Private Wealth

Weekly Research Briefing: Time to Throw Deep?

January 10, 2023

It's third and inches from deep in your own territory and you are about to take the snap. The defense is crowding the line of scrimmage while your fastest receiver is in a one-on-one wide left. The play call is a handoff to the fullback over the right tackle, but all you can see is a touchdown pass to the end zone. Do you feel like Kenny Stabler or Peyton Manning right now? Or are you going to play it conservative and make the handoff? Welcome to the current market setup.

Wall Street sees little upside in U.S. equities. Strategists and economists see a Fed induced economic slowdown leading to a recession causing an earnings collapse. The Fed continues to be hawkish and fly towards a 5% Fed Funds rate with no easing in 2023 (or 2024). Their job is to scare the markets, subdue risk appetites and keep cheap capital away from companies that want to grow. Mission accomplished as rookie retail investors trading meme stocks/options, crypto and NFTs have returned to their previous day jobs. And corporate CEOs are wearing hard hats while they dig a deeper foxhole to prepare for a more difficult 2023.

As the U.S. economy slows, the U.S. jobs picture remains decent creating 200,000+ jobs per month while the quits rate remains elevated. High tech job losses seem to lead the daily headlines as companies position to maintain margins and generate cash as their COVID business expansion plans recede. These higher priced jobs are doing the Fed's bidding by slowing total wage growth and ending excessive catered lunch buffets. Goods and services inflation has gone into a free fall caused by a bursting of the supply chain bottlenecks and easing of energy prices due to higher temps and increased conservation. Consumer spending continues on an even path as evidenced by strong sales at leaders like Costco, Nike, Lululemon and Starbucks being offset by laggards like Macy's and Bed, Bath and Beyond. Travel demand remains insatiable as you can tell from trying to book a vacation for the next six months.

With the U.S. economy slowing and all the Wall Street Debbie Downers making the rounds on the financial networks, why would anyone think about throwing deep right now? Well...

  • Both Treasury yields and the credit markets are in a better position than at the end of October
  • Corporate bond issuance is off to a big start in 2023 with numbers that rival 2021 and 2022
  • Stocks and bonds were dismantled in 2022 leading to very defensive positioning as we start 2023
  • China reopening is very bullish as is government's moves to ease their property rules
  • Europe's warm winter has crushed energy prices and helped optimism and margins
  • The Q4 2022 earnings bar has been set very low. Could a weaker US$, lower energy/other prices and corner office over-preparedness make for many easy earnings beats?
  • The Fed soft landing scenario is gaining a bit of traction
  • Ukraine

The U.S. equity market is still a bit pricey as it nears 18x a non-recessionary earnings estimate. But international equity markets are cheaper and may have more tailwinds and less headwinds as China rises and Europe grinds through its energy cost issues. If the U.S. can continue to grow while inflation retreats and the recession odds dissipate, then maybe U.S. earnings don't fall off as much as they have been cut in the last few months. Bonds in the 1st half, stocks in the 2nd still seems like the safe call on third-and-one, but what if everything lined up for your fastest receiver to get wide open?

It is go-time for the markets with the earnings reporting season beginning this week. The CPI drops on Thursday, and it will get plenty of attention as investors dial in their next Fed Funds rate increase on 2/1. There will be much Fed speak this week including Chairman Powell from Sweden which could also help twist that dial between 25 and 50 basis points. Have a great week and 2023.

Some big economic data releases over the break. The weak ISM Manufacturing report was a big one and showed a second month of contraction...

ISM Manufacturing PMI for December 48.4 vs 48.5 est. and 49.0 in November; strong employment trends weigh on markets as employment index 51.4 in December vs 48.4 in November, which overshadowed a drop in orders and prices paid - prices paid index 39.4 in December vs 43.0 in November and new orders index 45.2 in December vs 47.2 in November.

Hammerstone Markets

December's ISM joined a list of other weak readings to put a wider smile on the Fed's face...

@WilliamsonChris: US business surveys from the #ISM, regional Feds and @SPGlobalPMI send a clear signal of #manufacturing production being in steep decline at the end of 2022.

Maybe even better news, ISM prices paid are now falling faster than they rose post-COVID...

@MacroAlf: The ISM Prices Paid index called for US CPI at 8% already in summer 2021.

Its rapid decline now points to sub-2% headline inflation at the end of this year already!

Not to be outdone, the ISM Services index contracted even further in December...

The ISM services index fell by 6.9pt to 49.6 in December, sharply below expectations for a more moderate decline. The underlying composition was weak, as the business activity (-10.0pt to 54.7), new orders (-10.8pt to 45.2), and employment (-1.7pt to 49.8) components all fell. The supplier deliveries component fell by 5.3pt to 48.5 (nsa), and the new export orders index increased by 9.3pt to 47.7 (nsa). The prices paid measure decreased by 2.4pt to 67.6 (sa).

Goldman Sachs

Now we watch to see how services payrolls will act in the months ahead...

@LizYoungStrat: Massive drop-off in ISM Services PMI for Dec, coming in at 49.6 vs 55.0 est. First contractionary print since May 2020 (50=neutral), with slowdowns in nearly every underlying component. This is what could change jobs data in coming mos, as services have been holding it up.

Friday's jobs picture showed slowing strength...

Will it be enough to keep the Fed happy enough to line up a +0.25% Fed Funds hike in three weeks or do we need to digest more inflation readings? Also of note: Did you catch the UE rate falling to a fifty year low of 3.468%?

The employment report which showed that strong job growth continued to tighten the labor market in December, is important because many Fed officials have shifted their attention from inflation readings to the labor market. They are concerned that inflation, while expected to decline this year, could settle at uncomfortably elevated levels, particularly if it leads workers to bid up wages.

The report offered little evidence that the Fed’s rapid rate rises last year have significantly slowed hiring. Employers added 223,000 jobs in December and the unemployment rate dropped to 3.5% from 3.6% in November, returning to a 50-year low.

But revisions to figures on wage growth showed recent gains weren’t as brisk as previously thought and instead indicated they continued slowing through the end of the year. Hourly wages rose 0.3% in December, bringing the 12-month increase to 4.6%, the lowest such reading in more than a year.

Last month, the Labor Department reported wage growth had accelerated in November, rising 5.1% from a year earlier. But on Friday, revisions to that data brought the annual increase to 4.8% in November.

Moreover, the average workweek declined for the second straight month in December, a sign of moderating demand for workers. Also, a separate business survey released Friday showed a large decline in new orders for service-sector firms.


JOLTS also slowed but there are still more jobs than workers...

@bencasselman: There were 1.7 open jobs for every unemployed worker in November, essentially unchanged from October (thought down from the 2:1 ratio at its peak).

So many looking for a recession...

Here is BofA's estimates. But with jobs and consumer data better, will the slowdown forecast need to be delayed? If inflation collapses, might the recession forecast even need to be canceled?

BofA Global Research

Wage inflation is slowing and helping the Fed's job...

Wage inflation is rolling over across the income distribution, see chart below. A slowdown in wage inflation is exactly what the Fed is trying to achieve with tighter monetary policy. And note how it is happening without an increase in the unemployment rate. Lower inflation with a steady economy and steady earnings is the definition of a soft landing


Mother Nature is also helping lower the world's energy bills...

@LizAnnSonders: Natural gas futures have plunged and are now hovering near lowest since beginning of 2022

With bottlenecks gone, transportation costs are going to deflate...

The U.S. bottleneck has been broken off as containerships, railroads, loading docks and warehouses move toward no backlog.

Goldman Sachs

Expect Jerome Powell and other Fed members to start pushing around this paper on shelter costs...

A new paper from the Cleveland Fed shows the difference between new rental rates and average rental rates.

Abstract: Prominent rent growth indices often give strikingly different measurements of rent inflation. We create new indices from Bureau of Labor Statistics (BLS) rent microdata using a repeat-rent index methodology and show that this discrepancy is almost entirely explained by differences in rent growth for new tenants relative to the average rent growth for all tenants. Rent inflation for new tenants leads the official BLS rent inflation by four quarters. As rent is the largest component of the consumer price index, this has implications for our understanding of aggregate inflation dynamics and guiding monetary policy.

Cleveland Fed

With so many prices in retreat, there is increased hope that 25 bps will be the level for future rate increases...

@NickTimiraos: Retiring Chicago Fed President Charles Evans says he is hopeful milder inflation data would allow for the Fed to return to raising interest rates in more traditional 25-basis-point increments beginning with its next meeting... "Going forward the deceleration in goods-prices inflation has been important, noteworthy. It’s the service side and how that behaves that I think is going to be a little more indicative of whether or not policy’s adequately restrictive or something more has to be done."


But don't forget that the Fed wants to be a scary monster to the financial risk markets right now...

Even though the employment numbers at first blush suggest that the Fed has done a good job of tightening money without breaking anything, it’s also likely that the central bank will be unhappy about this. The Fed’s strategy is to use a tightening of financial conditions to spur the corporate sector into driving the kind of economic slowdown that will help bring price rises under control. Strengthening stocks and falling bond yields make conditions easier (and the weaker dollar that accompanies them tends to make liquidity far more easily available for much of the rest of the world). According to Bloomberg’s index of US financial conditions, which combines a number of different measures, they’re now their loosest since October, and almost back to their norm for the last decade (marked by a 0). The tightening of financial conditions that the Fed engineered last year is now in danger:


The chief economist at Moody's is moving into the soft-landing scenario...

@Markzandi: The deeper I look into the bowels of last week’s job market data, the more I think we can skirt a recession. That’s because businesses aren’t laying off workers and unemployment is at a half century low, but regardless, job market slack is forming, and wage pressures are abating.

The weakening economic data should keep a lid on Treasury yields for the time being...

J.P. Morgan

It looks like the 10-year Treasury yield broke this line on Monday...

@hmeisler: Bondaleros. Yield on 10 yr. Big level.

While the Fed screams no future rate cuts in 2023/2024, the markets says 175 basis points...

@Lvieweconomics: Markets are (once again) increasingly pricing in cuts further out the curve.

Don't forget that the Big Hawks on the FOMC (Bullard/George/Mester) all lose their votes in 2023…

BofA Global Research

Peak inflation is not just a U.S. phenomenon...

@thedailyshot: Here are the CPI trends for Spain, France, and Germany. Source: @NordeaMarkets

Euro bond markets also like falling inflation...

@lisaabramowicz1: Last week was "the best week for 10yr German bunds (-35.8bps) since data on Bloomberg starts around reunification in 1990:" DB's Jim Reid

Thanks again to Mother Nature, Euro governments and broad conservation efforts for crushing energy prices...

“The danger of a complete economic meltdown, a core meltdown of European industry, has — as far as we can see — been averted,” German Economy Minister Robert Habeck, a key architect of the country’s response to the energy crisis, said during a trip to Norway, which has taken Russia’s place as the country’s biggest gas supplier...

Energy-saving measures from industry and households as well as the warmest January temperatures in decades have helped preserve that cushion.

“We are very optimistic, which we weren’t really back in the fall,” Klaus Mueller, head of Germany’s network regulator, said in an interview with public broadcaster ARD on Friday. “The more gas we have in storage facilities at the beginning of the year, the less stress and cost we will face in filling them again for next winter.”


A good chart from Michael Cembalest showing that market participants should keep a closer eye on the ISM survey, not earnings to tell you when to buy stocks…

The largest combined monetary and fiscal experiment in history is ending now, and a major growth slowdown is coming to the US and Europe. But: avoid the trap of becoming more bearish the lower the market gets, and be prepared to take advantage of selloffs when/if they occur. As shown below, in the history of US recessions (with the exception of the dot-com collapse of 2001), equity markets bottomed well before the bottom in GDP, payrolls, S&P 500 earnings and housing starts and the peak in household/corporate delinquencies. The ISM survey has been the most reliable coincident indicator of a bottom in equities, which is why we pay so much attention to it. If history is any guide, the equity bottom would also coincide with the end of Fed hikes. I expect equity markets to bottom sometime in the first half of next year, and for the October 2022 lows to hold.

J.P. Morgan

Another good signal is to buy when consumer sentiment is at its worst...

@ukarlewitz: In the past 50 yrs, by the time consumer sentiment gets this low, the recession has been nearly over. By the way, if past is prologue, nice 12-mo forward returns (from JPM)

Another great time to buy stocks is when the global recession indicator is high and falling...

@tonywelch17: 2023 is shaping up to be just flat out a polar opposite of 2022 in terms of macro backdrop.

@NDR_Research global recession indicator was basically rising all year last year and has now begun to fall. Best returns have historically coincided with high and falling recession risks.

Welcome to earnings season...

Earnings result announcements begin this week. According to Goldman Sachs, more than 20% of the S&P 500 has already preannounced in the Q4 which is an extreme amount.

Wall Street earnings estimates have continued to be cut along with all the pre-announcements and other macro/micro factors...

Earnings Scout

The market has now shaved almost 10% off its 2023 earnings estimate in six-months...

The Daily Shot

The strong U.S. Dollar was an earnings headwind, but for the Q4, it should become a tailwind...

@bespokeinvest: Q3 conference calls mentioned FX as a major headwind. Since the start of Q4, the US Dollar index has fallen over 7%. Keep that in mind as Q4 earnings season ramps up in a couple of weeks.

60% of the S&P 500 will report at the end of January and beginning of February...

Here is the small (but important) slate for this week...


Even with all the stock market negativity, there are still plenty of stocks hitting all-time highs as Friday's list shows...

Healthcare, Industrials, Insurance and Consumer names fill the list. Sure, it is a bit defensive, but at least some stocks are working.

If you need a top-tier buy and hold stock for the long term, Barron's had a good idea for you over the break...

Once we are past all the recession thoughts in 6 months, it's fair value could be worth $500 - $600 per share as it moves back toward its historical valuation ranges. Then your investment should grow along with its 5%+ revenue growth rate, margin expansion and well spent free cash flow. Dividend is only about 1% but it should also grow at a 10-15% annual rate (thus doubling every 5-7 years.).

One disappointing quarter shouldn’t obscure Costco’s strength, however. Annual earnings are growing by double digits, and membership renewal rates hovered near highs of more than 90% in the company’s latest quarter. With inflation still a problem, Costco should keep attracting customers—even affluent ones—looking to save...

Founded in 1976, Costco has become one of the greatest retail success stories ever. “Costco is able to zig when the rest of retail zags because it sells primarily stuff that customers need at unbeatable prices,” says John San Marco, portfolio manager of the Neuberger Berman Next Generation Connected Consumer exchange-traded fund (NBCC). That formula, he says, has been “a good recipe regardless of the macro backdrop.”...

Costco’s membership fees have been a steady source of revenue, most of which flows to the bottom line. Some fees appear due for an increase in early 2023. The company’s lowest-tier annual fee is $60.

Membership at Costco has grown at a 6% annual clip over the long term. Cowen analyst Oliver Chen lauds the company’s “competitively unique value-to-price proposition,” and has an Outperform rating and a $650 price target on the stock.


You should probably keep spending time researching solar plays if you are a growth stock investor...

IRA is a broad benefit to US solar and storage.

The IRA is one of the most meaningful policy developments for the US solar and energy storage sector and clears the way for at least a decade-long runway for stable installation growth across all residential, commercial and utility-scale markets. Specifically, the IRA increased the solar investment tax credit from 26% to 30% and extended the credits for at least 10 years. Tax credits have been a key incentive mechanism in the US to spur solar and solar+storage installations and directly lowers the cost to develop these assets across residential, commercial and utility-scale end markets. The IRA is also transformative for the energy storage sector as it extends, for the first time, the 30% ITC to storage-only installations. We forecast robust growth of +18% CAGR from 2022 through 2026 in US solar installations and we forecast growth of +16% CAGR through 2040 in US energy storage installations.

Goldman Sachs

What are housing stocks telling us today as they begin to eye their 52-week highs?

Homebuilder stocks told us a year ago that mortgage rates were going higher and demand was going to fall. Since the June lows and October test, the group has worked its way higher to become one of the best sectors in the market. So are the stocks now telling us that mortgage rate increases are done and raw material prices will moderate?


The 30-year fixed mortgage rate peaked at 7.37%. It is now under 6.2%...

If interest rates keep sliding and home sales for 2023 come in better than expected, it helps to explain why these residential real estate stocks have stopped going down.

And if you think the U.S. Dollar has run its course, keep digging into those international stocks...

“Buy the World… US stocks crushed Global stocks for 15 years… $100 invested is US stocks Mar'08 now worth $288, $100 invested in Global (ex. US) stocks $94… US set to underperform World in '23”

BofA Global Research

@daChartLife: S&P Rel to Rest of World.

More amazing insight from Michael Cembalest...

On property markets, there’s an enormous amount of bad news priced in as shown in the below chart: only 5%-10% of China’s high yield property bond universe is priced above 60% of par value, and a startling 85% of the universe is trading at or was exchanged at less than 20% of par value. I began my career at JP Morgan in 1987 in emerging markets and worked on the Brady bond exchanges; I don’t remember any default or restructuring episode as bad as this across an entire sector. Once markets reach the “how much worse can it get” phase, marginal improvements in policy or macro can lead to a sharp improvement in asset prices. The latest measures for the Chinese property market include a central bank relending program and the lifting of restrictions on equity market and shadow finance fundraising.

J.P. Morgan

If China goes up, the emerging markets will go up...


As an alternative to the Emerging Markets, John Roque might have you consider the Iron Ore companies...

Rebounds in global growth and emerging markets typically coincide with increased demand for industrial metals. Global companies, good dividend yields, and as far away from the meme-stock crowd as you can imagine.


Wow, even France breaking up through its year end levels...

@the_chart_life: And the $CAC has gotten back to 11-month highs above 6800...

Hmmm... Semis no longer screaming recession...

If you are competing against the FANG/Nasdaq, chip stocks might become your new best friends for 2023. Even outperforming with the weak Micron earnings and Apple pre-announcement.

These long-term returns of Private Equity funds are not make-believe...

I built this chart in Cobalt over the weekend. It shows the IRRs by vintage year of all private equity funds in our database. These are after-fee returns. I only went back to 1984 because the universe of funds begins to go below 25 funds on an annual basis as you retreat into the 1970s and early 1980s. Funds included are all private equity strategies across all geographies that we have numbers on. So buyouts, growth equity, venture capital, will make up the vast majority.

In looking at the field of 2005 vintage PE funds, the top quartile hurdle IRR was 9.6%, the second quartile hurdle IRR was 5.2%, and the 3rd quartile hurdle IRR was 0.2% over the life of those funds. The 2005 vintage year of PE funds was a terrible class and to date, one of the worst in the life of private equity. Imagine putting most of a fund's capital to work going into the 2008 great financial crisis. But even with that very bad timing, the average return for this 2005 vintage class still managed a positive return over their fund’s life. For comparison, the S&P 500 was flat between 2005 through 2010.

The IRRs of vintage year 2020, 2021 and 2022 funds could be leaner than the rest of the 2010's due high prices paid by venture cap and growth equity funds during the last few years as well as the current economic slowdown. These concerns have been reflected in the slowdown of global M&A as well as in the exit of traditional lenders from the majority of current acquisition activity. This happened in 2000 and it happened in 2007/2008. As capital left the markets for private equity, the funds created and invested after the downturn put up very good returns as shown below. If a significant recession and credit crisis does not take place in 2023, shouldn't we expect a similar result? Stay tuned.

Hamilton Lane, Cobalt LP

Past performance is not an indicator of future results.

Our Hamilton Lane Direct Equity team gave me a fresh update on their deal activity and focus that I can share with you...

Our deal flow is on pace for a record year for fiscal year 2022 in terms of number of deals and available allocation. We are tracking towards 800+ deals and $30+ billion in investable opportunities. Key factors driving this:

  • Expansive and growing nature of our GP relationships, proactive sourcing.
  • A more difficult fundraising environment leading to GPs seeking additional sources of capital for deals.
  • Prominence of ‘Unleveraged’ Buyouts - as we predicted, when acquiring high conviction targets, Sponsors are over-equitizing at entry in order to navigate difficult, but gradually improving, Debt markets.

Our equity investment approach in this environment remains consistent.

  • Invest in sectors that are resilient, and products and services that are mission critical.
  • High earnings and asset quality are paramount.
  • Consolidation plays and deals with very apparent bond/call profiles is where we have really spent time and made commitments over the past several quarters.
  • Alignment in deals alongside GPs who have sector expertise that have invested through cycles.
  • Pricing equity returns at levels appropriate for the higher cost of debt and reduced leverage levels which drives moderating valuations.
  • Overall, our view is that it pays to be patient and only deploy into the most compelling risk-adjusted situations.

Outlook: Things to Watch

  • Whether 2023 will be the ‘Moment of Truth’ and we will finally get the answer to the question that’s been top of mind for the past several quarters: Recession or no recession?
  • Where are inflation and interest rates heading? Today it feels like inflation is heading in a better direction, but the Fed and other Central Bankers are still being hawkish which means higher rates in the near term. A reversal in rising rates at some point next year should bode well for deal activity and existing portfolios, which are showing signs of strain.
  • How strong will the headwinds caused by continued quantitative tightening be?
  • Will business sentiment be better and buyers more optimistic? Or will sentiment be worse, with a hard landing and sellers forced to transact at lower valuations?
  • Our strategy plays well in any environment, with dry powder (~$2B) and pacing to strike a nice balance between patient and opportunistic.

Hamilton Lane

If you are interested in learning more about private market investing, here is a good educational piece...

Start 2023 with a better understanding of the different types of #privatemarket investment strategies! Read our 'Guide to Private Markets' to learn more:

I know that you played with the ChatGPT chatbot over the holidays...

The kids had a blast with it although it probably made you think how far this new Open AI will run. We already see schools banning the app on its students computers (good luck with that). How soon until it is writing widely distributed content? This business reporter takes the idea to a (maybe?) extreme level.

I have been replaced.

Not just fired like a Twitter employee, not just pushed to the sidelines like the gas-guzzling car by the electric vehicle, not just put out to pasture because I can’t remember my last name. No sir, I have met the future, and there is no country for old columnists with ChatGPT — Open AI’s new artificial intelligence chatbot.

I have been writing about entrepreneurship, startups, venture capital and behavior economics for more than 11 years for this paper, but it is now time to meet the newest writer for I’m There For You Baby.

Raising money from a venture capitalist can be a challenging process, but it can also be a great way to fund the growth of your startup. Here are some steps you can take to increase your chances of success:

1. Develop a solid business plan: Venture capitalists want to see a clear vision for your company and how it will generate revenue. Make sure you have a solid business plan that outlines your target market, competitive advantage and financial projections...

The San Diego Union-Tribune


Learn more about the Hamilton Lane Strategies

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The author has current equity ownership in: Costco Inc & Starbucks Corp.

The information presented here is for informational purposes only, and this document is not to be construed as an offer to sell, or the solicitation of an offer to buy, securities. Some investments are not suitable for all investors, and there can be no assurance that any investment strategy will be successful. The hyperlinks included in this message provide direct access to other Internet resources, including Web sites. While we believe this information to be from reliable sources, Hamilton Lane is not responsible for the accuracy or content of information contained in these sites. Although we make every effort to ensure these links are accurate, up to date and relevant, we cannot take responsibility for pages maintained by external providers. The views expressed by these external providers on their own Web pages or on external sites they link to are not necessarily those of Hamilton Lane.

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