bad as feared. Its revenues increased 8.1% from a year ago with product sales almost $1 billion more than expected, driven by strong Mac and wearables (watch) sales, which was offset by lower services sales from lower gaming and digital ad revenue. Recall, over the past month there were multiple reports of Apple telling suppliers to cut production on its new iPhone, so expectations going into the report were low. The company did not provide specific guidance but gave “directional thoughts” that suggested a deceleration in revenue growth that was not as bad as feared but highlighted meaningful pressure from the stronger dollar.

Amazon reported mixed quarterly results with revenues that were short of expectations as its important cloud computing segment, Amazon Web Services, revenue rose 28% but slowed from 33% in the second quarter and was still $0.5 billion below expectations. In addition, operating income was $2.5 billion and lower than the $2.9 billion expected due to higher labor and energy costs. The bigger story was its revenue guidance for the important holiday shopping quarter of $144 billion was well short of the consensus expectation of $155 billion with operating income that was also short of expectations due to a more challenging macro environment and higher costs.

Google parent Alphabet missed most estimates, including revenues, margins, and profits, as it was impacted by a stronger dollar, higher costs, and weakening advertising demand. A big disappointment was an unexpected decline in ad revenue from YouTube with softer branded advertising and softer pricing from the transition to YouTube shorts. Despite strong growth from travel and retail sectors, its search growth decelerated more than expected. Company mentioned adjusting to a slower economy by adjusting headcount and other tradeoffs to moderate growth in expenses.

Microsoft reported results that beat expectations, however its cloud revenue, mostly from its Azure, slowed to 37% growth which was below estimates and compares to 42% growth in the prior quarter. Management commentary was more cautious, particularly on its cloud growth, as well as a deterioration in demand for PCs. Its forecasts warned for a rough period ahead, singling out PCs, with guidance below estimates on all its business segments.

But the largest disappointment came from Facebook’s parent company Meta. The company posted mixed results with revenues decelerating, but not as much as feared and profits declining for the fourth consecutive quarter. User engagement was strong, particularly with Facebook Reels where usage increased 50% from just six months ago. Its revenue guidance was slightly below expectations, but the bigger story was it increased its capital expenditure guidance to $99 billion, up 15% from 2022 levels, despite a slowdown in revenues as it continues to aggressively spend and double down on the metaverse. This was a key point on the conference call where analysts questioned the very high spending, but CEO Zuckerberg defended it saying, “we should keep investing heavily in these areas” which caused the stock to selloff with some analysts calling the report “thesis changing.”

From an economic data perspective, the highlight was GDP that indicated the economy grew at a 2.6% annualized rate in the third quarter, slightly better than expected. The growth in the quarter was driven by solid strength in exports which contributed 2.8% to the headline number, while consumer spending, the most important component, slowed to 1.4%, down from 2.0% in Q2. More details in the “economic data” section of the newsletter below.

For this week, the market’s focus moves to the anticipated 75 basis point increase in the federal funds rate at the upcoming FOMC meeting that concludes Wednesday with an announcement set for 2:00. As usual, the bigger impact will be the Chairman’s press conference following the announcement and how Chairman Powell and the Fed see inflation moving forward and how the Fed signals it will be slowing the pace of increases starting in its next meeting in December. Market participants will also pay close attention to the terminal rate, or the rate at which the Fed believes it will be done with its rate hike cycle. Currently the markets are expecting that to be 4.80%, which has moved lower in recent weeks and is one part that has helped the markets bounce off its recent lows mid-October.

Any sort of message that suggests the Fed is closer to being done raising rates than what the market expects will lead to a rally in stocks and bonds, in our opinion. A message that is more tough on inflation and suggests rate projections prematurely moved lower would lead to additional selling for the markets. Either way, fixed income investments are looking more attractive as bonds are trading at a large discount to par and are generating attractive yields north of 5%. It would be a good time for retirement plan participants, such as 401k plans, to review allocations, specifically if there is no exposure to core bonds.

Week in Review:

Stocks opened the week on another solid note, carrying over from a solid finish to the prior week. There was no clear catalyst for the move higher and comes despite many Chinese stocks down double digits due to a consolidation of power by President Xi after the Communist Party Congress. Elsewhere in international news, UK’s Conservative Party confirmed former Chancellor Rishi Sunak as the new party leader which paves way for him to be the new Prime Minister, easing market concerns in the UK. Stocks closed near the highs of the day with the S&P 500 1.19% higher.

Stocks continued to move higher on Tuesday with the third straight day of gains. Reports out of UK showed Chancellor Hunt preparing for tax increases to help balance the budget, a major reversal from the minibudget just a month earlier and helping ease market concerns. Markets focus continued to be on earnings that were not great, but better than feared. Bond yields moved lower while the S&P 500 gained 1.63% and is up 10.5% from the lows.

It was a bad start to the day on Wednesday after disappointing results from large tech names such as Texas Instruments, Alphabet, and Microsoft, over weakening conditions and lower ad revenues, leading to a selloff in tech names. Technology was by far the worst performers, with the tech heavy NASDAQ down 2.04% on the day while the more value oriented Dow was flat.

A disappointing report from Facebook on Wednesday after the bell continued the selloff for tech stocks on Thursday. New economic data released in the morning was solid and included GDP figures that indicated the economy grew a better than expected annualized 2.6% in the third quarter, jobless claims that remained low, and new home sales that were better than feared. Elsewhere, the Bank of Canada raised rates a less than expected 50 basis points while the European Central Bank raised policy rates 75 basis points, with both suggesting more increases to come. Many other companies reported earnings results, mostly mixed results, but the focus continued to be on the tech sector due to Facebook’s 26.6% decline for the day and 28.8% decline over the two day period. Value outperformed growth again with the Dow up 0.61% while the NASDAQ lost 1.63% and S&P 500 down 0.61%.

There was another wave of economic data reports Friday morning with incomes and consumer spending right in line with expectations for September, and the employment cost index, which is an important reading for Fed policymakers when it comes to wages and employment costs, which was up 1.2% in the third quarter and right in line with expectations. Apple, with upbeat comments on iPhone demand, led markets higher with stocks finishing with another day of strong gains as the S&P 500 increased 2.46%.

Bond yields moved lower for the week, with the exception of the short-end of the curve, which caused another yield curve inversion as the short-term 3-month yield at 4.09% rose above the 10-year yield of 4.01%. Stocks made another move higher, despite the disappointing performances from several mega cap tech companies after earnings reports, with the major US indices finishing the week as follows: Russell 2000 +6.01%, Dow +5.72%, S&P 500 +3.95%, and NASDAQ +2.24%.

Recent Economic Data

  • According to the Case Shiller Home Price Index, home prices fell 0.9% in August with the index rising 13.0% from a year earlier. This is a deceleration from the 15.6% rate in July and is the largest pace of deceleration in the history of the index (with follows June’s second largest deceleration) as home prices cool. The largest gains continue to be seen in cities like Miami, Tampa, and Dallas (up 28.6%, 28.0% and 20.2%) while San Francisco, Washington, and Minneapolis (rising 5.6%, 7.4%, and 7.6% respectively) remain at the bottom of the list. Home price gains in the Cleveland area were in the middle, up 11.5% y/y.
  • Sales of new single-family homes were at a seasonally adjusted annualized rate of 603,000 in September, down 10.9% from 677,000 in August and down 17.6% from 732,000 a year earlier, but slightly above expectations of 580,000. Supply improved slightly, up 5k to 462,000 homes, but up 17% from the beginning of the year, with months’ supply at 9.2. Higher supply is coming with higher cancellation rates, for example, Pulte just reported its cancellation rate was 24%. The average and median sales price has been very volatile, with the average price down 2% to $517,700.
  • Pending homes sales dropped a much more than expected 10.2%, according to the National Association Realtors, versus the expected 4% decline. Sales of homes are down 31% from a year ago for the slowest pace since 2010. The data reflects signed contracts in the month so are a future indicator of closed sales and reflects buyers from September when rates were closer to 6% still (versus the average 7.08% now).
  • According to the Freddie Mac mortgage survey, the prime 30 year mortgage rate (with an average 0.8 point) was 7.08% last week, moving over 7% for the first time since April 2002, and up from 6.94% the week prior.
  • The Conference Board’s index of Consumer confidence was 102.5 in October, lower than the 106 expected and the weakest since July’s 95.3. The current conditions index was 138.9, a big decline from 149.6 last month, while the expectations index was 78.1, down from 80.3 last month, and also the lowest since July and signaling recession expectations (below 80 typically coincides with recessions).
  • Durable goods orders were up 0.4% in September, slightly below the 0.6% increase expected. Excluding the volatile transportation category, orders were down 0.5%, suggesting transportation orders gave a large boost to the headline number. Non-defense capital goods, a proxy of capital spending by businesses, was a big disappointment, down 0.7%, versus the 0.2% increase expected, while shipments were down 0.5%.
  • For the week ending October 22 there were 217,000 new jobless claims filed, relatively unchanged from the prior week and remaining near very low levels, continuing to indicate a tight labor market. The four-week average was 219,000, up 7k from the prior week. Continuing claims were 1.438 million, a larger rise than expected (by 55k), and the highest since early April, with the four-week average up 23k to 1.387 million.
  • The first estimate on third quarter GDP shows an annualized increase of 2.6%, better than the 2.4% expected and comes after a 0.6% decline in Q2. Positives were exports, consumer spending, nonresidential investments, government spending, offset by decreases in residential investment and inventory investments. Some details:
  • The most important category, consumer spending, rose 1.4% which is a slowdown from 2.0% in Q2, and contributed 1.0% to GDP. Within the category spending on services was 2.8% higher which was offset by a 1.2% decline in spending on goods.
  • Fixed investments were down with business investments rising 3.7%, driven by spending on equipment and intellectual property, which was more than offset by a quite large 26.4% decline in residential investments as construction in the housing market cooled. In fact, housing subtracted the most from GDP since the housing crisis in 2007. In all, fixed investments contributed a -0.9% to GDP.
  • Government spending rose 2.4% and contributed 0.4% to GDP
  • Businesses slowed the pace of building inventories as they work through existing inventory, with the category contributing -0.7% to GDP
  • Exports were up a solid 14.4%, coming off a 13.8% increase in Q2, which was offset by a 6.9% decline in imports, which comes after 8 quarters of very strong growth in imports. In all, net exports contributed 2.8% to GDP after being a drag on GDP for seven of the past eight quarters.
  • One of the more important measures for true US economic growth, final sales to domestic purchasers, was up 0.5% and follows a 1.3% and 0.2% increase in the prior two quarters.
  • The GDP price index was up 4.1%, after a 9.0% increase in Q2 (the highest since 1981), while the core index was up 4.5%, as expected and comes off a 4.7% increase in Q2.
  • Personal Income and Spending:
  • Personal income increased 0.4% in September, right in line with expectations, and is 7.3% higher from a year ago. the important wages and salaries component increased 0.6%, reaccelerating from a 0.3% increase in August, and is up 9.4% from a year ago, down slightly from the 9.5% rate in August.
  • Consumer spending remained strong, increasing 0.7% in the month of September and now 9.9% higher from a year ago, up from 9.8% in August. As has been the trend, consumers are spending more on services this year after seeing enormous spending on goods since the pandemic as goods spending was up 0.3% in the month and 7.9% from a year ago while services spending increased 0.8% in the month and 10.6% from a year earlier.
  • The savings rate fell once again, down to 3.1% and, outside of the 3.0% savings rate in June, is the lowest savings rate since 2007. For comparison purposes, the savings rate averaged 7.3% in the 2010’s.
  • The PCE price index increased 0.3% in the month as expected and is 6.2% higher from a year ago, matching August’s rate. The core price index is up 0.5% as expected and matches August, which year-over-year the index was up 5.1%.
  • The employment cost index, an index that measures all costs of employing a person and is an important reading for Fed policymakers, rose 1.2% in the third quarter in the first estimate, right in line with expectations with wages and salaries rising 1.3% and benefit costs rising 1.0%. The largest increase in the history of this series was in the first quarter this year when the index was up 1.6%. For the 12 month period, compensation costs increased 5.0% with wages/salaries up 5.1% and benefits up 4.2%.
  • The University of Michigan’s final read on the October Consumer Sentiment index was 59.9 up from the mid-month read of 59.8 for the best reading since February and comes after an all-time low just four months ago. Current conditions index was 65.6, up from 65.0 with expectations index at 56.2, matching the mid-month read. One year ahead inflation expectations was 5.0%, down from 5.1% in the mid-month read, but higher than 4.7% in September while five year ahead inflation expectations remained at 2.9%.

Company News

  • Apple is raising the price of its subscription services for Music (up $1/month to $10.99) and Apple TV (up $2/month to $6.99). The company said the increase was due to increased licensing costs for Music and increased content costs for TV after the service ramps up content.
  • Amazon said it will allow all of its customers to use Venmo at checkout by Black Friday, an announcement that comes as we near the busy holiday shopping period. Venmo parent company PayPal was higher on the news.
  • Intel spun off its autonomous self-driving technology company Mobileye last week through an initial public offering (IPO) where the opening price was higher than expected with shares trading 38% higher by the end of the day for a $17 billion market cap.

Other News

  • Former Chancellor Rishi Sunak was confirmed as the new leader of the Conservative Party and Prime Minister of the UK. He was a major critic of Liz Truss’ policies and is regarded as fiscally responsible, helping stabilize the gilts market and causing gilts, the pound, and its stock market to rally. It was also reported early last week that Chancellor Jeremy Hunt is looking at tax increases to balance the budget, a major reversal from the previous leaders’ minibudget that called for lower taxes and higher spending. Hunt said the announcement of a fiscal plan would be delayed until November 17.
  • Chinese President Xi Jinping secured a third term as president of China, creating a new precedent (leadership used to be two five year terms), something not seen since Mao Zedong. He also appointed several allies to his standing committee, consolidating his power over China and raising fear it gives the Chinese Communist Party more control over China’s private sector. As a result, Chinese stocks had their worst day since 2008 on Monday with the Hang Seng Index falling 6.4% over concerns the government would continue its aggressive crackdown, particularly on tech companies, and more restrictions.
  • Global Central bank headlines:
  • The European Central Bank raised policy rates by 75 basis points for the second consecutive meeting, which was expected, to 1.50%. Policymakers said the rate is nearing a point which would become restrictive and said it expects to continue to raise rates.
  • Bank of Canada raises rates 50 bps to 3.25% versus the75 bps increase expected and will continue its QT plans and plans to continue raising rates.
  • The Bank of Japan kept its policy rate at -0.1% and will continue to peg its 10-year government yield near 0% by buying an unlimited amount of bonds to keep it below 0.25%. Increased its inflation forecast to 2.9% from 2.3%.

Did You Know…?

Big Buybacks Ahead

Through the first ten months of the year, corporations have announced stock buybacks in the amount of $1 trillion, up 8% from a year ago and on pace to break 2021’s record year, according to an article from Bloomberg. Companies go into a blackout period where they are restricted from buying back stock during a period around their quarterly earnings release. However, around the first week of November, nearly 90% of companies will be out of their blackout period and corporate stock buybacks are expected to make a big return. JPMorgan strategists see buybacks reaching as much as $5 billion per day, which could bring demand for stocks and higher prices in a time of uncertainty and volatility.

Another Inversion

Last week the 3-month Treasury yield closed higher than the 10-year Treasury yield for the first time since 2020, right before the 2020 recession. The spread between the two is typically positive as investors demand a higher interest rate for committing their money for longer periods of time. When plotting this on a graph, the line is positively sloping with rates higher as the bond’s maturity is longer. However, in times like now, the curve is inverted and slopes downward. Investors have piled more cash into short-term bonds amid rising interest rates where there is less price sensitivity to changes in rates while the longer-end with 10-year maturities is where investors see longer term rates. If investors are predicting a slowdown or recession in the future, they would anticipate the Fed to cut rates to provide support for the economy, and this expectation of lower rates in the future reduces the yield on longer-term bonds, while shorter term rates are correlated to Federal Reserve moves.

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

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

Monday, December 19, 2022 – All Day
*** Please note the change in the date for Career Development 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 19. 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

It will remain a busy week on the earnings calendar with another 35% of the S&P 500 reporting quarterly results this week. Some important or notable results will come from NXP Semiconductor on Monday; AMD, BP, Airbnb, Uber, Pfizer on Tuesday; Qualcomm, CVS, eBay, Paramount Global on Wednesday; Illumina, PayPal, Starbucks, and Warner Bros Discovery on Thursday; and DraftKings on Friday. With the new month Tuesday we will see many of the beginning of the month economic data releases which starts with the manufacturing survey index results from PMI and ISM on Tuesday, along with construction spend and results from the job openings and labor turnover survey. Wednesday will see final numbers on October vehicle sales and the ADP employment report. Thursday’s economic releases include weekly jobless claims, trade data for September, worker productivity and labor costs, factory orders, and the ISM services index. Finally, the week wraps up with the DOL employment report on Friday where the current consensus expectation is for a gain of 210,000 jobs in October. However, the main event for the week will be the FOMC meeting on Tuesday and Wednesday and a policy announcement at the conclusion of the meeting Wednesday at 2:00. The Committee is widely expected to raise the federal funds rate by 75 basis points, but the bigger market impact will be what the Committee and Chairman Powell say about the pace of future increases and if there is any additional commentary on how far the Fed is projecting to raise rates.