Market Note – February 14, 2023

By Hightower Great Lakes on February 14, 2023

Consumer Resilience

The economy continues to show pockets of strength and weakness. Manufacturing and housing industries are weak – impacted by inflation and higher costs – but service industries, along with jobs and wages continue to support economic activity.

Bank of America released their January “Consumer Checkpoint” report, which highlighted +5.1% y/y credit and debit card spending per household in January. Data continues to underscore consumer resilience.

Higher wages, ample job opportunities (low unemployment), $1.7 trillion in excess savings and the 3.4% savings rate continue to support consumer spending and healthy balance sheets. We maintain that betting against the consumer is a bad bet. The U.S. is a nation of spenders, even in recessionary times.

Even within some of the weaker sectors, we may be experiencing trough conditions. Last week, we discussed in greater detail the potential housing market recovery, with better costs for potential homebuyers and the continued inventory deficit. A recovery in housing supports the broader economy with its significant multiplier effect as new homebuyers spend money on a variety of housing-related goods and materials.

Forecasts Whipsaw

The broad-based narrative that the U.S. will enter a recession, which lasted for much of 2022, is pivoting to a narrative that the economy might reaccelerate. This reacceleration narrative is supported by upward revisions in global economic outlooks and global monetary policy easing.

The shifting narrative is confusing; many of the forecasters themselves are confused. With the entire focus on the macro and broad analyst earnings revisions, the limited focus on individual companies presents opportunities.

With 80% of the S&P 500’s market cap having reported 4Q22 earnings, EPS is on track to contract -2.2% y/y. Most of this contraction is within the index’s large weight in technology, of which earnings are contracting much more than other sectors.

Earnings for Tech+ are down -24% y/y in Q4, and the S&P 500 ex-Tech+ shows earnings expansion +4% y/y. Energy, industrials and discretionary (ex-retail) are reporting the greatest earnings expansion.

Inflation Data This Week

Annual inflation remains very high. As global economies re-open (China) and expand (Europe/U.S.), we may continue to see upward pressure on commodity prices. Last week, WTI Crude rose +8.6%, its best week since early October.

This week, we receive inflation data from January PPI and CPI reports. As long as they both remain elevated, the Fed will not shift course and expectations for a Fed pause/pivot are premature. Our higher-for-longer expectation continues, and the Fed will maintain a slower pace of rate hikes at 25 bps.

Backup in Rates Along the Curve

The yield curve remains steeply inverted, but a big backup in yields created some flattening on the longer-term end of the yield curve. We’ve referred to it as a “tale of two curves,” with the short-term predicting the Fed’s upcoming rate hikes, and the belly/longer-term reflecting expectations for 2024 and onward – still elevated, but some policy easing.

Chart 1: Yield Curve Remains Elevated¹

The Week Ahead

Earnings – Tuesday: KO, MAR. Wednesday: GNRC, CSCO. Thursday: HAS, CF, SO, MRO. Friday: DE, CNP, PPL.

Economics – Tuesday: CPI (January). Wednesday: Retail Sales (January), Industrial/Manufacturing Production (January). Thursday: PPI (January).

Return for Selected Indices²

Click here to read last week’s Market Note (2/6).

Disclosures

OCIO is a group of investment professionals registered with Hightower Securities, LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC; advisory services are offered through Hightower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. OCIO and Hightower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed are solely those of OCIO and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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¹ Source: FactSet (chart). As of February 13, 2023.

² Source:  Bloomberg. As of February 12, 2023.