In the U.S. the trading week is shortened by the Martin Luther King Jr. Day holiday on Monday; however, investors still have a number of key indicators to watch with the main focus on U.S. earnings and retail sales, as investors are looking for signs of growth and profitability in the face of rising costs and economic uncertainty.
The economic calendar also includes important data on producer price inflation (PPI), existing home sales, and initial jobless claims, Fed’s Beige Book, as well as regional reports on manufacturing output. These indicators will give investors a sense of how the broader economy is faring after last year’s aggressive interest rate hikes.
At present the swaps market is pricing in a 90% chance of a 25-basis-point hike at the next meeting, followed by another one in March, with rates reaching a peak at 4.9%, and then 60% odds that the Fed will deliver at least one cut before the end of 2023. However, we still think that a rate cut will not arrive before 2024.
Reporting season is upon us and investors will also be closely monitoring the earnings reports from S&P 500 companies. According to Refinitiv data, year-over-year earnings for these companies are expected to have dropped 2.2% for the quarter. This would be the first decline since the third quarter of 2020, when companies were still grappling with the impact of the coronavirus pandemic.
As we move forward in the earnings season, a plethora of financial services companies will continue to unveil their quarterly results. The recent releases from the big U.S. banks mark the conclusion of earnings announcements from the major players in the industry. As such, attention now shifts to regional banks and other financial services entities and the remaining companies listed on the S&P 500, as investors eagerly await their earnings reports to gain further insight into the state of the economy.
On Wednesday data showed that producer prices in the U.S. dropped 0.5% from a month earlier in December 2022, following a revised 0.2% gain in November and compared with market expectations of a 0.1% fall. It was the largest monthly decline since April 2020, adding to signs that inflationary pressures are cooling.
Retail sales were also released on Wednesday showing a decline of 1.1% month-over-month in December 2022, following an upwardly revised 1% drop in November and worse than forecasts of a 0.8% fall, which is a sign of a weaker-than-expected holiday shopping and a slowdown in consumer spending amid high inflation and interest rates.
S&P 500 Yearly Chart. Source: Tradingview
Stock market valuations appear excessive and market sentiment has become far too complacent again as evidenced by the strong rally from the beginning of the year. Technical indicators are close to overbought levels suggesting that the market is vulnerable to a pull back in the short-term.
The S&P 500 index, which fell more than 27% from peak to through last year, its biggest annual decline since 2008, is up almost 5.0% so far in 2023. We expect the market to be volatile throughout this year, with the stock rally driven by hopes that inflation may be on a sustained downward trend, bolstering expectations that the Federal Reserve would ease the pace of its interest rate hikes, approaching an inflection point. Overall, the current rally appears unsustainable for too long as the U.S. equity market is likely to enter a lower valuation regime.
The CBOE Volatility Index (VIX) has reached 18% last Friday suggesting that the market is extremely vulnerable to a correction in the short-term. The VIX is very close to key support levels from where many turning points in the market had occurred in the past.
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Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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