Sage Investment Club

Good Friday evening to all of you here on r/stocks! I hope everyone on this sub made out pretty nicely in the market this week, and are ready for the new trading week ahead. :)Here is everything you need to know to get you ready for the trading week beginning January 16th, 2023.Dow closes 100 points higher, S&P 500 and Nasdaq notch best week since November – (Source)Stocks rose Friday as investors digested bank earnings and bet inflation would ease in 2023.All of the major indexes fought their way into the green after beginning the day deep in the red. The Dow Jones Industrial Average rose 112.64 points, or 0.33%, to 34,302.61. The S&P 500 rose 0.40% to 3,999.09, and the Nasdaq Composite advanced 0.71% to 11,079.16.The S&P and Nasdaq each posted their second consecutive positive week and best weekly performance since November. The tech-heavy Nasdaq was the outperformer for the week after rising 4.82%. The S&P advanced 2.67%, and the Dow added 2%.Bank earnings weighed on equities to start the day, but sentiment reversed as investors appeared to shrug off negative news that was expected to some degree, according to Ross Mayfield, investment strategy analyst at Baird.“Financials weren’t really quite expected to have a blockbuster quarter,” he said. “It’s just providing a bit of a sentiment wave, and since the banks lead earnings season they can kind of set the tone for how investors look at the broader picture.”“Frankly, the market has rallied pretty nicely over the last few weeks, absent a catalyst, and so there might be a little bit of profit taking out of earnings season going,” Mayfield added.Wells Fargo, whose profits for the last quarter had been cut by half, said it’s preparing for the economy to “get worse than it’s been over the last few quarters.”JPMorgan Chase posted revenue that beat expectations, but even so, the bank warned it’s setting aside more money to cover credit losses because a “mild recession” is its “central case.” The bank posted a $2.3 billion provision for credit losses in the quarter, a 49% increase from the third quarter.The CEOs of Citigroup and Bank of America also said they’re anticipating a “mild recession.”Elsewhere, Delta Air Lines reported earnings and revenue that beat estimates for the final quarter of 2022. However, the stock slid 3.5%. Investors have been awaiting these results to gain more insight into the health of the economy.In economic data, the University of Michigan consumer sentiment survey showed the one-year inflation outlook down to 4%, the third straight monthly decrease and the lowest level since April 2021.That followed December’s CPI report, released Thursday, which showed prices declined 0.1% over November. While prices rose at a 6.5% pace compared to the previous year, the results heightened hopes that the Federal Reserve may soon slow its hiking.This past week saw the following moves in the S&P:S&P Sectors for this past week:Major Indices for this past week:Major Futures Markets as of Friday’s close:Economic Calendar for the Week Ahead:Percentage Changes for the Major Indices, WTD, MTD, QTD, YTD as of Friday’s close:S&P Sectors for the Past Week:Major Indices Pullback/Correction Levels as of Friday’s close:Major Indices Rally Levels as of Friday’s close:Most Anticipated Earnings Releases for this week:(CLICK HERE FOR THE CHART!)(T.B.A. THIS WEEKEND.)Here are the upcoming IPO’s for this week:Friday’s Stock Analyst Upgrades & Downgrades:Bears Back DownThe S&P 500 has rallied impressively in the past week leading up to Thursday’s CPI print, and bullish sentiment has lifted along with it. While the reading remains low, the percentage of respondents to the weekly AAII sentiment survey reporting as bullish rose from 20.5% up to 24%. Bulls were higher only two weeks ago when the reading was at 26.5%That rise in bulls has meant bearish sentiment has fallen to a notable level. For the first time since the first week of November and for only the eleventh time in the past year, bearish sentiment came in below 40%. Bearish sentiment has now fallen for three weeks in a row, which is the longest streak of consecutive declines since last August as well.Although bullish and bearish sentiment are sending a more optimistic tone, the bull-bear spread remains heavily in favor of bears at -15.9. That grows the record streak of negative readings to 41 weeks in a row.Last week, neutral sentiment leaped higher given the mid-single-digit declines in bulls and bears. Some of that move was given back this week with only 36% reporting as neutral. However, that remains an elevated reading at 4.6 percentage points above the historical average.A Trifecta for Stocks in 2023?“If you torture numbers enough, they will tell you anything.” Yogi BerraStocks have seemingly gone up each day this year, which is quite different from what we all experienced last year. Today I’ll look at some potentially positive developments which indeed could have bulls smiling in 2023.It’s been a strong start to 2023, with stocks up nicely after the first five days. Although we’d never suggest investing based on five days, this is something many people watch for clues as to how the year might go, and it has a solid track record. As Yogi told us, if you have a bias, you can likely get the numbers to confirm that bias. We’ll try just to state the facts, and the facts do suggest this is a good sign. Of course, let’s not forget that stocks were down the first five days last year, and we know how that worked out.It turns out that when the first five days are higher for the S&P 500, the full year is higher nearly 81% of the time and up 14.0% on average. Compare this to when those days are lower, and the full year is virtually flat and up only 54% of the time. Lastly, when these five days are up more than 1% (like 2023’s 1.4% gain), the full year does even better, up 15.4% on average and higher more than 86% of the time.Let’s take things a little bit deeper now… We talked a lot about the Santa Claus Rally (SCR) last month, and the good news is that stocks, indeed, were higher during those historically bullish seven days. When stocks are higher during the SCR, the first five days of the year, and in January, the full year has historically done quite well.Below we show the 31 times that the trifecta of bullishness (I may have made that word up, but I like it) happened, and the full year finished in the green more than 90% of the time and gained 17.5% on average. Sure, this month isn’t over yet, but we are off to a great start, and a higher January could be in the cards. If you are bullish, you should be rooting for a green January based on the table below.Lastly, stocks were down last year, which makes the potential trifecta in 2023 even more special. That’s because when the previous year saw stocks in the red, the annual returns of the S&P 500 the following year were typically strong (just look at those numbers in the righthand column in the table below!). In fact, stocks have never been lower during the year and gained more than 27% on average. After last year, that’s something I think we’d all take!There are still many worries out there, but we continue to see more positives than negatives, and we think 2023 could actually be quite a good year for investors. We are putting the finishing touches on Outlook 2023: The Edge Of Normal, and we can’t wait to share it with you soon. Be on the lookout for it.Claims Drop But Were the Holidays Helping?Initial jobless claims posted another low reading in the latest print, with national seasonally adjusted claims totaling only 205K. That was down slightly from 206K the previous week; a number revised up by 2K. After that revision, this week’s reading was the strongest showing for claims since the end of September.Before seasonal adjustment, claims were considerably higher at 339.29K. At the end of the year and in the first weeks of a new year, claims tend to experience a significant seasonal increase which appears to be playing out in the current environment. This year’s reading is in line with the comparable weeks of the few years prior to the pandemic. As we also noted last week, this time of year tends to see the largest revisions in claims as well. In other words, from a seasonal perspective, claims can be a bit volatile in terms of actual levels and revised levels. So while the seasonally adjusted reading was solid and the non-seasonally adjusted number is nothing too concerning, the next several weeks will likely provide a clearer reading on how claims are trending.Turning to continuing claims, this week’s print covered the final week of 2022. Like initial claims, the end of the year saw declines in continuing claims with the latest reading falling to a low of 1.634 million; the strongest level since the week of November 19th. Although that is a solid improvement following multiple months of claims rising rapidly, similary to initial claims, more weeks of data will help to provide a clearer picture given the effects of seasonality during the holidays.We would also note, that although the drop in claims over the past two weeks has only put a small dent in the recent rise in claims, the 4.89% decline is historically large. That drop impressively ranks in the bottom 3% of all 2-week moves on record.Why is Everyone Predicting a Recession?Almost every outlook you open this season has forecasters predicting that 2023 will see a recession. In contrast, we here on the Carson Investment Research Team believe the economy can avoid a recession this year.Note that the recession calls are all forecasts and clearly do not reflect where the economy is right now. For example, looking at the NBER’s preferred list of economic indicators, which they use for determining recession, every single one grew over the past three months and year-to-date (2022). Moreover, four of the six indicators exceeded their pre-pandemic growth rates over the past three months (comparing the yellow bars against the dark blue bars).Obviously, the above is data for 2022, and the question is what happens in 2023. For one thing, inflation looks to be falling – and with wage growth remaining strong, real incomes will be higher. In addition, lower gas prices, lower energy prices (utilities), and lower food prices mean consumers should have more money in their pockets. Just as higher inflation is effectively an income tax, falling prices are akin to a tax cut. And unless households choose to save this excess income, this will likely keep consumption up.Concerning tax cuts, thirty-eight states have significant tax changes that took effect on January 1st. As the Tax Foundation notes, most of these represent net tax reductions, which result from a wave of tax cuts we saw over the past two years as state revenues surged and governors/legislatures looked to ease the impact of higher prices on residents.Also, social security recipients are slated to receive a cost-of-living adjustment of 8.7% to their incomes in 2023, a function of the high inflation we saw last year but coming just as inflation starts to pull back. Seniors will get another break from Medicare premiums, slated to fall this year.All tailwinds for consumption, which make up 70% of the economy.So, Why the Recession Calls?In short, forecasters expect the Fed’s aggressive rate hikes of 2022 to hit the economy in mid-2023 and beyond. The idea is that monetary policy impacts the economy with “long and variable lags.” Even Fed Chair Powell and other Fed officials have cited the uncertainty around the lagged impact of their rate hikes as a reason for stepping down the pace of rate hikes in December. Instead, they want to wait to see the impact of the 425 bps of rate hikes they did last year.However, the reality is that monetary policy impacts the economy through financial conditions. For example, higher interest rates can crimp household demand for mortgages, and tighter credit conditions can crimp business spending, including hiring, CAPEX, and M&A.In fact, because of the Fed’s forward guidance and other commentaries (including leaks to the press), financial conditions can tighten well before actual rate hikes as investors anticipate future Fed actions. You can see this in the chart below – across 2022, financial conditions tightened well ahead of the Fed’s rate hikes.This means financial conditions can impact the economy sooner than most expect. The steep falloff in housing activity is a good example of how tighter financial conditions make an impact almost immediately – residential investment was a significant drag on GDP growth since the second quarter of 2022, which is when financial conditions started to really tighten in anticipation of the Fed’s aggressive turn. On an annualized basis, residential investment fell 18% in Q2 2022 and 27% in Q3.Goldman Sachs had a research note pointing out that tighter financial conditions impact the economy as soon as rate moves are expected, as opposed to when rate hikes are actually delivered (see chart below). Also, they pointed out that the lags from monetary policy apply to GDP levels as opposed to GDP growth.Unexpected policy changes have a peak impact on GDP growth within 1-2 quarters. After that, it starts to wear off, though there is still a negative impact on GDP growth six quarters down. This means there is still a drag on the level of GDP 6 quarters down – it’s just less than what it was in the immediate aftermath of rate moves.The confusion between the lagged impact of rate hikes on GDP growth vs. GDP level is perhaps why the consensus view amongst forecasters is a recession in 2023.However, we may be beyond the point of peak negative impact of rate hikes on the economy. Most of the tightening in financial conditions occurred during the first three quarters of 2022. Financial conditions have eased since October (coinciding with a stock market rally), which is even more favorable for economic growth as the drag from tight financial conditions declines. The other side of stronger economic growth is that we’re more likely to see the Fed keep rates at a higher level for longer.Silver Linings Playbook: M&A Edition2022 was a rough year for investors. Stocks had their worst performance in many years, and shareholders are left wondering what is next. However, amidst all the uncertainty with inflation, rising interest rates, geopolitical tensions, supply chain bottlenecks, and volatile capital markets, there were important buyers that saw through these near-term hurdles and focused on long-term value – private equity and corporate M&A.To be clear, global M&A activity dropped 36% to $3.7 trillion in 2022, according to Dealogic. However, that’s compared to the all-time record of $5.7 trillion in 2021, which was fueled by strong capital markets and low-interest rates. When comparing 2022’s deal activity to the average over the past eight years, it was down only about 10%, or just 4% if 2021’s record high is excluded. This is in stark contrast to just $24 billion being raised through US IPOs, which was the lowest since 2009. Considering all the headwinds and increased regulatory scrutiny, we think global M&A was surprisingly healthy last year.What’s also impressive is the premiums paid recently for publicly-traded M&A targets. During times of high volatility, like in 2022, it’s not unusual for buyers and sellers to struggle to agree on price. Sellers tend to get anchored to where their stocks used to be when valuations were much higher (2020/2021), and buyers focus on where shares are currently trading (2022). A few of these recent M&A targets got a price close to their all-time highs (Abiomed, Horizon Therapeutics, Altra Industrial Motion). Yet, many sellers came to terms with lower prices compared to the past two years, but at a meaningful premium to their trading levels prior to the announcement.What can this mean for broader equities? Perhaps that valuations have fallen too far in certain cases. Many of these transactions carry big premiums to where their peers still trade in public markets. Also, many of these recent takeouts were of firms with little to no profits. We find this interesting as investors’ appetites have completely swung from seeking high growth at any cost a couple of years ago to now wanting profitable growth. Or perhaps last year’s relatively healthy M&A activity proves that “animal spirits” continue to linger and that the market still needs to adjust to the new reality.Our primary takeaway is that investors who take a longer-term perspective can use this recent volatility to purchase quality assets at reasonable or even depressed prices.Higher Rates Wards Off Small Business ExpansionThe National Federation of Small Businesses (NFIB) released its Small Business Optimism Index for December early this morning. The report showed optimism has begun to fade after a modest rebound in the past few months. The index fell back below 90.0 to the lowest level since the June of 89.5.The 2.1-point drop in the index was also the largest m/m decline since June ranking in the bottom 12% of all m/m moves on record. Given that lower reading, the December print is also now back below the spring 2020 lows putting it in the bottom decile of its historical range. Breadth within the report was abysmal with only one input to the headline index (current inventory) moving higher m/m while plans to increase inventories was the only input unchanged. The rest of the categories experienced significant declines, some of which rank in the bottom few percentiles of all monthly moves.As we noted in today’s Morning Lineup, employment metrics were not a bright spot. Overall, labor market conditions continue to roll over. Hiring plans hit the lowest level since January 2021, and the percentage reporting job openings are hard to fill likewise dropped to the lowest levels since the start of 2021. On the bright side, compensation recovered from the November decline while firms also reported adding workers on a net basis.The economic outlook remains historically depressed with that index falling 8 points to -51. Although that still has 10 points further to fall to reach the June low, this index continues to hover well outside of historical norms. Given the lack of optimism, a net of only 5% of businesses report now as a good time to expand. Additionally, a higher percentage of businesses are also reporting weaker sales and expectations for weaker sales while observed earnings also continue to worsen in spite of the rollover in prices.As for a breakdown of the reasons small businesses are reporting now as a good time/not a good time to expand, economic conditions are the main reason given for pessimism. Of those responding now is not a good time to expand, 42% blamed economic conditions while the second highest share (9%) blamed the political climate. The joint next most common reason blamed for pessimism was interest rates and the cost of expansion. For the former, that is the highest reading since at least the start of the pandemic while the latter is the highest reading since July 2021. That high reading in cost of expansion is somewhat surprising given the drop in the higher prices index, however, that could suggest that costs of financing are lumped in with the “cost of expansion” category.We would also note that the stress of higher rates is also beginning to show up elsewhere in the report. While capital expenditure plans and actual changes to capital expenditures have not seen any major shifts, expected credit conditions fell to the lowest level in nearly a decade. Meanwhile, the availability of loans reached the worst level since September 2014.Short-Term Treasury Yields Provide the TellThe yields on short-term Treasuries have been offering up some important tells recently. Below we highlight the yields on 6-month, 12-month, and 2-year Treasuries over the last 12 months. After trading with a positively sloped curve (the longer the duration, the higher the yield) through the first half of 2022, the yields on all three began to converge in late July/early August. In November, the 2-year yield started to drift lower, while yields on the 6-month and 12-month held firm. And just in the last week or so, we’ve seen the yield on the 12-month start to drift lower as well, while the yield on the 6-month has ticked slightly higher. As things stand now, the 2-year yield is at 4.18%, the 12-month is at 4.66%, and the 6-month is at 4.82%. This means the 2-year is inverted with the 6-month by 64 basis points, while the 12-month is now inverted with the 6-month by 16 basis points.Yields on these three Treasuries are telling investors (and the Fed) where “the market” expects the Fed Funds Rate to be over the duration of the maturities. Right now the market expects rates to peak at some point in mid-2023 before ultimately pulling back. The fact that no points on the Treasury curve are currently above 5% tells you what the market thinks about the Fed’s unanimous support of getting the Fed Funds Rate above 5% and holding it there. It’s not buying it. While “the market” sees inflationary indicators falling pretty much everywhere it looks, Fedspeak has so far been unwilling to acknowledge any meaningful progress. The more inverted we see longer duration yields become with the 6-month T-Bill, the more damage the hawkish Fedspeak will become.First Five Days Up, Our January Indicator Trifecta is Now 2-0Even though S&P 500 finished today with a fractional decline, our First Five Day (FFD) early warning system is positive. Over the first five trading days, S&P 500 gained 1.4%. In pre-presidential-election years, such as this year, our FFD has a respectable record with 13 full years following its direction in the last 18 years.Last week our Santa Claus Rally was also positive, and with today’s positive FFD reading there are two possible outcomes remaining for our January Indicator Trifecta. Our January Barometer can either be positive or negative.As depicted in the table above a positive January Barometer would further boost prospects for the last 11 months and the full year. When all three indicators were positive the next eleven months have been up 87.1% of the time with an average gain of 12.3% and the full year was positive 28 of 31 times (90.3% of the time) with an average gain of 17.5% in all years.Following the previous twelve occurrences when the SCR and FFD were positive, and our January Barometer was negative S&P 500 advanced ten times over the remaining eleven months and nine times for the full year with average gains of 9.9% and 6.0% respectively.The December Low Indicator (2023 STA, page 36) should also be watched with the line in the sand at the Dow’s December Closing Low of 32757.54 on 12/19/2022.At this juncture our outlook for 2023 remains unchanged from our annual forecast. We do acknowledge the numerous headwinds that the market is currently facing, but we still contend that the market will continue to climb the proverbial “wall of worry” with choppy trading likely to persist until typical, pre-election year seasonal forces kick in later this year most likely after the Fed signals it will end increasing rates. This could happen as soon as their next meeting at the end of this month, but it may not happen until the Fed meets in March.Here are the most notable companies reporting earnings in this upcoming trading week ahead-(CLICK HERE FOR NEXT WEEK’S MOST NOTABLE EARNINGS RELEASES!)(T.B.A. THIS WEEKEND.)(CLICK HERE FOR NEXT WEEK’S HIGHEST VOLATILITY EARNINGS RELEASES!)(T.B.A. THIS WEEKEND.)Below are some of the notable companies coming out with earnings releases this upcoming trading week ahead which includes the date/time of release & consensus estimates courtesy of Earnings Whispers:Monday 1.16.23 Before Market Open:(CLICK HERE FOR MONDAY’S PRE-MARKET EARNINGS TIME & ESTIMATES!)(NONE. U.S. MARKETS CLOSED IN OBSERVANCE OF MARTIN LUTHER KING JR. DAY.)Monday 1.16.23 After Market Close:(CLICK HERE FOR MONDAY’S AFTER-MARKET EARNINGS TIME & ESTIMATES!)(NONE. U.S. MARKETS CLOSED IN OBSERVANCE OF MARTIN LUTHER KING JR. DAY.)Tuesday 1.17.23 Before Market Open:Tuesday 1.17.23 After Market Close:Wednesday 1.18.23 Before Market Open:Wednesday 1.18.23 After Market Close:Thursday 1.19.23 Before Market Open:Thursday 1.19.23 After Market Close:Friday 1.20.23 Before Market Open:Friday 1.20.23 After Market Close:(CLICK HERE FOR FRIDAY’S AFTER-MARKET EARNINGS TIME & ESTIMATES!)(NONE.)(T.B.A. THIS WEEKEND.)(T.B.A. THIS WEEKEND.) (T.B.A. THIS WEEKEND.).DISCUSS!What are you all watching for in this upcoming trading week?I hope you all have a wonderful weekend and a great trading week ahead r/stocks. 🙂

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