The Week in Review 2/13/23

“When it's grim, be the Grim Reaper and go get it.” – Andy Reid

Good Morning ,

Congratulations to Kansas City for winning the big game!

Last week we saw a cooling off in the stock markets… as many investors looked to take some gains after the robust beginning of 2023. It was a week filled with economic news and Fed policy.

On Monday most market participants were hesitant in front of Fed Chair Powell's commentary on Tuesday and there was also some increased geopolitical tension after the U.S. shot down China's suspected spy balloon off the South Carolina coast last Saturday. Basically we saw a sloppy day with the S&P 500 violating the sacred 4100 level that traders have been watching. There was no U.S. economic data of note on Monday.

The stock market kicked off Tuesday's session on a mixed note. The main indices oscillated around their flat lines in the first half of the day as investors awaited Fed Chair Powell's "Conversation with David Rubenstein" at the Economic Club of Washington, D.C. at 12:40 p.m. ET.

Mr. Powell didn't say anything too surprising, but the market responded with some volatile price action anyway. The main indices initially shot higher, a move that was attributed to Mr. Powell's relatively calm demeanor when asked about last Friday's stronger than expected January jobs report.

That initial upside momentum quickly gave way to selling pressure though, after Mr. Powell said that the Fed will react to the incoming data and will do more rate hikes if the data suggest that is necessary. That disclaimer has been provided by him in the past however, so it was not surprising either. He also said that the Fed has a significant road ahead to get inflation down to 2.0% and that he doesn't think it will be a quick move to 2.0%.

The aforementioned reversal in the major indices saw the S&P 500 breach support at the 4,100 level, where buyers stepped in (again) and a technical rebound effort took root, supported by short-covering activity. Ultimately, the main indices closed near their best levels on Tuesday.

Also helping late Tuesday was a bid in Microsoft and other AI-related stocks after Microsoft announced its new AI-powered Microsoft Bing search engine and Edge browser.

We received the following data on Tuesday…

• December Trade Balance -$67.4 bln (consensus -$68.5 bln); Prior was revised to -$61.0 bln from -$61.5 bln
• The key takeaway from the report is that it reflected a slowdown in global trade, evidenced by a $2.1 billion decline in the three-month moving average for the goods and services deficit to $68.6 billion that resulted from a $2.6 billion decrease in average exports and a $4.7 billion decrease in average imports.
• Consumer credit increased by $11.6 bln in November (consensus $24.5 bln) following an upwardly revised $33.1 bln (from $27.9 bln) in November.
• The key takeaway from the report is that total consumer credit expansion slowed in December, with higher interest rates crimping loan demand. Nonrevolving credit saw its smallest expansion ($4.3 billion) since August 2020.

Equities spent Wednesday's session in retreat mode largely due to concerns that the market got overextended and was due for some consolidation. Selling efforts were broad based but generally modest in scope from a sector and index standpoint.

A notable exception was Alphabet, however, which plunged 7.4% on Wednesday.

Shares of GOOG were reeling on concerns the company is behind in the AI space -- a concern that was magnified by a report that its Bard AI bot provided an incorrect answer at the company's launch event.

Wednesday's weakness followed on the heels of President Biden's State of the Union address in which he called for a billionaire minimum tax, a quadrupling of the tax on corporate stock buybacks, and raising the debt limit without conditions. He also made a case for more antitrust regulation of technology companies.

Good times… given our divided Congress, the market wasn't overly concerned about new tax policies being passed, but it was certainly interested in what happens with the debt limit discussions and the possibility of increased regulations.

We received the following data on Wednesday…

• Weekly MBA Mortgage Applications Index 7.4%; Prior -9.0%
• December Wholesale Inventories 0.1% (consensus 0.5%); Prior was revised to 0.9% from 1.0%

The stock market started Thursday's session with a distinctly bullish bias, yet the bulls were soon corralled and the major indices spent nearly the entire session retracing their opening steps in what became a trend-down day. The selling that took place was broad based, but orderly; nonetheless, it left the S&P 500 below 4,100 at the closing bell.

A favorable response to Walt Disney's better-than-expected fiscal Q1 earnings report and restructuring announcement, falling Treasury yields, and another weekly initial jobless claims report that was supportive of the soft landing scenario provided the fuel for the opening bid. The market's footing started to slide when Treasury yields began moving up from their overnight lows. The jump in market rates compounded the selling pressure that had already taken root.

Separately, Thursday's early rally effort also fostered some pressing concerns about the market trading at a premium valuation despite declining earnings estimates. Those concerns triggered renewed selling interest that was fairly unrelenting over the course of Thursday's session.

We received the following data on Thursday…

• Initial claims for the week ending February 4 increased by 13,000 to 196,000 (consensus 194,000). Continuing jobless claims for the week ending increased by 38,000 to 1.688 million.
• Notwithstanding the jump in initial claims, the key takeaway is that claims remain below 200,000, which is indicative of a very tight labor market and a reluctance on the part of most companies to cut their workforce.

Friday's trade was decidedly lackluster ahead of key data releases this week… there was a lack of conviction from both buyers and sellers, which left the S&P 500 and Dow with modest gains while the Nasdaq logged a modest loss. Lagging mega cap stocks kept pressure on index level performance.

Tesla was a losing standout among the mega cap stocks amid investors' concerns that a potential Department of Transportation order could force Tesla to make its charging stations available to other electric vehicles.

Oil prices reclaimed some lost ground on Friday, which also pressured the equity market, in response to Russia saying it is going to cut production by 500,000 barrels per day in March in response to international sanctions. WTI crude oil futures rose 8.7% this week to $79.66/bbl.

We received the following data on Friday…

• February Univ. of Michigan Consumer Sentiment - Prelim 66.4 (consensus 65.0); Prior 64.9
• The key takeaway from the report is the understanding that the year-ahead inflation expectation increased versus January, raising concerns, along with angst over rising unemployment, about consumers' future discretionary spending capacity.
• The Treasury Budget for January showed a deficit of $38.8 bln versus a surplus of $118.7 bln a year ago. The Treasury Budget data is not seasonally adjusted, so the January deficit cannot be compared to the deficit of $85.0 bln for December.

Only one of the 11 S&P 500 sectors logged a gain this week -- energy (+5.0%) -- while the communication services sector (-6.6%) registered the largest decline by a wide margin.

The 2-yr Treasury note yield rose 22 basis points this week to 4.51% and the 10-yr note yield rose 21 basis points to 3.74%.

Those moves in the Treasury market reflected some budding angst that last Friday's January employment report will give the Fed more room to raise rates and to keep rates higher for longer. This sentiment was also evident in the fed funds futures market, which is now pricing in a 78.0% probability of a third, 25-basis point rate increase at the May FOMC meeting, according to the CME FedWatch Tool, versus only a 30% probability last Thursday (i.e., the day before the employment report).

We have quite a bit of data to digest this week… Consumer Price Index, Retail Sales, Industrial Production, Housing Starts, and Producer Price Index reports all from January. And we will watch the Fedspeak on future hikes.

Have a wonderful week!

The opinions expressed herein are those of Michael Hilger and not necessarily those of Raymond James & Associates, Inc., and are subject to change without notice. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forcasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

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