Weekly Market Update February 17, 2023
Dow Jones Industrial 33,827 -0.1%, S&P 500 4,079 -0.3%, Nasdaq Composite 11,787 +0.6%,
US Ten Year 3.81%, West Texas Intermediate $76.60
Equity markets were mixed this week after three widely followed economic figures came out higher than expected. On Tuesday, the headline CPI figure was +6.4% YoY (vs +6.2% f/c), while the Month-over-Month (MoM) reading was +0.5% (vs +0.4% f/c). On Wednesday, US Retail Sales rose 3% in January, well above the +1.9% forecast. Then on Thursday, the Bureau of Labor Statistics announced the Producer Price Index rose 0.7%, which was higher than the 0.4% estimate. These readings sent bond yields higher, as the stronger than expected economic data indicates the Fed will likely have to continue raising rates and keep them elevated for some time. The 10-year Treasury Yield rose 11.2bps to end the week at 3.83%. The 2-year Yield rose 6bps to end the week at 4.62%.
Despite the backdrop of rising interest rates, corporate layoffs, and geo-political events (Ukraine, China tensions) equity markets have performed well in 2023. Year-to-date the S&P is 6.2% higher while the Nasdaq is up 12.6%. A big factor in the performance of the market can be attributed to the strength of the American consumer, as well as the resilience of corporate earnings. The chart below from Data Trek/FactSet shows that in the face of the current environment, the S&P 500 is still expected to earn $53.34/share in the fourth quarter, not dramatically lower than the previous 6 quarters. Analysts expect almost the same level of earnings between the first and second quarter of 2023.
Higher interest rates in general will result in lower valuations for stocks because the discount rate used to value future earnings is higher (which equates to a lower present value). However, if analyst projections above are correct and if ~$52 is the bottom for S&P earnings, then corporate America is showing that companies can continue to be profitable, even in this higher rate environment. This is giving equity investors confidence that the most fundamentally sound companies will survive and thrive in the face of a resolute Federal Reserve.
John Maynard Keynes once said “Markets can stay irrational longer than you can stay solvent.” In other words, it’s practically impossible to predict or time the markets, and those who try may find themselves “over their skis.” We believe it is necessary to continue to stay invested in those companies with proven business models that can stay profitable in any environment. Stay committed to those investments and block out all the “noise” that can cause you to panic. The market may often seem confusing and irrational, but having a sound fundamental investing strategy will prevail over time. I’ll finish this week’s writeup with a quote from Mark Twain that seems applicable to the current market environment…
“When we remember we are all mad, the mysteries disappear and life stands explained.”
Have a Great Weekend,