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 9th, 2023.Stocks stage first big rally of 2023 as hope grows that inflation will ease, Dow closes up 700 points – (Source)U.S. stocks advanced Friday after the December jobs report and an economic activity survey showed signs that inflation may be cooling, signaling that the Federal Reserve’s interest rate hikes are having their intended effect.The Dow Jones Industrial Average increased 700.53 points, or 2.13%, to close at 33,630.61. The S&P 500 ended up 86.98 points, or 2.28%, to 3,895.08. The Nasdaq Composite added 2.6%, which equates to 264.05, to end at 10,569.29.It was the best day for the Dow and S&P 500 since Nov. 30 and the best for the Nasdaq since Dec. 29. Every Dow component ended Friday up.Friday’s rally helped stocks end in positive territory for the week, which was the first of the year. The Dow and S&P 500 each closed the week up 1.5%. The Nasdaq advanced 1%.The December nonfarm payrolls report showed that the U.S. economy added 223,000 jobs last month, slightly higher than the expected 200,000 jobs economists polled by the Dow Jones expected. In addition, wages grew slower than anticipated, increasing 0.3% on the month where economists expected 0.4%.“All investors care about is that the data suggests inflation is moving towards the Fed’s target,” said Michael Arone, chief investment strategist at State Street Global Advisors. “That’s all investors care about and average hourly earnings suggest inflation continues to slow. They are excited about that.”Stocks rose again when the ISM’s nonmanufacturing purchasing managers’ index showed that the services industry contracted in December, a sign that the Fed’s rake hikes may be working to slow the economy.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:The Labor Market Remains StrongThe December payroll report was yet another upside surprise as far as employment data go. Monthly payrolls rose by 223,000, above expectations for a 200,000 gain. The unemployment rate was expected to remain at 3.7% but fell to 3.5% – tying for the lowest rate since the 1950s. This is not remotely indicative of an impending recession. However, what matters for markets is how Federal Reserve (Fed) officials react to the strong employment data.As inflation falls, much focus is going to be on the employment picture since this is what is going to matter for the Fed. Especially since they are focused on wage growth being a driver of underlying inflation, i.e., services ex housing, as Chair Powell noted after the December FOMC meeting. In their minds, a softer employment picture is required for inflation to get close to its target of 2% and remain there. If not, they are going to need to see a significant and persistent decline in price data to be convinced that inflation is heading the right way. Only then are we likely to start seeing rate cuts.The “problem” is that a slew of recent data suggests the labor market remains far from soft. Let’s walk through four key data points.1.) Strong job growthJob growth has slowed from more than half a million at the beginning of 2022 to just under 250,000 over the last three months of 2022. But make no mistake, this is still a very strong pace of job growth. As Powell has noted, the economy needs to create about 100,000 jobs a month to keep up with population growth. And we’re more than double that currently.1.) Labor demand still out-running supplyEarlier this week, we got the November JOLTS data (Job Openings and Labor Turnover Survey), which showed that job openings remain elevated at 10.5 million. It was around 7 million before the pandemic. Powell’s favored metric is the vacancy ratio, which is the ratio of job openings to unemployed workers – that is currently at 1.7, down from 2.0 a few months ago but well above the pre-pandemic level of 1.2.1.) Elevated QuitsThe JOLTS data also showed that the rate at which workers voluntarily leave their jobs, i.e., the “quit rate,” remains elevated. For private sector workers, the quit rate had been declining over the past six months, but it rose to 3% in November, which is well above the pre-pandemic rate of 2.5-2.6%. This indicates that workers are confident enough to quit their jobs; often for jobs with greater pay – driving up wage growth. The Atlanta Federal Reserve finds that “job switchers” have seen much faster wage growth than “job stayers.”1.) Low level of layoffsInitial claims for unemployment benefits, which is a leading employment indicator, closed out 2022 at 204,000 – the lowest level since September and a sign that layoffs remain low. Meanwhile, continued claims, which represent the number of unemployed workers who continue to receive benefits, remain steady at around 1.7 million. It has trended higher in recent months, indicating that unemployed workers are finding it a little harder to land a job as hiring slows, but the recent data don’t suggest anything alarming. In fact, the insured unemployment rate is at 1.2%, close to a record low. This measures the number of people currently receiving unemployment insurance benefits as a percentage of the labor force. It is a more useful and timely measure, as there is an observed action, i.e., filing for unemployment benefits, associated with being among the insured unemployed.All the above points to a hot job market. Which is great by itself but not what the Fed wants to see. In short, it means the Fed is likely to keep rates higher for longer.But wage growth is easingHere’s what is strange but certainly good news: Wage growth is showing signs of declining momentum even as the employment picture remains strong.Average hourly earnings for private workers rose at an annualized pace of 3.4% in December, which is only slightly above the pre-pandemic pace of 3.1%. For “production or non-supervisory employees,” wage growth registered just 2.6%, well below the pre-pandemic pace of 3.4%. Non-managerial workers earn less income and tend to spend a greater portion of their income – faster wage growth for this group can potentially put upward pressure on prices. Monthly numbers can be noisy, but even the 3-month wage growth numbers clearly show declining momentum for all workers and for non-managerial workers. We’re yet to get to the pre-pandemic pace, but the trend is positive.Ultimately, the “Goldilocks” scenario is this:Strong employment growthWage growth easesInflation fallsThis is not what “theory” says should happen, but it is exactly what we’ve seen recently. We’ll take it. And if it continues, we believe it’ll only be a matter of time before the Fed takes notice.Higher Claims on the Horizon?Unfortunately for equities, between a stronger-than-expected ADP payrolls number and stronger-than-expected jobless claims data, today’s data showed some strength in the US labor market. Honing in on the weekly claims print, initial claims dropped all the way down to 204K this week. That marked a 19K decline from last week’s 2K downwardly revised level of 223K and brings claims to the lowest level since the last week of September when we last saw a sub-200K print. Expectations were calling for the reading to go unchanged from the unrevised level of 225K from last week.Even continuing claims improved falling to 1.694 million instead of the forecasted increase to 1.728 million. Last week’s reading of 1.71 million had been the highest since February 2022 as continuing claims have steadily risen (at a pace consistent with past recessions) in the past several months.Although both initial and continuing claims had strong showings, there is the caveat that the current period was smack dab in the middle of the holidays. For starters, that could have some impact on the weekly seasonal adjustment, but more importantly, we would note that those are some of the weeks of the year most prone to revisions.In the chart below, we show the median revision (expressed as an absolute percent change from the first release) for each week of the year since 1997. The final week of the year has typically experienced a revision of +/-3.8%, tying the week of the July 4th holiday for the largest revision of the year. That means that while claims did show improvement this week, it might not be worth reading too deep into that single number. Further data will be beneficial to help confirm this print (via revisions or lack thereof) as well as provide a clearer picture of the trend, which had been one of deterioration leading into the end of the year.One other slightly more anecdotal factor worth noting on the stronger-than-expected jobless claims data is that the strong reading this week has gone contrary to the number of layoffs that have made their way into headlines lately. Although the company initially announced the layoffs back in November, Amazon (AMZN) announced today that it plans to lay off a higher number of employees than previously stated (18K versus 10K originally). That also follows an announcement of a significant reduction of roughly 10% of the workforce of Salesforce (CRM) yesterday.Over the past few months, news story mentions (in data aggregated from Bloomberg) of things like job cuts, firings, and layoffs have surged reaching a high of 16.5K on a four-week rolling average basis in November (around the time of Amazon’s initial announcement). Although that reading has pulled back in the several weeks since then, news counts on the topic remained elevated through the end of 2022 and are likely to get a further bump with this week’s headlines. Over the past decade, these story counts have generally followed the path of both initial and continuing claims. More recently, however, there has been somewhat of a divergence with story counts far outpacing actual claims figures.That divergence could be for an array of reasons such as workers are quickly finding other roles and not needing to apply for unemployment insurance, but another thing to consider is the timing of the announcement of layoffs versus when they actually happen. For example, in the case of Amazon, while the initial announcement was all the way back in November, those cuts were not planned to go into effect until mid-January. In other words, while not in the data now, higher claims may very well be on the horizon.China Emerges from zero-COVID: What’s Next?Happy new year! We’ve officially turned the page to 2023 and hope you and yours had a wonderful holiday season.As we closed out 2022, there were numerous major news topics, but one that picked up steam towards the year’s end was China’s assumed reopening after nearly three years of heavy restrictions. There were nationwide protests that started in November over the country’s zero-COVID policy, restrictions, and economic impact. The country started to ease many of the rules put into place. In December, they took a main health code app that tracked travel history offline and overhauled a lot of other limits that had been in place for a long time. This all implied an end to the strict zero-COVID approach.With the world’s second-largest economy opening back up, it makes sense to ask…what now?Inside China, they’ll have to grapple with rising cases and a health infrastructure that’s probably not as well-equipped to deal with a large outbreak as other Asian nations, like Japan and South Korea. Those countries had lower fatality rates upon reopening. That may not be the case for China, which has had low vaccination and booster rates for the elderly and relied on two domestic vaccines that have been less effective than the ones used by other nations. They’ll have to get better vaccines and import Paxlovid, the anti-viral pill. They’ll also need to increase adoption amongst those who haven’t gotten their jabs.Those should help, but there might be an adjustment period. It may take some time before Chinese citizens return to normal. Like in the US, some people may still be reluctant to be out and about with China opening up after nearly three years, but maybe they’ll welcome the reopening flexibility. Travel activity will be watched closely after China’s National Health Commission said there will be no quarantine for inbound travelers starting on January 8th. It may still be a couple of months before activity really takes off (thank you, thank you ).Infections could still cause labor shortages and supply chain issues. In place of full lockdowns, they may strongly encourage people who are sick to stay home. With cases rising in the last couple of months in Guangdong Province, which includes the major port city of Guangzhou, there could be supply chain issues in the near term. Tesla’s Shanghai factory was shut down this week with a spike in cases. Ultimately, there could be some starts and stops as the economy adjusts after a really long run of zero-COVID policy.Then there will be the 15-day Lunar New Year starting January 22nd, so there will be another slowdown…and hopefully not widespread virus spreading as people leave the cities and head home. That will slow down economic activity and could be another delay to international travel picking up, with Chinese citizens typically going home for the holiday.After a few months, this more relaxed approach to the virus should be positive for China, but also more broadly for supply chains to hopefully get closer to pre-pandemic activity levels. But, of course, there are always risks that China decides they need to crack down again.The Chinese equity market had a similar run to what was experienced in US stocks. Both sold off for much of the year, and each saw 2022 lows in October. Both saw a weakening in December. That being said, the CSI 300, an index of China’s largest 300 companies, saw a bigger bounce off lows despite the domestic unrest and sold off less in December.There is optimism for Chinese equities in 2023 as the economy gets back to normal, with some economists expecting a quick rebound. While ending the year down, the Q4 rally showed optimism in Chinese stock resiliency as Hong Kong-listed stocks rebounded by over 35% at one point. In the coming months, we’ll see if the optimism is on track or ahead of the economic recovery.For us in the US, hopefully, their economy opening up does help supply chains for businesses that have been slow to recover the last 2.5 years after everything ground to a halt. It will be interesting to see what the impact on inflation will be. Reopening means more spending on air travel, which could push prices up. There could also be more demand for raw materials and energy, which could keep inflation higher. We might see some benefit in other areas as supply chain constraints ease, so it very well could be a mixed bag.There’s also global concern about the impact of travelers from mainland China. As cases surge, there are limited data shared by Chinese authorities. Starting today (January 5th), the US will require a negative COVID test before departing. Japan is imposing similar measures.There will be a lot to watch in the new year. Speaking of, 2023 is the year of the rabbit in China. Chinese astrology says the rabbit is the symbol of patience and luck and follows the tiger, which tends to be more dramatic and tumultuous. Here’s to hoping this rabbit isn’t as frustrating as the ones that ruin my garden every year.Bulls and Bears Back OffThe S&P 500 has seen some choppy price action heading out of 2022 and into 2023, and that has seemed to have sent shivers down the spines of investors. Only 20.5% of respondents to the weekly sentiment survey run by AAII reported as bullish this week. That is down from 26.5% last week and is just shy of the recent low of 20.3% from two weeks ago.Although bullish sentiment dropped six percentage points week over week, there was not a shift to bearish sentiment as it also fell from 47.6% down to 42.0%. That is the lowest reading since December 8th.Given both bullish and bearish sentiment fell by similar amounts, the bull-bear spread moved down to -21.5, slightly below the previous week’s reading of -21.1 and extending the record streak of negative bull-bear spread readings to 40 weeks.With both bullish and bearish sentiment falling, neutral sentiment surged to 37.5% which was the most elevated reading since the last week of March. Additionally, the 11.6 percentage point week-over-week increase was the largest since a 12.6 percentage point surge in July 2018.Although that may sound like an impressive and notable jump, historically double-digit increases in neutral sentiment in just one week have been followed by somewhat ‘meh’ returns. Both average and median performance are worse than the norm albeit the index has moved higher more than half the time one month to one year out.As the AAII survey continues to have an overarching negative tone, the same can be said for other surveys like the Investor’s Intelligence and NAAIM readings. Combining all three of these into a composite, this week’s reading was roughly 1 standard deviation below its historical average. While that implies sentiment is extremely bearish, that is only in the middle of the past year’s range. Additionally, we would note that this composite has been negative (meaning these indicators in aggregate are more bearish than historically normal) for a full year. The only other time period since at least 2006 when that was also the case was in the 54 weeks ending June 2009.Homebuilders Shrugging Off Mixed DataThe national average for a 30-year fixed-rate mortgage has come well off its highs falling to 6.6% versus a high of 7.35% in early November. Despite the decline, mortgage rates remain at levels not seen since the early 2000s. We would also note that rates have gone on a series of wild swings in the past year. The second chart below shows the rolling 3-month change since 1998. Whereas most of the year saw rapid increases the likes of which have not been seen in the past quarter century, the current drop of 0.4 percentage points over the past few months has ranked as the largest since late 2020 and is just shy of a bottom decile reading of all periods.With mortgage rates giving buyers some relief, purchase applications had generally been on the rebound throughout November and December. However, the final week of 2022 saw a large reversal in purchase apps with a 12% week-over-week decline (potentially as a result of residual holiday seasonality) in the largest single-week decline since the last week of September.While it is hard to say if the final week of 2022’s large decline was seasonal or a return to purchase apps that are more consistent with readings from earlier in the fall, 2022 tended to follow seasonal patterns. The year began with applications around some of the strongest levels of the past decade and they continued to rise into peak housing season in the spring with applications hitting their pinnacle in the first week of May. The typical seasonal drift was then exacerbated by the added headwind of higher rates, and applications finished the year with the worst reading since 2014 for the comparable week of the year. Additionally, looking at the drop for each year from the annual high through 34 weeks later (second chart), 2022’s percentage drop was the second largest since 1990 behind only the 75.7% decline in 2013.Refinance applications have continued to hit new lows as this week saw yet another decline down to the lowest level since May 2000.Even though there are some silver linings in recent data, housing activity remains weak. Homebuilder stocks continue to look past that though and continue to shrug off much of the broader market choppiness. The past week has seen the homebuilders, proxied by the iShares US Home Construction ETF (ITB), rally 3.25%. That has largely erased the mean reversion from the second half of December and brings the ETF right up to resistance at the mid-August highs.Average Isn’t So Average When It Comes To Investing“There was a statistician, and he stuck his head in a bucket of ice and feet in the oven. They asked him how he felt, and he replied, ‘about average.’”Old statistics joke.First, I wish everyone a happy 2023 and hope you had a great holiday season with family and friends!I love using that joke above in a presentation, as it always gets a good laugh. But there is something to it, especially when looking at stock returns. The truth is that average returns aren’t so average, while larger moves happen more than we probably expect.If you go back to 1950, the S&P 500 is up 9.1% on average. So let’s say that an average year for an investor is between 8 and 10%. Sounds fair, right? Incredibly, stocks have gained between 8 and 10% only four times (or 5.5% of the time)! The years that hit the average market were 1959, 1965, 2004, and 2016. That’s incredible if you ask me, as I would have assumed we’d have a few more in that average range.This tells us one thing: larger moves are more likely to happen, and the good news is that most of the big moves historically have happened to the upside. This time I looked at all the 20% gains since 1950 and found 20. This comes out to an impressive 27.4% of all years’ gains of at least 20%. I do this for a living, and I point this out each year, but it still somewhat surprises me.What about the negative years? Or, more specifically, the large negative years?There have only been three 20% losses, and those were in 1974, 2002, and 2008. But, of course, last year just barely missed this dubious feat.Five years lost at least 15%, and 12 years lost at least 10%.What about 10% moves up or down? 51 years saw stocks either gain or lose at least 10% (39 up and 12 down). That is 69.9%% of all years see a move of greater than 10%.As the great Ohio State football coach Woody Hayes once said, “Statistics remind me of the fellow who drowned in a river where the average depth was only three feet.”Investors need to take Woody’s advice and remember that averages are important, but there is usually a lot more to the whole story. The bottom line is we could gain between 8 and 10% this year, but the odds favor it’ll likely be a good deal, more or less. I know it is a lonely call, but we are in the camp. It may be more, which we will discuss in our Outlook 2023 next week.January Weaker Last 21 YearsRecent January weakness can be seen in the chart. January has on average started out positive with DJIA, S&P 500, NASDAQ, Russell 1000 and 2000 all logging gains in the first half of the month, but weakness then creeps in. From around the seventh trading day to the end of the month declines have prevailed over the last 21 years.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 1.9.23 Before Market Open:Monday 1.9.23 After Market Close:Tuesday 1.10.23 Before Market Open:Tuesday 1.10.23 After Market Close:Wednesday 1.11.23 Before Market Open:Wednesday 1.11.23 After Market Close:Thursday 1.12.23 Before Market Open:Thursday 1.12.23 After Market Close:Friday 1.13.23 Before Market Open:Friday 1.13.23 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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