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WEEK AHEAD
April 24-28, 2023
Heading into a shower of first quarter earnings seasons, what will dictate the momentum is forward earnings guidance, layoffs, and drivers for growth. Sowell’s technical signals rest in neutral position (60/40).
Economic pundits continue to expect a recession is looming, especially with the latest U.S. Leading Economic Index reporting on the 12th continuous decline of 1.2% in March and a lower-than-expected consensus reading. Despite the pessimism, equity markets for the past month have bucked the trend and continued to post positive gains until this week, with the S&P 500 returning -0.09% for the week while returning +8.21% YTD. Is that how markets react in fear of a recession? At Sowell, we are less concerned about a slowdown or recession and more interested in the Fed's actions to jumpstart the economy and possibly boost the stock market should we be in a recession: i.e., lower interest rates, quantitative easing, increasing the money supply, economic stimulus, etc. Combined with the upcoming 2024 elections, when was the last time the Fed raised rates during a recession – ask Google.
There is no doubt the economy is slowing down, but there are also mixed signals of growth with last week's economic releases: Empire State manufacturing posted a 10.8% gain, better than consensus; New Housing Starts of 1.42 mil, better than expected; and Services and Manufacturing PMI was better than expected. Long overdue, bond yields widened slightly, resulting in the Bloomberg US Aggregate returning -0.23% last week while returning 2.73% YTD.
Although last week's financial sector earnings were mixed, fundamentally, they were positive, with diversified banks like JP Morgan and Bank of America posting strong results. Capital markets and Regional Banks posted lower than consensus expectations. Next week will report on GDP, Wholesale, and Personal Consumption. Still, all the attention will be on industry heavyweights reporting on earnings and their forward guidance: Coca-Cola, Alphabet, Microsoft, McDonald's, Meta, Boeing, Amazon, Exxon Mobil, etc.
"A.I. is going to help with math—the ability to understand mental misconception, the ability to give you very quick feedback in an even deeper way than today's systems do—but I wouldn't say that it immediately helps with the motivational piece. We don't yet have the personal tutor. The gold standard of learning basically is a personal tutor who's looking at your fatigue and your interests and constantly adapting. Because when you have one student, that's a lot easier to do. The A.I.s will get to that ability, to be as good a tutor as any human ever could." – Bill Gates, GatesNotes – A fireside chat on education, technology, and almost everything in between, April 19th, 2023
Why the coming face-off between the Petro-Dollar and Petro-Yuan?
Many are asking about the recent news around strengthening relations between Saudi Arabia, China, and Russia. Candidly, geopolitics worldwide today post-Ukrainian war are especially complex and far out of our expertise and scope for this message. However, it's not wrong to question the financial effects as political maneuvering and protest manifest in certain financial and global commerce linkages.
The Petro-dollar is one linkage countries like the U.S., Saudi Arabia, and China are especially interested in. It was 50 years ago that "Petrodollars" came to explain the U.S. dollar's status and role as the principal currency for the exchange and store of value for oil producers and export revenues. Most have seen the dollar's reserve currency status as the economic and political dominance of the U.S. starting in the 70s.
With this backdrop and through the lens of "economic and political dominance," it should be easier to understand, if not obvious, that things have changed around the globe from the 70s to today. Globalization and specifically in China, the concept of world "dominance" has changed, and that would undoubtedly affect "Petrodollars" if not already affecting the level that the U.S. dollar, at least that is the perception.
However, over the last two decades, there has been no shift in the currency composition of global reserves; about 80% is the U.S. dollar and Euro. So, despite the cries that the sky is falling for the U.S. dollar, chicken little remains untouched by falling dollar fragments.
That said, the future will determine the shift in the composition of bank reserve currencies. Any factors that could affect those shifts shouldn't be taken lightly, but for today the U.S. dollar's status as a reserve currency is not threatened.
This gets us back to the recent news around the prospect of Petro-Yuan, which could be viewed as the tail wagging the dog— a very small tail on a very large dog. Given the minute effect, one might not even really classify the action between Saudi Arabia and China regarding oil payments as De-dollarization.
This falls on the strategic considerations regarding the U.S. dollar and is a clap back on the actual strength of the dollar. Post covid and U.S. monetary policy of zero rates, the dollar has been an effective weapon against Russia and inflation, which we have effectively exported to other countries. The U.S. has seized any dollar assets for Russia, and for Saudi Arabia and China, U.S. relations have hit rock bottom. Too much to talk about here but Yemen, Iran, and Taiwan to tease a few hot buttons. It's no wonder other countries question their continuing role and cost of supporting the U.S.'s dominance as the reserve currency.
Petro-yuan is nice news fodder, but any real conversation would start with Petro-BRIC, and the reality is there is no stomach for anything but the Petro-Dollar at this time. Lastly, far bigger factors might affect the reserve currency composition, Petro-dollar being the least: international finance, particularly debt obligations, trade links, trade agreements, credibility, and payment technologies. One final comment around credibility speaks to Covid and how countries handled covid policies. Clearly, China struggled, and whole global supply chains were disrupted. For now, we see no threat to the face of the global reserve currency, still the winner, the U.S. dollar.
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.