“Our core holdings are the same as last year. We own shares of the best businesses in the world. Our attitude is that of a museum director: We only want to own masterpieces.” – François Rochon
Investors digested a lot this week between the FOMC meeting, big-tech earnings, and surprising jobs data. Plus, Adam Gould, Head of Quantitative Strategy, revealed his 2023 Quantitative Strategy Outlook, including his S&P 500 price target.
The FOMC on Wednesday raised rates by 25 bps, as expected. In the post-meeting press conference, Fed Chair Jerome Powell buoyed markets by acknowledging that “the disinflationary process has started,” but he warned that “we’re going to be cautious about declaring victory.” Asked about the odds that the Fed would keep the rate below 5%, he said it was “certainly possible.”
In our weekly research huddle, Head of Technical Strategy Mark Newton suggested Powell’s remarks show that “the Fed is definitely retreating from this uber hawkishness.”
Newton’s work has shown that the broader trend of breadth and momentum continues to improve as many stocks break out to their highest levels in six months. Yields and the U.S. dollar have broken down, a negative correlation that has boded well for equities. Further, Newton noted more than 70% of stocks have risen about their 200-day moving average, the best percentage in more than a year.
“On a very short-term basis, we might pull back, but most people don’t have to worry about that,” Newton said Thursday. “I think the bull market has started, but it’s not going to be straight up. Initiating new longs is probably not right at this moment but that doesn’t mean you sell. The breadth, momentum, sentiment, seasonality cycle all suggest this year should be a better year, so one certainly wants to be long … This quarter historically has been the best in the four-year presidential cycle. I just don’t see a reason to be extraordinarily negative given sentiment is only gradually starting to appreciate this rally.”
Newton reiterated that, “The recovery has been better than what many strategists and PMs have hoped for, but the majority of the people I have talked to remain on the sidelines and not convinced.”
Our “Tireless” Ken Xuan, Head of Data Science for Tom Lee’s research department, added: “There’s tons of cash on the sidelines – comparable to pandemic high levels. That is both on the institutional and retail side. So there’s still a lot of dry powder.”
The week ended with a jobs report that showed unexpectedly surging job growth, which Gould described as “definitely startling.” Although stocks reacted with dismay to the news and its potential effect on the Fed’s future moves, Gould reminded us that Powell has been “remarking more about trends in inflation and financial conditions, and obviously one data point does not make a trend.”
A quant’s perspective on 2023
In his 2023 market outlook, which you can view here, Adam Gould shared his base case for the S&P 500 this year: 4,039.88, with a 223.73 EPS forecast. He also showcased his overall stock rating system, which has outperformed in both up and down years, and generated 9.3% outperformance in 2022. He also walked investors through a number of single stocks and how his model views them.
A big earnings week
Big Tech reported mixed results this week. Meta, a Granny Shot, surprised with an optimistic outlook and an expectations beat, along with a $40 billion share buyback, driving the stock to its best day in nearly a decade (and up 50% YTD). Amazon reported slowing cloud business and e-commerce – along with its first unprofitable year since 2014.
Alphabet earnings fell and missed expectations. Google’s parent cited a slowdown in digital advertising and economic uncertainty. But in his Outlook, Gould continued to rate the company as a strong outperform using his proprietary quantitative model, citing the stock’s strength in factors related to quality, value, and analyst estimates. The stock has risen 18% YTD.
Apple broke a 14-quarter streak of revenue growth as supply chain problems in China delayed the delivery of iPhones during the holiday period, resulting in its worst holiday season since 2018. The iPhone maker also cited challenging macroeconomic conditions as a significant impediment to its performance. Gould’s stock-rating model ranks AAPL as an outperform, primarily due to its excellent quality-related attributes. The stock rose nearly 7% this week and is up 23% thus far in 2023.
In the energy sector, longtime Granny Shot Exxon Mobil rocketed to its highest-ever annual profit, resurrecting its status as one of America’s most prosperous companies and erasing billions of dollars of losses incurred during the pandemic. Chevron and Shell similarly rode surging oil prices to report record-breaking profits.
The world is likely to avoid a recession in the next two years, according to the International Monetary Fund’s World Economic Outlook report. The IMF’s latest forecast cited China’s post-COVID re-opening, the weakening of the U.S. dollar, and progress on the inflation battle around the world. Global growth is nevertheless predicted to be weak over the next two years due to the Ukraine war and rising interest rates, and considerable risks remain, the IMF said.
President Biden moved to limit China’s access to advanced semiconductor technology this week. He reportedly secured an agreement from the Netherlands and Japan to restrict the export of advanced chipmaking technologies to China. The countries are home to ASML and Nikon, respectively, the only makers of the cutting-edge lithography equipment essential to the manufacture of today’s most advanced semiconductors.
Rates rose in Europe. The Bank of England on Thursday hiked interest rates by 50bps to 4%, announcing that the pending UK recession will be shorter and less severe than previously estimated. UK rates are at their highest in 14 years. The European Central Bank also raised by 50bps to 2.5%, telegraphing a likely similar hike in March.
The Adani Group scandal has entered India’s political sector. Following a scathing report by short-selling research group Hindenburg Research on January 24 alleging decades of “‘brazen” accounting fraud at Adani, loud and chaotic demands for an emergency investigation forced India’s Parliament to adjourn until Monday. This was perhaps inevitable, as the State Bank of India and the government-owned Life Insurance Corporation of India both have significant exposure to the Adani Group. Adani companies have lost approximately $110 billion in market value since the report was released.
The (very welcome) end of an era: The World Health Organization said COVID remained a global health emergency, but the pandemic could end this year as hospitalizations and deaths fall to their lowest possible levels. About 90% of the world’s population now has immunity through either past infections or vaccines, officials said. Separately, the U.S. said it would stop referring to COVID as a “public health emergency” on May 11.
Lastly: Argentina announced plans for a new 2,000-peso banknote in response to yet another year of skyrocketing inflation (95% in 2022, the highest since 1991). As of this writing, that note would be worth about $10.66.
By the way, we’d like your feedback. How are you enjoying this weekly roundup? We read everything our members send and make every effort to write back. Please email thoughts and suggestions to email@example.com