Market Commentary

Week Ahead

Core Segments Point to Contracting Economy

Core segments of the market are pointing to a contracting economy. Last week’s economic report on Retail Sales and Industrial Production was weaker than consensus forecasts. Capacity utilization, the gauge for production capacity in the U.S., was lower than expected. In addition, regional markets for Philly and NY Empire State are all reflecting worse-than-expected declines. The one bright spot is Housing Starts and the Mortgage Market Index, showing improving fundamentals with moderating mortgage rates.

After last week’s core banks earnings, this week will spotlight prominent earnings across a broad spectrum of industrials, including core Dow companies highlighting the strength of the overall economy alongside U.S. GDP ranging from AT&T, Boeing, Chevron, J&J, Microsoft, Verizon, and Visa. Further, Thursday’s report on GDP, Inventories, and Durable Goods will shed light on the heartland of manufacturing.

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Markets Celebrate Another Week of Gains

The markets celebrated another week of gains following another relative decline in U.S. inflation – from a high of 9.1% in June 2022, U.S. inflation was 6.5% YoY to the end of December. Last week, the S&P 500 index gained 2.71%, while the Bloomberg Long-Term U.S. Treasury index gained 1.43% in anticipation that the Federal Reserve will be less aggressive in raising interest rates and stabilizing prices. Major banks, including JP Morgan, Bank of America, and Wells Fargo, posted strong earnings by not only beating consensus earnings expectations but also affirming the economy’s current strength.

This week, short from Martin Luther King Jr’s Day, brings several closely watched economic reports as investors seek confidence in the economy. Wednesday’s report on Retail Sales and Industrial Production, followed by the Housing Starts and Existing Home Sales report, will hopefully reveal that the economy could be on its way to a “soft landing,” or at least cooling inflation without a significant recession. 4Q earnings sneak peek will be led by Charles Schwab, Morgan Stanley, Proctor & Gamble, and State Street before heading into peak earnings week starting the week of Jan. 22nd.

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Is Style Still in Fashion?

From 2007 to 2021, ever since the 2008 Financial Crisis, Growth stocks have trounced Value stocks 11 out of the last 15 calendar years – AKA batting average of 73%. Post-Covid, Value stocks not since the Dotcom bubble hammered Growth stocks in 2022 (-29.41%), outperforming by 2,418 bps. Over the next few series of weekly commentaries, we will dive into understanding the reasoning, fundamental changes occurring to the S&P 500 index, and whether this is a blip in the Growth saga or are Value stocks becoming a trend leader. But let’s not forget, since the 2008 Financial Crisis, growth stocks have benefited from an environment of Fed policies of cheap money (Quantitative Easing, Pandemic Stimulus), federal bailouts, low inflation, low-interest rates, and last but not least, low-cost manufacturing in China all coming to a sudden halt in 2022. At Sowell, we fundamentally believe in style rotation between growth-and-value stocks in part due to its fundamental correlation to changing market environments and history repeating. But that fundamental investment philosophy also hinges on the make-up of an index, the dominant sectors leading the respective styles, and its correlation to the economy, interest rates, inflation, and market-capitalization of stocks. It is premature to state Value stocks will be the next trend leader after one data point, but all the right stars are in place.

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Back to Basics

Ringing in the new year, inflation, interest rates, and jobs will be the key global factors for 2023’s market outlook. Our initial focus will be on an aspect of inflation. The Federal Reserve’s definition of Inflation “is the increase in the prices of goods and services over time.” Inflation cannot be measured by an increase in the cost of one product, service, or even several products or services. Instead, inflation is a general increase in the overall price level of the goods and services in the economy. Inflation is a measure of the end reaction. The catalyst is the basis of a number of fundamental inputs, including monetary policy, supply-demand, prices of goods and services, productivity, and cost of labor, to name a few. The causality dilemma between wage inflation and rising hourly wages at the rate of inflation to maintain the cost of living is a major basis input to rising inflation. As illustrated by select major states, minimum wages such as CA, FL, IL, and NJ have been rising at rates well above the rate of inflation. The rise in labor costs eventually has to be absorbed by increased prices of goods and services; hence, inflation. As that broad market attempts to battle prices of goods and services by addressing supply and consumer demand, another effect of the Fed monetary policy, unless state policymakers moderate rising minimum wages, is to control labor costs by employment supply and demand – an increase in unemployment.

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Amgen acquires Horizon Therapeutics

Last week a major acquisition by Amgen was lost among the volatility of FED action and jawboning as Amgen announced the acquisition of Horizon Therapeutics. Horizon has become one of the leading biotech firms specializing in medicines and treatments for rare diseases. For the last couple of decades, starting with the growth of generics, large Pharma has looked at rare diseases to make a profit and a difference. Horizon has taken that strategy through its relentless focus on rare diseases with unmet needs, specifically autoimmune and severe inflammatory diseases. More than that, they have backed this priority up with a pipeline of new medicines. This pipeline drove a small feeding frenzy as, in early November, Horizon announced its plan to field acquisition offers. After a month with the likes of Sanofi, J&J, and others, this “technology” was purchased by Amgen for $28 billion.

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Global Manufacturing Shift

Supply chain bottlenecks, anti-China political rift, and export controls have sparked a global movement to shift manufacturing away from mainland China. A major milestone of such was marked by last week’s opening of Taiwan’s TSMC $40 billion manufacturing site in Arizona, attended by President Biden. TSMC accounts for over 50% of the world’s chip manufacturing, followed by Samsung, a distant second. The top 5 world’s foundries account for 90% of the global chip production & supply, while over 65% of the foundries’ market share is from Taiwan companies. The recent U.S. Chips and Science Act to fund domestic research and manufacturing of semiconductors is met with mixed emotions among Asian nations, especially Taiwan. Shifting production locally to the U.S. is also considered a shift in geopolitical balance accompanied by the fear that this would diminish the U.S.’s presence and support for Taiwan and its Southeast Asian neighbors. Strong ties with the U.S. have always been viewed as a protective shield from China’s Communist Party.

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Monthly Performance Reports

Monthly Performance November 2021

October experienced a spectacular rebound from the September Effect drawdown, with the S&P 500 gaining 7.0% along with long-dated Treasuries returning 1.8%. This momentum was aided by President Biden’s massive stimulus expected from the Infrastructure Bill, above consensus corporate earnings, and the market’s expectation of a softer landing in rate tightening. Equity market gains were concentrated on growth and momentum...

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Monthly Performance October 2021

October experienced a spectacular rebound from the September Effect drawdown, with the S&P 500 gaining 7.0% along with long-dated Treasuries returning 1.8%. This momentum was aided by President Biden’s massive stimulus expected from the Infrastructure Bill, above consensus corporate earnings, and the market’s expectation of a softer landing in rate tightening. Equity market gains were concentrated on growth and momentum...

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Monthly Performance Report September 2021

To the casual eye equity markets led by the S&P 500 index-free climbs past another record gain of 2.38% in July was anything but routine. With close scrutiny as the undertow from the economic skepticism from the delta variant and emerging markets uncertainty with China’s sudden stock market crackdown temporarily splintered the global recovery. What should have been a choreographed...

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Monthly Performance Report August 2021

To the casual eye equity markets led by the S&P 500 index-free climbs past another record gain of 2.38% in July was anything but routine. With close scrutiny as the undertow from the economic skepticism from the delta variant and emerging markets uncertainty with China’s sudden stock market crackdown temporarily splintered the global recovery. What should have been a choreographed...

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Quarterly Performance Reviews