February Look at The Markets | Stock Talk Podcast
This week we’re talking about Earnings, Economic Data, what happened last week, and what we see going forward into February.
The Stock Superbowl:
Chris Perras: Hey, I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group in Houston, Texas. This is Charles Scavone, Director of Investments. This is our weekly Stock Talk podcast, keeping you connected to your money. We’re going to do something a little different this week. Normally, I script these things, but Charles, myself, and James have been really busy the last week with earnings and economic data. We’re going to do a bit of ad lib here. We’re just going to walk through what happened last week, and what we see going forward here in February. Charles, I’m just going to ask you, what did you do last week? What did you see last week?
Charles Scavone: Yes, well, it was interesting. I guess, if we break it into a couple of big buckets, we did have some big economic data, we also had a lot of earnings. Let’s go reverse the order there. Let’s just talk about earnings a little bit. We have now had over 50% of the S&P 500 report earnings. If I had to characterize it, I’d say they were okay. Expectations had been lowered headed into earnings season, but they probably were good enough. People are concerned about what the outlooks are going forward. Outlooks have generally been, again, okay and so people are right setting expectations.
It’s a good process. It can create some volatility, but it helps us then get a gauge on how we need to assess the GoForward look, which is what’s most important, obviously. Coming back, we had Amazon, Apple, Tesla, Microsoft, big, big-name companies reporting. Again, in characterizing them, they were good enough and have hopefully right sized where expectations are. Anything from you from earnings standpoint maybe before we go to economics?
Chris: Yes. What Charles said, I totally agree with. It’s pretty normal. If you’ve looked at earnings expectations throughout the year, generally what happens is they set the bar high at the end of the year, and then the expectations come down throughout the year. Expectations that actually have been coming down at the end of the year very rapidly. We print out research notes every week, and it was exactly opposite of a year ago in December, January 2021/2022.
I’d print out some research, and it’d be 10 pages of analysts’ upgrades and targets’ upgrades and an earnings revisions up, now it’s six or eight pages of estimate cuts, estimate revisions down. What was really interesting is the companies that outperformed last year, the stable companies, utility companies, they reported okay earnings. Their stocks all went down. Most all the tech companies’ expectations have been cut. Those were the laggards last year, communication services, technology, semiconductors, a lot of those stocks, horrible performers last year.
Most of the stocks went up on the earnings if you waited a day or two. Microsoft was one that opened down, closed up. Apple opened down, closed up. There were some other ones that opened down and stayed down. As you said, it was okay. It was better than expected. Expected had been cut throughout most of the fourth quarter.
Charles: It’s been good enough. One of the points that you’ve made previously is like everything that worked last year is what’s not working this year. Why is that? It is because even though one of these defensive companies may have reported great earnings, that outlook for that company is not as great as someone, say, these expectations have been lowered and now the outlook may be more favorable. That’s just how these shifts occur in the market over time. A lot of the eye-catching performance of the market year to date has just been this reversal. It’s because people are changing their views and their expectations. The outlooks for technology, semiconductors, and all the outlook for them is incrementally getting more positive whereas some of these more defensive companies is a little bit negative.
You see short covering, you hear a whole lot about what’s driving the markets and it’s a lot of short covering, rebalancing and all that’s going on. I think it leaves us in a pretty good position for folks like us who look at individual companies. What is that forward-looking outlook? Can we add value to our client’s portfolios by focusing on individual stocks? Although it’s a little bit painful sometimes if you’re not positioned from day to day exactly right. I think what we’re doing and taking a longer-term outlook makes a lot of sense.
Chris: To put a little data behind the numbers. Year to date, before today which we’re filming this on Monday morning. Before today, the S&P was up a little over 7% year to date. To put it in perspective, telco services and technology, those groups, telco services was up 20.5% year today. Put it in perspective, last year it was down over 40%. Technology year to date was up 14%. Last year it was down almost 29% on the year. Total reversal there. On the downside, last year most viewers and investors will remember energy was pretty much the only group that was up last year. It was up 59% last year. Year to date it’s down 2%. It’s one of the worst groups.
Healthcare was a leading group last year, even though I can’t remember if it was net up on the year or not, but it’s down year to date. A total reversal of last year. If you were to pull up an S&P 500 chart for all your technicians and you looked at January of 2022 and January of 2023, they looked totally opposite. January of 2022, we started two days up and then plunged, this year we started two days down and then we went straight up. It’s been a reversal. A lot of that is because investors were positioned poorly, had sold a lot of stuff for tax purposes, and came into the year under-investing.
Charles: Agreed and so it sets up well for us I think going forward and puts us in a position where we can take advantage of what our market view was going forward, more back to a normal market cycle. We should talk about economics before we run out of time.
Chris: Midweek we had Fed meeting they did what everyone had expected to raise 25 basis points. Then Chairman Powell was more dovish than I think most people expected, he mentioned the word disinflation, I don’t know, 5, 6, 7 times.
Charles: More than that.
Chris: It seemed like each time he mentioned it the S&P 500 went up another five points and that I think it was Wednesday.
Charles: Correct, yes.
Chris: The market shot up on Wednesday, we had some more earnings on Thursday and then what happened on Friday?
Charles: We get this crazy employment report and there’s a handful of statistics that are widely important for market participants and one of them is usually this once a month first Friday of the month employment report. Unfortunately however, January is always a very unusual month in that it will have seasonal revision, sometimes they’ll go back and these are statistics, government statistics now have to go back and revise your benchmarks from years ago.
Although the employment situation is been strong, the number that came out on Friday was just so far out of line if it’s too good to be true it probably is. That’s the case, I don’t think, although it grabbed headlines. We talk about how the media sometimes grabs things and people like to use statistics sometimes like a bikini, right. You want to reveal what’s the most interesting aspects or eye-catching things, but it conceals some of the very vitally important information and so that’s exactly what happened.
Just as we had if you go back to the previous week all the headlines layoffs, massive layoffs that tech companies and such was grabbing the attention on seemed like with flip of a switch that all changed.
Chris: Yes the financial press called it the wow number and we’ve done a lot of videos and reported on some of these employment numbers, the BLS data, I’ve called it something else without one of the middle initials. It’s government data. As Charles mentioned, most of this data is revised, and this January is a ton of revisions having to do with catch-ups and makeups of misstatements of data from last year or from years before.
I don’t believe that number 500-plus thousand jobs, and even if I did, remember that BLS data it double and triple counts jobs. If you have a part-time job, if you worked three jobs or if you worked one job and got two more part-time jobs, they would count that as two job hires even though that’s just one person. If you look behind the scenes, the wage growth, it’s still growing. It’s decelerating. I think it was like 4.3%. average hourly worked, I think that’s decelerating too. That’s coming down. I know a bunch of the temporary help companies have said that demand is slowly declining.
Charles: You made me think of a couple of things. What’s more important was actually a piece of economic data that came out a little bit before the employment report, and that’s the employment cost index, which as you highlight, continues to come down and I think that’s more influential in what’s going on. Also, it emphasizes the importance of looking behind the numbers, looking behind the headline numbers, and that’s what we spend a fair amount of time doing. Why we look at- there’s a lot of detail that comes out behind that. It requires more effort to look into the details of what’s going on than it does just to flash that eye-grabbing headline number.
The other thing it makes me think about real quick, though, is we were getting all these headline-grabbing layoffs, layoffs, layoffs. You know what? At the end of the day, the vast majority of employment occurs in small and mid-sized businesses and that’s what a lot of the Jolts data, this employment cost index, that’s what you’re capturing. It doesn’t quite sound as glamorous as Google lays off 10,000 employees. It’s relevant, but it doesn’t move the needle as much as one might think.
Chris: Just this morning, I think Dell announced 5% layoffs. I think it was 6,000 employees this morning they’re going to have to layoff. Which is, once again, it’s horrible if you’re an employee at one of those companies. I’ve been in that situation before. It’s nothing I’d wish on anyone. At the same time, as we’ve talked in the past, a lot of these tech companies their main operating costs are people. When they lay off people, the stocks tend to go up because investors will say, “Hey, their margins have a chance of expanding in the future when demand returns.”
We have given up a lot of that pop after the Fed meeting already last Friday. I think this morning we’re going to open down whether it’s because of following onto that data, I think yields are up and the bond market real yields which we talked about have popped up. Tech has given up some of the gains the last couple of days. With that going forward, I just wanted to let viewers know that.
If you go back and look at 2022, January was bad. February actually was up a little bit, in February of 2022. That’s unusual. February is usually one of the worst months in the market seasonally. By worst it’s down marginally. I think it’s around half a percent. Not a lot historically. I would expect some digestion of the 7% plus S&P gains here in February. We are giving up some of the gains this morning, expect the Federal Reserve, our party to come out almost every day over the next couple of weeks talking about economic data.
Charles: There are a lot of Fed speakers the next couple of weeks or this week particularly. They’ll probably continue to try the messaging that they do to– Just the normal course of how they operate.
Chris: With that, we’ve got some additional material on our website. Every week we post a weekend update where we distribute exactly what happened last week. We don’t give a lot of opinions there. It’s just what groups worked, what didn’t, what we saw on economic data. It’s pretty much the facts versus opinions. If you want some of that, go to our website look for the weekend update. From Charles and myself for the whole team here at Oak Harvest, we hope you keep tuning in to our YouTube series. This one’s keeping you connected to your money, which comes out on Friday. The other investment one we have is News or Noise, which is a Wednesday release. From the whole team here, we hope you have a blessed February.
CFA®, CLU®, ChFC®
Chief Investment Officer, Financial Advisor
Chris is a seasoned investment professional with over 25 years of experience working with some of the most successful money management firms in the world. Chris has made it a point in his career to adapt as the market landscape changes, seeking to utilize the appropriate investment strategy for a given market environment. His transition from managing billions of dollars at the institutional level to helping individuals and families retire is guided by a desire to see first-hand the impact he is making in the lives of clients at Oak Harvest.