Good evening:
Happy New Year! We hope your 2023 is off to a healthy and productive start.
Adam Gould, Head of Quantitative Research, opened our Thursday meeting in New York the same week he published his stock-rating model’s 2022 performance. It was an excellent year for quant funds across the Street, and Gould’s model continued its outperformance: Last year, his basket of favored stocks beat the S&P 500 benchmark by 9.3%.
Overall, Gould continues to view stocks as expensive relative to both investment-grade and high-yield corporate debt, though he noted there are small improvements on those fronts.
The comparison charted here should not be used predictively in an attempt to time entry and exit points. But it might be useful for investors trying to adjust their stock and bond allocations or those trying to adjust weights between high-beta and low-beta sectors.
Adam led a discussion about the current increase in idiosyncratic risk, which tends to favor stock-picking strategies. Historically, such increases have been accompanied by a market recovery, so the current situation is unusual. Adam’s work suggests stocks could retest the lows of October 2022 (3,5077.03) in the next few months, with idiosyncratic risk to also fall before shooting back up.
“The market has looked overvalued since last March,” Gould said in our weekly meeting. “But it has become a little less overvalued.
“If we retest the lows in February or March, that would be the time to get into your high risk, your value, your more cyclical names,” Gould added. “That would be the time to take on more risk. But I think we’re going to retest the October lows, and hopefully, from there we can rally strong.”
Meanwhile, recessionary fears and the state of US employment dominated investors’ attention this week. Several data releases suggested the labor market remains strong, but hiring and wage growth are slowing. The November JOLTS, the December ADP private payroll, and the Department of Labor’s nonfarm payroll reports each showed stronger-than-expected job growth. Initial and continuing unemployment claims fell more than expected.
However, although wages continued to grow, the rate of growth is slowing. This week’s DOL statistics showed wages grew 0.3% in December, below November’s 0.4%. As Tom Lee has pointed out before, this is consistent with the trend shown by the Atlanta Fed wage tracker (3M annualized slowing).
The December S&P U.S. manufacturing PMI on Tuesday came in at 46.2, down from 47.7 in November. This was the lowest number since May 2020, as output and new orders both contracted. The ISM Services index fell to 49.6% for the month, below estimates of 55.1%. Both reports suggest an economic contraction.
As Head of Technical Strategy Mark Newton predicted, stocks have stayed within the levels made in December, with support and resistance levels for the S&P 500 at 3800 and 3900, respectively.
Americans have been fixated on this week’s dramatic and precedent-setting contest for Speaker of the House. Our Washington Policy Strategist Tom Block described it as a “mess” and “very distressing,” particularly as it relates to legislation to raise the debt ceiling which will need to be passed later this year. “It’s the responsibility of the majority party to pass this bill. This is probably the single most difficult vote for a Republican to take. I just don’t know how they’re going to do it.” That in turn could lead to some “very bad market headlines,” he warned, because failure to raise the debt ceiling could have huge implications throughout the economy, affecting the ability of the US government to raise money, pay off its debt, and pay bills. The huge negative consequences from that would ripple throughout the US and the global economy at all levels.
Elsewhere
Inflation seemed to cool in Europe in December, based on statistics released by German and French officials. Germany reported 9.6% YoY inflation in December compared to 11.3% in November. Analysts had expected 10.7%. France said annualized inflation fell from 7.1% in November to 6.7% in December, contrary to expectations of 7.3%.
That doesn’t diminish the extent of European inflation last year: Germany’s 2022 7.9% inflation was the highest in post-war German history, and Bundesbank President Joachim Nagel warned that 2023 inflation in Germany is still expected to be more than triple the ECB’s 2% target.
And finally …
China is scheduled to reopen its doors to foreign travelers this coming Sunday (January 8), after closing its borders 1,016 days ago at the start of the COVID pandemic.
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