Market Note – January 18, 2023

By Hightower Great Lakes on January 18, 2023

Financials Reporting

Financials always tend to trade poorly around earnings and, given low expectations and cheap valuations, management comments support our thesis for opportunities within the sector.

Wells Fargo (WFC), JP Morgan (JPM), Bank of America (BAC), Morgan Stanley (MS) and Goldman Sachs (GS) represent most of the heavyweight banks that have reported earnings recently.

As expected, a higher interest rate environment is supporting better net interest income (NII). WFC reported NII +45% y/y. Financials are also reporting a pickup in trading activity and highlighting better-than-anticipated credit ratios.

Companies are raising their provisions for credit losses – and we applaud this prudent action to prepare for unknowns – but good credit quality and the controlled number of nonperforming loans continues to underscore an easier credit environment for businesses and consumers, alike.

Conditions have become easier over the past few months in large part because inflationary costs, labor tightness and supply challenges have improved.

Employee costs continued to be a headwind in Q4. Expenses are higher overall, but manageable. This was expected. GS was an outlier across the banks – indicated by the market’s reaction to their poor cost-management and additional speculation around the CEO’s job security. Banks also continue to provide conservative guidance, given the economic uncertainties.

A potential trough in fees, healthy investment banking pipelines and priced-in negative sentiment can provide future market tailwinds. A pickup in activity in the second half will also have favorable y/y comparisons.

Banks are indicating near-term buyback activity as well. We like opportunities to invest alongside companies at cheap valuations with positive upside opportunities/catalysts.

Inflation Narrative: Falling Goods, Persistent Services

The latest December CPI report highlights a trend in the right direction, with goods inflation leading the way down. Headline CPI declined -0.1% m/m, the core goods category (ex. food and energy) was down -0.3% m/m. Services inflation remains hot and actually accelerated +0.5% m/m in December.

Since services represent 73% of core CPI, this drove core CPI (ex. food and energy) up +0.3% m/m. Categories like rents and medical care are drivers for higher inflation. Markets are premature thinking that the Fed is going to ease soon. Even if goods CPI goes to zero, the services category is very strong.

Around the world, we’re hearing positive revisions to growth. Europe’s economic chief says that encouraging economic news indicates that the EU may avoid an anticipated recession.¹ Goldman Sachs (GS) also upgraded their outlook for the region and no longer anticipate a 2023 European recession.

Similarly, Japan revised their 2023 growth assumptions higher and anticipate +1.5% y/y GDP growth.² China has reverted to pro-growth policies, including a resumption of activity which will release over $836 billion of excess savings.³

Importantly, in the U.S., the Atlanta Fed’s GDPNow forecasting model shows its latest estimate for GDP growth in Q4 at +4.1% q/q. The U.S. consumer, which represents 70% of the U.S. economy, remains strong with higher wages and lower inflation.

There’s a lot of underlying momentum in global economies that can offset the Fed’s restrictive actions. We may experience slow growth, but that’s a positive contrast to the alternative, which is the highly anticipated recession. The Fed does not want conditions to ease, and their policy going forward will remain important.

Bonds and Equity Correlation Remains Positive

U.S. Treasuries rallied through Thursday with the help of a sixth consecutive lower y/y CPI reading and indications from Fed officials that 25 bps is likely at the February meeting. After Friday’s sell off, the two-year yield finished the week +3 bps at 4.23%, while the longer dated 10-year finished -3 bps at 3.50%.

Both High Yield and Investment Grade spreads have tightened 45 and 9 bps, respectively. Municipals have rallied to begin the year as investors have cash to put to work and supply has been lackluster to begin the year, with the Bloomberg Municipal Agg up 2.31% YTD.

The Week Ahead

Earnings – Tuesday: GS, MS. Wednesday: UAL, JBHT. Thursday: PG, NFLX. Friday: SLB.

Economics – Wednesday: PPI (December), Industrial Production (December), Retail Sales (December). Thursday: Philadelphia Fed Index (January), Building Permits and Housing Starts (December). Friday: Existing Home Sales (December).

Return for Selected Indices⁴

Click here to read last week’s Market Note (1/9).

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: Yahoo! News. As of January 17, 2023.

² Source: Reuters. As of January 17, 2023.

³ Source: Bloomberg. As of January 17, 2023.

⁴ Source: Bloomberg. As of January 9, 2022.