Welcome to another issue of the Weekend Edition.
Thank you to all who’ve read and welcome to all the new subscribers this week!
Here’s what we cover:
Market Recap - First up week in while
Macro - Fed Speak
Earnings - The end of Q4 earnings
Premium Articles - March Strategy Note & China Picks
The Week Ahead - Economic & Earnings Calendar
Let’s dive in ⬇️
Market Recap - 27 Feb - 03 Mar, 2023 📉📈
We had the first green close after 3 weeks. While the week started with the continuation of selling from the previous week, the rally on Thursday and Friday has erased losses for the past two weeks with the S&P 500 closing at 4045.
What sparked the rally? Traders will say that the market was oversold, Macro experts will say it was comments from the Fed speakers. Others will say it was driven by options in the market. All of these are true - a confluence of factors that drove a strong two-day rally.
The problem with a rally like this is that there almost always is a reversal - whether sharp or gradual over the course of the week. We do also have a potential catalyst. Fed Chair Powell speaks in front of Congress on Monday and Tuesday, and his comments could be hawkish given the resurgence of inflation, sparking a sell-off.
Commodities have volatile, no surprise. Gold had a good week and so did natural gas. But the winner this week seems to be steel and with them the steel stocks.
Macro - Fed Speak
All we seem to have these days are Fed speakers. And whether we like it or not, some of what they say do tend to move markets. There’s some agreement out there that Thursday’s rally may have been sparked by comments from Bostic.
“I want to be completely clear: There is a case to be made that we need to go higher,” Atlanta Fed President Raphael Bostic told reporters Thursday.
And Bostic is not the only one. We continue to hear comments from Fed Speakers about how rates may need to be higher, something that’s sparked the mantra - “higher for longer”. Whether it’s rates or inflation, the mantra seems to be universally applicable, as the Fed keeps alluding their work not being done.
“It’s clear there is more work to do,” San Francisco Fed President Mary Daly told an audience Saturday at Princeton University in New Jersey.
We got the Summary of Economic Projections in December that showed the median rate for next year move up to 5.1%. That’s a Fed Funds Rate of 5%-5.25%. This is exactly the number I arrived at in my last article on rates.
However, now with the new set of PCE numbers coming in hotter in the US and Eurozone inflation re-accelerating again, the market seems to be pricing in a much higher number of 5.5% and Fed speakers continue to imply that. Some say we may even get 6%. I don’t see this happening. I’m more inclined to think that they probably stop at 5.25%.
Fed Chair Powell testifies in front of Congress on the “Semiannual Monetary Policy Report” on Tuesday and Wednesday, both starting at 10am ET and we’re probably going to hear some hawkish comments as he prepares to hike again in March. The next Fed rate decision is on Wednesday, 22 March.
Earnings - The end of Q4 earnings
FactSet Earnings Scorecard:
We’re almost at the end of earnings season with 99% of the S&P500 reporting earnings for the 4th quarter of 2022. We’re now have a blended earnings decline of -4.6%.
All things considered, the reaction to earnings this season hasn’t been as dire as expected and prices actually held up quite well. Part of the reason was the excess liquidity in the system and part of it was downward revisions in earnings estimates, which made them easier to beat.
Analysts are pricing a further decline in estimates for the Q1, 2023. This should come as no surprise. With estimates being taken down however, we’re likely to see a fair number of beats again.
During the months of January and February, analysts lowered EPS estimates for the first quarter by a larger margin than average. The Q1 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q1 for all the companies in the index) decreased by 5.7% (to $51.13 from $54.20) from December 31 to February 28.
The chart above shows the change in earnings estimates for Q1, 2023, from Dec 31 to Feb 28. Based Q4 reports and guidance, analysts have now decided to be far more prudent and take down earnings estimates.
Article of the Week
Premium membership is $10/month or $100/year.
Beware the Ides of March - A Strategy Note for 2023
China - A few picks for recovery - Stock and ETFs with exposure to China
The Week Ahead
Going into next week, the main thing to keep an eye on will be Powell’s testimony. Given that there are major earnings to move the markets, macro and technicals will be all that’s in play.
I do believe we see the S&P500 decline and retest the 4000 level - whether as a sharp reversal or slow grind. Given that even after the rally on Thursday and Friday, the market is not overbought, we could see some continuation on Monday before a reversal.
I hope to have posts out covering Powell’s testimony during the week and some new stock ideas coming up. So stay tuned!
Here’s wishing you safe investing.
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Ayesha Tariq, CFA
There’s always a story behind the numbers.
None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.
Full disclaimer: https://ayeshatariq.substack.com/about
For one-on-one coaching on macro and fundamentals: https://www.traderade.com/ayesha
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Nice market summary.. Thanks Ayesha