Wentz Weekly Insights
What Bank’s Earnings Results Tell Us About Consumers & The Economy

Stocks closed the week with broad based gains on Friday, helping stocks move higher in a week filled with Fed comments. Investors have added risk assets like stocks with smaller sized companies performing the best so far this year. The Russell 2000 index is up 7.1% so far the first nine trading days this year, compared to a 4.2% gain for the S&P 500, whereas blue chip stocks, as measured by the Dow, is up 3.5% over the same period. This pattern has followed the trajectory of the VIX, which measures volatility – the VIX is down 15% this year.
The downward move in volatility was helped by Wednesday’s consumer price index report that came in exactly as expected. Investors have been laser focused on inflation data as that is the number one concern at the Federal Reserve, and remarks from policymakers indicate the Fed will stay data dependent and rely on incoming data to determine the path forward for interest rates. Consumer prices fell 0.1% in the month and decelerated (slowing, not declining!) to a 6.5% increase over the past 12 months. However, headline inflation is not the issue, it only declined because of a sharp decline in energy prices (specifically gasoline prices) – it is core prices and services inflation that will receive the attention over the several couple months. Core prices, which exclude food and energy prices, rose 0.3% in the month and were up 5.7% over the past 12 months. Despite the headline index showing a decline, all major core categories saw an increase in prices in December.
The fact these “core” price pressures remain strong will keep the Fed on path of raising rates to its projected 5.0%-5.25% range, up from 4.25%-5.00% now, as was the message many Fed officials repeated in public speeches over the past week. The public remarks repeated Chairman Powell’s message of raising interest rates to a “restrictive” level and holding them there until they are comfortable and confident inflation is coming down. Officials continue to talk about letting off the brakes too soon – this was a lesson taught from the 1970s and early 1980s, if the Fed lets off too soon it risks the chance of inflation coming back stronger, requiring the Fed to do even more later and causing more significant damage to the economy and households.
Big banks that reported earnings results last Friday suggested the economy and consumer strength has slowed, but still not enough to cause alarm. Banks made more profits from higher net interest margins – the difference between what banks charge on the money they lend and what banks pay on deposits, due to higher interest rates. Trading revenue was solid as volatility continued in the fourth quarter while consumer and commercial banking saw growth. Offsetting the areas was depressed investment banking activity as M&A activity remains low, and provisions for loan losses. This received a lot of attention over the pandemic years as early in the pandemic banks set aside billions in cash in reserve accounts for loans they believed would default, but later in the pandemic these banks were able to release billions from reserves as consumer health turned out much better than expected (thank government stimulus). Now, with big banks expecting a slowdown and possible recession, they have turned back to setting aside cash for potentially bad loans, suggesting their expectation is consumers will be increasingly unable to pay back loans.
All this indicates the Fed will make a smaller move in February, deciding to raise rates 25 basis points, rather than 50 basis points like it has done so in its most recent meeting. Markets may celebrate a slower increase, but the next question is how long the Fed expects to keep rates in this “restrictive” territory. Markets may be surprised when Fed continues to project rates at these levels through the end of the year, differing from markets projections that have priced in two rate cuts by the end of the year.
For now, markets will be focused on earnings over the next couple weeks. This week will bring the first full week of earnings reports, before things really ramp up next week. Earnings are expected to have declined 3% in the fourth quarter for the first decline since Q3 2020. We will be focusing on 2023 forecasts and guidance to see the trend for the next several quarters.
In the meantime, another short-term pullback is not out of the question – the S&P 500 is at its key 200-day moving average, this has provided resistance the past five significant price moves, the VIX is at a level where is has formed short-term tops, 80% of stocks are in overbought territory, a looming debt ceiling, and a challenging earnings season could provide headwinds.
Week in Review:
Stocks got off to a choppy start in the U.S., rising by mid-day but then moving lower and finishing mixed with growth performing better than value as yields on the 10 year Treasury fall back to near 3.50%. There was global optimism, particularly China with certain Covid travel restrictions lifted over the weekend, helping global stocks move higher. There was no market moving headlines to start the week, but data from the NY Fed in the morning showed inflation expectations moved slightly lower in the short-term but slightly higher over the longer term. The S&P 500 fell 0.08% while the NASDAQ was positive 0.63% for the session.
Fed Chairman Powell’s speech on Central Bank independence had less policy and inflation comments than probably what was expected, leading to a quieter day on Tuesday. There were more company specific headlines with guidance updates and earnings pre-announcements at several large conferences that moved individual stocks, but the overall market moved higher with growth continuing its outperformance. CVS was reportedly in talks to buy a primary health center, Apple was reported to start making more of its own chips in house, while Bed Bath & Beyond took moves in attempt to avoid bankruptcy. The S&P 500 rose 0.70% while the NASDAQ gained 1.01%.
Wednesday was a strong day for stocks again with 3.45 to 1 advancing to declining stocks and all sectors seeing positive performance for the session. It was another uneventful day with markets looking forward to the CPI report Thursday morning. Treasury yields continued to fall with the 10-year yield at 3.54% while the S&P 500 rose 1.28%.
The consumer inflation report Thursday morning was exactly as expected with no surprises – the CPI declined 0.1% in the month, with core prices up 0.3%, and decelerated (not declined, but decelerated!) on a year-over-year basis for now the sixth consecutive month. Markets were choppy, moving back and forth after digesting the report that core and services inflation remain high, however, ultimately finishing higher by 0.34% after being down as much as 0.8%. Additional Fed speak maintained the message of interest rates higher for longer but more support for a smaller rate increase at the February meeting.
Stocks moved higher through Friday’s session with bank earnings in focus – results that were largely mixed with higher net interest margins, and better trading revenue, but offset by continued weakness in investment banking and more cash set aside for potentially bad loans. Banks were lower in early trading before finishing mostly positive. Later in the day the Treasury warned Congress the U.S. is on track to hit the statutory debt limit January 19 when extraordinary measures must be taken to avoid default. Stocks finished higher with the S&P 500 gaining 0.40%.
Treasury yields saw a brief move higher in the beginning of the week but ultimately finished the week where they started, despite the wave of Fed speak, with the 10-year yield at 3.51%. Oil moved higher by 8.3% over continued optimism of China reopening. The U.S. stock indices all finished the week higher, with the NASDAQ even riding a six day winning streak to close the week with the indices finishing as follows: Russell 2000 +5.26%, NASDAQ +4.82%, S&P 500 +2.67%, and Dow +2.00%.

Recent Economic Data

  • The Federal Reserve Bank of New York said its latest survey of consumer expectation in December showed consumers expect inflation in the next year to be 5.0%, down from its November expectation of 5.2%, while the medium term inflation outlook (three years) unchanged at 3.0% and longer-term inflation ticking up slightly to 2.4% from 2.3%. Consumers expect household income to growth 4.6% over the next year, up from 4.5% for a new high for the data series. However the expectation on job security fell slightly.
  • The rate of inflation moderated again in December with just about all numbers coming in as expected. The consumer price index fell 0.1% in the month but still 6.5% higher from December a year earlier. Energy, more specifically gasoline, was by far the largest reason for the monthly decline with energy prices down 4.5% and gasoline prices down 9.4% in the month. In fact, gas prices are now down 1.5% from a year ago, helping the year-over-year number move lower. Food prices continue to rise at a steady pace, up 0.3% in the month, but the slowest monthly increase since March 2021. Since March 2021, food prices are up 17% and have averaged a 0.8% monthly increase. Excluding food and energy prices, which are two volatile categories, the “core” consumer price index was up 0.3%, in line with expectations, while the core index was up 5.7% from a year ago, also meeting expectations. Vehicle prices continue to decline, used vehicles down 2.5% in the month (down 8.8% y/y) and new vehicles down 0.1% (although still up 5.9% y/y). All major core categories saw an increase in the month – Apparel saw an uptick, rising 0.5% in the month (up 2.9% y/y), the more persistent shelter inflation (including rents and owners’ equivalent rents), which is the largest weight in the index and drove most the monthly increase, was up 0.8% (now up 7.5% y/y), while transportation up 0.2% and medical services up 0.1%. It was very much an in line report, and with no surprises, markets did not make much of a move. However, the core categories continue to rise at a pace three times what is normal and what is the target rate of inflation, so until this shows more signs of slowing, we expect the Fed will continue with its ‘tough’ message on inflation.
  • For the week ended January 7 there were 205,000 new unemployment claims, relatively unchanged from the prior week with the four-week average at a very low level of 212,500. The number of continuing claims was 1.634 million, down by 63,000 which is a relatively big drop, bringing the four-week average to 1.679 million.
  • Import prices rose 0.4% in December after five consecutive months of declining, a large surprise considering the expectation was for a 0.9% decline. There was an increase in energy prices for the first time since June, but it wasn’t only fuel, the index excluding energy was still up 0.4%. Compared to a year ago import prices are up 3.5%, a bump higher from November’s 2.7% y/y rate, and is the first acceleration in the y/y rate since March 2022. Export prices fell another 2.6% in December for the sixth consecutive month of declines. The index of export prices rose 5.0% in 2022, decelerating from the record 18.6% y/y increase that was seen in May and June. The index decline was a little more broad, seen in both agriculture and non-agriculture.

Company News

  • The Big four U.S. banks reported quarterly results Friday morning that were mostly mixed. The takeaway was higher profits from growing net interest margins as banks were able to charge higher interest rates as rates rise. There was continued strength in the consumer and commercial banking segments at banks like JPMorgan and Bank of America, and trading revenue that was better than expected thanks to continued market volatility. However, investment banking divisions remain weak over a lack of deal making and banks set aside billions more in cash to cover potentially bad loans. If the banks are expecting consumers to increasingly be unable to pay back loans, they will set aside cash in reserves to help cover the bad debt. Meanwhile, Citigroup continues to make progress on its restructuring, focusing more on the U.S. market and becoming a leaner bank, while Wells Fargo posted an operating loss after a large settlement over the fake account scandal.
  • CVS, in its continued attempt to grow its primary care capabilities, was reported by Bloomberg to be interesting in acquiring Oak Street Health, an operator of primary care centers. The report says the deal would potentially be $10 billion, which would be about a 100% premium to Oak Street’s price prior to the report. Recall CVS previously was in talks to buy Cano Health last year but did not come to an agreement.
  • In its commitment to save $3.7 billion in the current year, FedEx said it is cutting its Sunday delivery schedule effective mid-March to only be available to about 50% of the U.S. population, “primarily in densely populated areas with proven customer demand.”
  • Bloomberg reported Apple is planning to replace Bluetooth and Wi-Fi chips it uses from Broadcom with its own in-house chips starting as soon as 2025. Broadcom derives about 20% of its sales from Apple. Separately, Bloomberg also reported Apple is preparing to use custom displays for devices built in-house, with technology known as micro LED, as soon as 2024. Samsung and LG and been suppliers for current devices that provide OLED displays. Apple plans to initially roll out the new displays to its highest end Apple Watches, then its iPhones.
  • Activist investor Nelson Peltz is preparing for a proxy fight to gain a seat on Disney’s board. He believes Disney can unlock additional value, with his concerns around operating performance, poor judgement on M&A, deteriorating cash flows, failed succession planning, poor shareholder engagement, and a flawed direct-to-consumer strategy.

Other News

  • The World Bank lowered its global economic growth forecast to 1.7%, down from its 3.0% estimate that it made just six months ago. It also said it expects global growth of 2.7% in 2024.
  • In a Fox Business interview, JPMorgan CEO Jamie Dimon said the economy could fall into a “goldilocks mild recession,” citing still strong consumer spending that is 10% more than pre-pandemic levels and companies that are “in good shape” combined with higher macro uncertainty and restrictive monetary policy. He said the Fed still needs to remove some sort of liquidity from the economy, but supports it pausing rate hikes after they reach 5% (which is in line with the Fed’s projections).
  • Treasury Secretary Janet Yellen said she will agree to stay at her position, which comes after a request from Biden in December. This was bigger news because the U.S. is approaching its debt limit which will need to be raised as soon as mid-year and there is expected to be a gridlock in Congress when it comes time to negotiating an increase to the limit.
  • Recent Fed Speak:
  • In a discussion with the WSJ, San Francisco Fed’s Mary Daly said she can still make the case for a 50 bps increase in rates at the February meeting, but 25 bps increase is still possible, while saying she doesn’t expect a pause from tightening policy anytime soon because it is too soon to declare victory on the inflation fight. She said the Fed will remain data dependent when assessing the path of monetary policy. She highlighted the still high services inflation that is being driven by the tightness in the labor market, however is not concerned about a wage price spiral.
  • Atlanta Fed President Bostic made remarks on inflation still being elevated in the services side while saying he believe the Fed should get rates above 5% by early second quarter and hold them there for “a long time.”
  • Fed Chairman Powell gave a speech at an International Symposium on Central Bank Independence on Tuesday in Sweden, highlighting the importance of the Central Bank making its decisions independent of political factors like climate change, which is the job of federal governments. There was a light amount of comments on current policy and the inflation/labor market picture, but Powell did say that policymakers will have to make “some unpopular decisions” over the short term.
  • Boston’s Susan Collins said in a NY Times interview returning to 25 bps increases will allow the Fed to assess the impacts of tightening the Fed has already undertaken. She thinks 25 or 50 bps increase in February will be “reasonable” but smaller changes give more flexibility. Her base case is three more 25 bps increases to get the Fed funds rate at 5%-5.25% and hold there until at least the end of year.
  • Philly Fed President Harker said he expects to raise rates a few more times and expects 25 bps increases at each meeting (rather than 50 bps), siding with caution to avoid too much harm to the labor market. Despite this, Harker still expects to be “sufficiently restrictive” at some point this year and hold rates at there for some time.
  • Richmond’s Fed President Barkin said it is welcoming seeing inflation numbers decelerating but their studies show it takes 6-12 months after demand starts weakening to see inflation pullback, and with labor markets still healthy, demand still resilient, and the shock from Ukraine, while inflation likely peaked, it is still elevated. He too talked about learning from lessons of the 1970s and warned against backing off inflation too soon because when that is done inflation comes back stronger, requiring the Fed to do even more later and cause more damage.

Did You Know…?

The Most Anticipated Recession
  • A WSJ article on economists’ expectations show more the two-thirds of economist surveyed at 23 major financial institutions expect a recession this year, with two additional economists expecting a recession in 2024. These economists cite a number of issues including Americans spending down their savings and weaker demand, a declining housing market, tighter lending standards by banks, higher interest rates, and higher unemployment. Although a recession is the expectation now, a majority of the economists expect the recession to be mild.
The Cost of Higher Interest Rates
  • The U.S. Treasury said the U.S. budget deficit jumped 30%, or by $57 billion, in November from a year earlier to $249 billion. The larger deficit was due to a decline in revenues as outlays, such as education, healthcare and interest on the public debt, accelerated. Revenues for November of $252 billion fell 10% while outlays of $501 billion rose 6%. As interest rates rise, the interest paid by the Treasury on government debt rises as well, and that interest cost added $19 billion in the month, or a 53% increase.

WFG News

Secure Act 2.0 – Important Retirement Account Changes
The recently passed government funding package included the Secure Act 2.0 which made many changes to retirement planning involving areas such as RMDs, 401(k)s, 529s, and Roth IRAs. See below for a recap of some key changes
  • The Required Minimum Distribution (RMD) age was increased to 73 this year and is scheduled to increase to 75 by the year 2033.
  • The penalty for a missed RMD is reduced to 25% (from 50% currently).
  • Starting in 2025, all new 401k plans must have automatic enrollment. New employees will be automatically enrolled at a 3% contribution rate and automatically increase by 1% each year until the contribution rate is 10%, unless employees opt out.
  • Emergency savings accounts will be established within a 401k to allow people to save $2,500 annually in an emergency savings account
  • Employers can now do their employer match in Roth contributions if they like. The plan would need to have Roth option available.
  • Starting in 2023, SIMPLE and SEP plans can allow contributions on a Roth basis
  • After 2025, if your income is over $145,000 – your catch up contribution must be made as Roth
  • Employers now have the ability to recognize payments made on student loans as elective deferrals, and therefor match on those payments to a retirement plan to assist those people paying on loans to save, effective in 2024.
  • Retirement plan lost and found is being created on DOL website for those people who may have old 401k accounts
  • Financial hardships – Employees will now self-certify if they qualify for a financial hardship to take a permissible withdrawal
  • For those ages 60-63, the catch-up contribution limit is raised to $10,000 or 50% higher than the regular catch up amount, whichever is higher, effective for 2025.
  • A 50% tax credit for administrative costs incurred by new businesses is increased to 100% for small businesses (less than 50 employees).
  • Special Rules on 529’s – Beneficiaries of 529 accounts have the options to rollover these balances tax free to a Roth IRA as long as the 529 account has been opened for 15 years. These rollovers are subject to Roth contribution limits annually.
Economic & Market Outlook Meeting
**Please note the change in the Outlook meeting schedule**
Wednesday, January 18 – 6:00 pm – WFG Auditorium in Hudson, OH
Thursday, January 26 – 12:00 pm – WFG Auditorium in Hudson, OH
Thursday, January 26 – 6:00 pm – WFG Auditorium in Hudson, OH
Wentz Financial Group will be holding its semi-annual Economic and Market Outlook Seminars on the dates above. Join us as we recap a volatile 2022, explain how we got to where we are today, as well as give our expectation and forecast on the economic and market environment and how that will affect portfolios in the challenging year ahead. We will have three seminar times, one during the lunch hour and the other two in the evening. Please RSVP by responding to this email or by calling the office at 330-650-2700. Seat are limited for each event and will be on a first come first served basis. A buffet style meal will be served approximately 30 minutes before each event.

The Week Ahead

Markets will look to continue its momentum in the upcoming holiday shortened week as the number of economic and earnings releases pick up this week. We will get an updated picture on the housing market with the housing market index on Wednesday, housing starts and permits on Thursday, and existing home sales on Friday. The housing market index is expected to have held steady at depressed levels, while housing starts and existing home sales are expected to have declined slightly in December. Elsewhere, we will also see survey results from the Empire State and Philly Fed manufacturing indexes for an update on activity in the manufacturing sector. On Wednesday we will see the release of the Beige Book, producer price index, where expectations see a 0.1% decline but 0.1% increase in core prices, along with industrial production, and retail sales – which are expected to have declined again in December, by 0.8%. More banks will release earnings results this week, starting with Goldman Sachs and Morgan Stanley on Tuesday. On Wednesday we will see results from Charles Schwab, PNC, Discover, and JB Hunt, then Netflix, Fastenal and Procter & Gamble on Thursday. In central bank news, there will be another big week of remarks from Fed officials, although the message should be consistent. The Bank of Japan will conduct its policy meeting and announce its policy decision on Wednesday. Politics is expected to stay in headlines as well, after the Treasury warned late last week that the U.S. will reach its debt limit on January 19 and will need to take extraordinary measures to avoid default until the debt ceiling is raised.