Marking Musings and Macro Thoughts - January 22, 2023
Sentiment seems to be shifting as some investors increasingly believe the fed may be able to pull this off.
3 weeks (13 trading sessions) are currently in the books for 2023. The Dow Jones Industrial Average, S&P 500, and Nasdaq 100 have all enjoyed a good start to the year. The Dow is up 0.72%, the S&P 500 is up 3.8%, but the tech heavy Nasdaq has come out of the gates strong, enjoying gains of 6.9% so far in 2023. The Nas was taken out to the woodshed in 2022, ending the year down 32.4%, as rising rates made stock valuations compress, fixed income yields became more attractive, and investors rotated into safer, dividend producing stocks in the Dow (the Dow ended the year down 8.8%.)
However, many of the most beaten up tech names in 2022 (Amazon, Google, Facebook (sorry, I just can’t call it Meta yet), Nvidia, Tesla, Apple, Airbnb, and Warner Brothers Discovery) have all led the charge, up more than 10% YTD. So what’s driving these tech names higher in 2023? Is it just that investors believe these stocks were beaten up so badly that finally you could make an argument to buy them on valuation? Is it simply a short squeeze, as many institutional investors came into the year short technology? Or are investors front running the fed in anticipation of a pivot into a lower rate environment?
Obviously, the market is not a monolith and the reasons each of these stocks have gotten off the mat in 2023 varies. Surely the implication that the fed is almost done helps long duration tech stocks. However, my belief is that companies like Amazon, Google, Facebook, all reached valuations that were too attractive to pass up for many investors, especially those that have a longer term time horizon. After all, these companies are revenue generating machines, and while both revenues and net profits did not grow in 2022 and are projected to barely grow in 2023 for all 3 companies, it is hard to imagine these businesses not being able to continue to innovate and be successful. Whether or not they will be the market leaders they were in the previous decade remains to be seen, but as an investor if you have a long term mindset, QUALITY technology names have a place in your portfolio. Notice the emphasis on quality - don’t get caught up chasing the junk meme stock names like Gamestop, Bed Bath & Beyond, or GME, all of which have undergone a bit of a resurgence thus far YTD (all up more than 20%.)
As we look toward the next few weeks, we’re going to hear from many companies that will report Q4 2022 earnings and give full year 2023 guidance. Many believe 2023 earnings estimates are likely too high, even as Wall Street strategists have begun to revise their numbers down over recent weeks, with consensus lying somewhere between $220 and $225 a share for FY 2023.. It is my belief that we have now transitioned into a “bad news is bad news” environment in the market, (see the sell off on Wednesday of this week after poor retail sales data) and if earnings disappoint and forward guidance deteriorates, look for more volatility in equity markets. Over the last decade or so, investors were able to buy stocks hand over fist even if economic data deteriorated because the federal reserve was incredibly accommodative for investors and valuations did not matter. We find ourselves in a different environment as we begin 2023 - the fed, although likely nearing the end of their hiking cycle, will not be coming to the rescue this time. Inflationary data, while certainly moving in the right direction, is far from the Fed’s target of 2%. This is what makes investing difficult - how much of this is priced into equity markets? If we do get a earnings recession, how bad is it and will stocks fall? There is plenty of historical precedent for earnings coming in light but equity markets grinding higher. How will China seemingly reopening for business affect US Multinational revenues and margins? Is the market paying enough attention to the debt ceiling negations in Washington? The macroeconomic environment is about as difficult of an environment as I can remember, and regardless of whether we get a soft landing or not, 2023 will be fascinating.
The good news - you can now get a 4.5% risk free return in the 3 month, 6 month, and 1 year treasury bill, so if you as an investor are risk averse, there are options out there to protect your capital in the short term. There are opportunities in this market, and I think it’s a good time for investors to understand what they own in their portfolio and why they own it (2 key investing principals of famed investor Peter Lynch.) Accommodative policy over the last decade plus and led many investors to disregard fundamentals - this is not a time for that; bottom up analysis is now as important as it has been in quite some time.
Until next time,
Tyler