There is a place for that stack of 2023 recession forecasts currently saved on your desktop. I know it is a big pile because I have the same one. Time to trash them all. I am beginning to wonder if the economists and strategists on Wall Street even know where Main Street is located? This weekend, I saw 60–90-minute waits at any decent restaurant, two weeks of sold-out performances for "To Kill a Mockingbird", full parking lots at many retailers and lines of cars streaming up and down to the mountains to enjoy an epic snowfall. Clearly the credit markets also live in Colorado given their recent tightening to 10-month lows. Recession? Right. Just ask Beyonce how many tickets she sold this week for her 2023 tour.
Friday's hot jobs data adds a bit of spice to last Wednesday's FOMC outlook. Will all the talk about slowing inflation and the potential soft-landing economy continue if jobs continue to run hot? The good news is that wage growth continues to cool down even as hours worked, and job openings rise. White collar to blue collar? Silicon Valley geeks to Philly? Cloud and social media gigs to the aerospace and auto industries? Jobs are shifting and while it is rippling all the data that we look at; the end results have been good news for the American economy.
Checking the market scoreboard:
- Higher highs and higher lows
- Short covering at a historic rate
- Credit spreads tightening rapidly
- IPO windows opening
- M&A shifting into a higher gear (Public Storage looking at Life Storage $11b, Danaher looking at Catalent $10b, Newmont looking at Newcrest $17b)
The markets just want to go up right now. Sure, valuations are getting stretched but there is a lot of money in cash and defensive areas and investors want to dial up the risk a bit. While this earnings period did not lead to a rush of future estimate hikes, it did show investors that the downside scenario could be taken off the table. Companies like Meta/Facebook which needed to cut costs did so, and the stock surged. Even tech names with terrible end market exposures and challenges like Intel were rewarded with a quickly recovered and now higher stock price.
The S&P 500 Index looks to be trading at about 18x its 2023 earnings estimate, and 16.5x 2024 earnings. These valuations are no longer cheap like they were in the 4th quarter, but what the healthier stock market does show is that investors are looking forward to a more sustained economic outlook, controlled inflation and no credit crisis. Stocks might also be trying to tell us that the $250 earnings estimate for 2024 is too low. But if you don't want to pay current prices for the S&P 500 Index, then look to invest in one of the many individual companies that reported progress on sales, margins and cash flow generation this quarter. Or investigate the credit and preferred equity markets which still have attractive yields and even more stability now that the 2023 recession talk has been pushed off. Or look overseas where equities and credit have even more discounted valuations to that in the U.S. And of course, I will mention looking at the private markets once again which will only look even better without a 2023 recession and a re-opening of the capital markets for IPOs, easier financing and an acceleration in mergers and acquisitions.
Looking ahead, the corporate earnings reports slowdown for the S&P 500 but accelerate for the smaller capitalization and international companies. It will be a very light week of economic data. Fed Chairman Jerome Powell will be interviewed by David Rubenstein at the Economic Club in Washington D.C. on Tuesday. Now what might he say about Friday's jobs numbers? Have a great week.
Never forget that bad news sells ink and clicks...
Ignore the headlines if you are looking for signs of a recession. Go right to the credit markets...
The credit markets screamed "No Recession!" after Friday's strong jobs numbers...
@lisaabramowicz1: U.S. high-yield bond spreads are the tightest since May 2022.
Forget about the "soft landing". How about "no landing" scenario...
Goldman Sachs moves toward a Wall Street low risk for odds of a recession. Expect others to follow...
We have cut our subjective probability that the US economy will enter a recession in the next 12 months from 35% to 25%, less than half the 65% consensus estimate in the latest Wall Street Journal survey. Continued strength in the labor market and early signs of improvement in the business surveys suggest that the risk of a near-term slump has diminished notably. And while Q1 GDP still looks soft—our latest tracking estimate is +0.4%—we expect growth to pick up in the spring as real disposable income continues to increase, the drag from tighter financial conditions abates, and faster growth in China and Europe supports the US manufacturing sector.
Goldman Sachs
Don't even start betting on a recession until the U.S. economy starts printing monthly job growth below 200,000...
@WhiteHouseCEA: According to today’s jobs report, the economy added 517,000 jobs in January, for an average monthly gain of 356,000 over the past three months.
Open the Google Maps app. Type in Main Street. Follow directions...
@bespokeinvest: 10 straight better than expected nonfarm payrolls reports, double the prior longest streak.
Friday's jobs numbers were a blowout. But keeping Goldilocks in play was the slower rate of wage growth...
@LizAnnSonders: January average hourly earnings +4.4% y/y vs. +4.3% est. & +4.6%
For every high-tech company trimming its workforce, there is a front-page story looking to lure laid-off workers...
@carlquintanilla
What a great time to be a young worker...
Nine in ten teens have a job if they want one. And twenty-year olds have their pick of jobs.
@conorsen
Last week's ISM Manufacturing data showed a slowing U.S. economy across the board...
@LizAnnSonders
But the ISM Services data showed a rebounding U.S. economy across the board...
*(US) JAN ISM SERVICES INDEX: 55.2 V 50.5E (largest monthly increase since June 2020 and above all analysts' estimates)
- Business Activity Index: 60.4 v 54.7 prior
- New Orders Index: 60.4 v 45.2 prior (second-strongest monthly rise in the history of the survey)
- Employment: 50.0 v 49.4 prior
- Inventories: 49.2 v 45.1 prior
- Prices Paid: 67.8 v 68.1 prior (revised from 67.6)
Hmmm... Not recessionary...
Don't forget that Services makes up 3/4 of the US economy.
The January service economies were strong around the globe...
Goldman Sachs
Even the global manufacturing data is gathering momentum...
On the margin, there are now clear green shoots – China PMIs and the German IFO for example – signalling that we may be passing through the trough of the global manufacturing cycle. To be clear, spot activity conditions remain pretty weak in these surveys, so the improvement is mainly in the forward-looking expectations (Exhibit 1) or components such as new-orders-to-inventories ratios (Exhibit 2). But if we are in fact seeing a turn, on the face of it that would not be so unusual. After slowing for the best part of the year, absent a slide into recession, it is typical for industrial surveys to inflect higher as inventories are run off. That is especially likely if it comes alongside a pick-up in activity in Germany and China – two economies that are firmly plugged into the global industrial cycle. Whether the inflection is a flash in the pan or something more durable is still likely to rest on whether the US joins this trend – though even here amidst a generally weak spot picture, there are some encouraging indications.
Goldman Sachs
Now about Wednesday's FOMC meeting, there was a change in tone...
Here is the FOMC note that I sent to my team internally as soon as Powell's meeting ended...
Today's Fed actions were inline, but in looking under the hood, there was a lot of good news here for the public and private markets...
My notes:
- Today’s FOMC hike of +0.25% and the press release was very much in line with expectations.
- The release and press conference included hawkish language (“ongoing rate increases will be appropriate”), but the press conference tone was one of the Fed seeing Disinflation, Stronger Jobs, Weaker Wages (so a perfect soft-landing environment).
- The biggest item that I didn’t see was Powell going out of his way to talk down the very strong January financial markets. (This is different from the past and tells me that he is okay with the markets moving higher.)
- The markets were very happy with the hawkish language but dovish looks and future potential moves. Market moves: US$ down big, Stocks/Bonds/Credit up big. Equity risk sectors lead gains.
The FOMC is looking for non-goods inflation to slow. On deck for 2023: Negative apartment rates...
The rental market has changed rapidly. This index from the National Multifamily Housing Council (NMHC) has been an excellent leading indicator for rents and vacancy rates, and this suggests higher vacancy rates and falling asking rents in the coming months.
The Fed has never raised rates above the 2-year Treasury yield...
Today the 2-year stands at 4.5% so it will be interesting to see how the March and May meetings play out. March is set up for a 25-basis point hike. And the market likes another 25 bp hike at the May meeting as the odds below show.
Higher equity prices and tighter credit spreads have done wonders for the Financial Conditions indexes this year...
@LizAnnSonders: Financial conditions (using @GoldmanSachs Index) have eased considerably over past 90 days, now at fastest rate since September 2020
Financial conditions have improved so much that brokers will soon be lining up to sell you IPOs again...
More restaurant companies are aiming to test investors’ demand for new listings after the sector weathered the Covid-19 pandemic and as dining sales have largely held up so far this year.
Fogo Hospitality Inc., the parent company of a Brazilian-style steakhouse chain, is aiming for an initial public offering as early as spring, according to people familiar with the matter. Other restaurant companies including Panera Brands Inc. and Cava Group Inc., the parent company of a Mediterranean chain, are aiming for an offering in the first half of the year as long as markets keep improving, according to people briefed on the plans.
Though the IPO market has been mostly frozen for the past 12 months, restaurants are in a unique position, according to bankers, analysts and investors. Most restaurants tout moderate growth and profitability, something investors are valuing after the steep selloff of unprofitable public companies last year.
During the pandemic, many restaurants tightened costs and improved their margins, making them more-attractive companies to buy. Easing inflation and a slowly improving backdrop for IPOs could bode well for the sector, some bankers and investors said.
Now it is time to frustrate and test those portfolio managers and advisors who are underinvested...
@TheChartReport
The S&P 500 finally puts in a higher high to join its higher low...
The recent buying in the S&P 500 has pushed the forward P/E ratio to its 5-year average...
While some investors may not want to buy new longs at current prices, others are sprinting to cover their shorts...
@carlquintanilla: “.. Thursday’s short covering was the largest since Nov '15 and ranks in the 99.8th percentile vs. the past 10 years.” - Goldman desk
Most investors however, are looking elsewhere than US stocks to invest in 2023...
Goldman Sachs
Are earnings estimates nearing a bottom?
While the average future estimate continues to slip lower, the current revisions are still much better than the markdowns that many strategists were expecting. It will be a tight race to see if the Q1 or the Q2 will be the bottom in the average EPS growth rate.
Now a quick glance at some of last week's earning stock winners and other all-time highs...
Facebook led the mega-caps with their new focus on the bottom line. Apple's disappointment was short lived. Spotify and Manhattan Associates just leapt higher on their better outlooks.
StockCharts.com
Over in the semiconductors, good news was great news for these stocks...
StockCharts.com
These tech components and contract manufacturers also jumped after earnings...
StockCharts.com
These consumer driven stocks also moved higher on better results and outlooks...
Homebuilding, autos, motorcycles, snow mobiles, and Lt. Col. Frank Slade's favorite car company.
StockCharts.com
Even more affordable consumer purchases treated their companies well over the holidays...
StockCharts.com
Travel remains on fire as the casino and travel booking stocks showed...
StockCharts.com
Transportation stocks also did well after earnings last week...
StockCharts.com
The largest auto dealerships jump to all-time highs on Asbury's earnings...
StockCharts.com
Industrial and Material companies have shown few signs of a 2023 recession...
StockCharts.com
The big, pure play healthcare device companies move to all-time highs on Stryker's earnings...
StockCharts.com
Piper Sandler surprises and the stock rips up...
Could investors be positioning here for an upturn in small cap M&A and public/private financing?
StockCharts.com
The slowdown in the internet cloud services growth hit Amazon and Google hard this quarter...
@TheTranscript_: Meanwhile, cloud growth is decelerating:
"Moving on to AWS. Net sales increased $21.4 billion in Q4, up 20%YoY...So far in the first month of the year, AWS year-over-year revenue growth is in the mid-teens"- $AMZN CFO
Time for my soapbox: Nearly twice the return for two-thirds the risk...
This is the primary reason that private equity continues to be among the fastest growing asset classes in the world for investors. No there is not a daily NAV or daily liquidity. But the friction of getting in and out of private equity is decreasing as institutional investors are increasing their use of the secondary market to buy and sell companies or LP portfolios. And new 40-Act evergreen mutual funds now allow individual investors to buy and sell their holdings on a monthly or quarterly basis.
Using our COBALT database, I built a PE Fund Mix that is largely representative of the private investing world (big in buyouts and smaller in growth equity and venture capital). In comparing the 27 years of returns, you can see below that this PE Fund Mix returns 187% of the MSCI World index but with only 64% of the volatility. Now combine this better risk/return with the fact that your global universe of companies to potentially invest in grows by 10-fold (95,000 private companies over $100m in revenues versus 10,000 public companies). There should be no reason for you not to spend time researching private equity investing.
Source: Hamilton Lane Data via Cobalt LP and S&P Global
Here is a visual of the above data to print out and tape to your white board...
Source: Hamilton Lane Data via Cobalt LP and S&P Global
Past performance is not an indicator of future results
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The author has current equity ownership in: United Parcel Service, Inc.
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