This is the video recording of the December 22nd, 2022, Weekly Town Hall w/ Willie Delwiche.
12/22/22 2:00 PM ET [Read more…]
[PLUS] Weekly Sentiment Report: S&P Earnings: Direction > Level
From the desk of Willie Delwiche.
Seems like almost everyone has a 2023 earnings estimate for the S&P 500. The thinking seems to be that if you are going to make up a year-end guess at price you should come up with one for earnings as well. That’s not a game I want to play.
Why It Matters: It’s not the overall levels that matter, but whether those levels are being revised higher or revised lower. Earnings estimates for more and more companies were being revised lower over the second half of 2021 and the first half of 2022. That trend has stabilized since mid-year. If the worst case for 2023 is priced in, there is room for both price and earnings revisions to move higher. If it is not, then the lows established over the second half of 2022 are not likely to hold. Remember, when it comes to adapting to incoming information, it’s not a question of whether it is good or bad, but whether it is better or worse than expected.
In this week’s Sentiment Report we take a closer look at how investors are feeling as they say goodbye to a messy & challenging 2022.
[PLUS] Weekly Market Perspectives – Bank of Japan’s Christmas Pivot
The Bank of Japan hasn’t officially raised rates and is continuing to buy Japanese government bonds. But its surprise decision to stop defending the 0.25% ceiling on 10-year bond yields has reverberated through the global financial markets.
Why It Matters: While bond yields around the world climbed to new highs over the course of 2022, the Japanese 10-year yield was held at 0.25% through active intervention on the part of the Bank of Japan. Funding those purchases kept the Yen under pressure for most of the year. The de facto rate hike that allows the 10-year yield to move up to 0.50% brought strength in the Yen and weakness in the US dollar. Precious metals caught a bid and bond yields around the world moved higher. The yield on the German 10-year bond is approaching the 10-year high it reached in October and US yields are climbing as well. The lasting impact on equities from this Bank of Japan pivot is clear. A weaker dollar could be a tailwind for stocks (they certainly didn’t do well when the greenback was rallying earlier this year), but higher bond yields have been a headwind all year. For now, the most direct beneficiaries of this move have been the Yen and Gold and those typically behave as Risk Off assets. Despite the noise, and perhaps some fireworks, this central bank pivot is likely to keep the Risk Off environment intact.
Our Deeper Look considers the market reaction to the Bank of Japan’s Christmas surprise through the lens of our risk indicators.
Weekly Market Notes: Re-Test Time – Or Is It Now Different?
From the desk of Willie Delwiche.
Sector-level trends are deteriorating – every previous time this happened this year, the S&P 500 went on to make new lows.
More Context: Our sector-level trend indicator looks at momentum, price and breadth trends across the 11 S&P 500 sectors. It captures the breadth of these trends more than the intensity (the table inside the report shows the details). The mix of trends has ebbed and flowed by indicator and by sector this year. But every previous time the composite indicator has dropped below zero since the S&P 500 peaked in January, new lows have followed. If that pattern holds, the S&P 500 could soon find itself testing its October low (which is not what many of the seasonal studies would suggest is likely right now).
In our Market Notes, we take a Deeper Look at the price evidence arguing for & against a test of the Q4 lows and what that could mean in the context of a challenging longer-term trend environment.
[PLUS] Weekly Observations & One Chart for the Weekend: Missing The Inflation Message
From the Desk of Willie Delwiche.
After unexpectedly good headline and core CPI prints for November, the stocks were caught off guard by unexpectedly hawkish forecasts on both rates and inflation when the Fed released its Summary of Economic Projections following Wednesday’s FOMC meeting.
Why It Matters: The market is used to looking at core CPI as a way to filter out inflation noise. The problem is that core CPI was created with political motives, not for economic clarity. The median CPI is a better tool for discerning underlying trends. Central tendency measures of inflation (like the median CPI) were slower to climb post-COVID but now show inflationary pressure persisting. This helps explain why the Fed is likely to remain in inflation fighting mode longer than the market now expects. The Fed’s record here is not without blemish. Pre-COVID they were overly focused on the core indexes and missed the building of inflation pressure. In 2012, both the median and core CPI showed inflation near 2.3%. Core CPI was still there in the summer of 2019, while median CPI was at 3.0% and at its highest level in a decade. The market is missing the Fed’s inflation message, after the Fed missed the mark on inflation by falling years, not months, behind the curve.
[PLUS] Weekly Town Hall w/ Willie Delwiche
This is the video recording of the December 15th, 2022, Weekly Town Hall w/ Willie Delwiche.
12/15/22 2:00 PM ET [Read more…]
[PLUS] Weekly Sentiment Report: Have Equities Lost It?
From the desk of Willie Delwiche.
Household equity exposure (as a percentage of total liquid assets) fell again in the third quarter dropping from 56% to 54%. It was at its highest level ever (62%) coming into this year and remains high by historical standards (90th percentile).
Why It Matters: When equity exposure made a new high and then reversed in 2000, it ushered in a lost decade for stocks. The S&P 500 was no higher in late 2012 than it was in early 2000. The same was true in 1968. The S&P 500 was no higher in mid 1979 than it was in late 1968. While stocks were going sideways, household equity exposure was in secular decline. Equity exposure fell from 55% in Q4 1968 to 27% in Q4 1974 (when the S&P 500 bottomed). It dropped from 61% in Q1 2000 to 32% at the stock market low in Q1 2009. From this perspective, 2022 looks less like a one-off decline and more like year 1 of a secular bear market for equities. Opportunities will emerge and fade, but expecting a quick return to the market environment of the past decade seems to defy the lessons of history.
In this week’s Sentiment Report we take a closer look at how investors are feeling in light of their still historically high exposure to stocks.
[PLUS] Dynamic Portfolio Management
Portfolio Update: Precious metals have been showing signs of life relative to base metals for some time. For example, the trend in the copper/gold ratio has favored gold 40 weeks in a row. Silver has also gotten in on the action and with it holding above a key level last week, we are adding it to our Tactical Opportunity portfolio this week.
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