Hope you are doing well! Major U.S. equity indexes finished last week in a mixed fashion, still latching on to improved sentiment on inflation thus far in 2023. However, concerns about the debt ceiling, growth, and a recession were all contributing factors in keeping bulls somewhat subdued last week.
Debt Ceiling Reached
Fiscal differences between lawmakers created marginal investor concern last week, as a deal to avoid a potential default on our country's debt is still in limbo.
We have seen this story several times in the past, and some compromise on spending between lawmakers will be the most likely outcome.
Earnings season accelerated last week, with the bulk of earnings announcements slated for the next few weeks.
Mega-cap tech stocks were in demand last week, outperforming on average, as the Nasdaq 100 gained ground while the Dow Jones Industrial Average finished the week in the red.
The sentiment favored buyers in tech names that were hit hard in 2022 ahead of earnings. Earnings have shown mixed results thus far this season, and 2023 estimates are moving lower.
"To keep this rebound going, the guidance for ’23 has to be less worse than what people are anticipating," said Peter Tuz, President of Chase Investment Counsel.
Softer Retail Sales
Supply chain constraints should loosen in the future, and overseas container shipping rates have dropped dramatically, from about $20,000 per container to about $3,000 per container (China to the United States). The lower cost of shipping should trickle into pricing on the retail side at some point.
Growth Versus Value
Amid declining equity pricing and rising interest rates, last year featured large-cap value stocks in favor versus their large-cap growth stock counterparts. However, it seems that growth stocks are showing some nascent signs of falling back into favor so far in 2023.
The tech-heavy Nasdaq 100 index (NDX) has outperformed the S&P 500 (SPX) so far in 2023 as of the time of writing.
GDP This Week
Fourth quarter advance gross domestic product (GDP) will be released Thursday, and market watchers are looking to see if we can get two consecutive quarters of economic expansion, which would traditionally indicate an economic recovery.
Third quarter GDP rose 3.2% annualized, and consensus expectations ahead of the data release are for a 2.6% annualized rise in Q4.
The Federal Reserve Bank of Atlanta’s GDPNow report shows the latest estimate of 3.5%, updated on January 20th. 3.5% GDP expansion is indeed a big-growth number.
Should the data be close to or above expectations, it could put a dent into the recession expectation narrative that has been dominating market sentiment for quite some time.
The Week Ahead
Sentiment as a whole improved for the first couple of weeks of January compared to the end of December, with some concerns over the debt ceiling, a softer consumer, mixed earnings, and some weak manufacturing data creeping into the narrative last week.
Q4 GDP will be a big one on the radar for this week—and should data exceed consensus expectations, we could see sentiment improve even further. Recession remains a risk, however.
With that overview noted, how are things going in your neck of the woods? If there is anything on your mind regarding your portfolio or strategy, please let me know, and we can connect to discuss. In the meantime, have a great week!