Weekly Reflection for February 3, 2023

The Week - An Update in Charts

If we overlayed last week's chart of the three major stock indices onto this week's, they would look very similar - flat into Wednesday before a big jump up. However, the Dow has lagged the other two and the Nasdaq has powered farthest ahead. Although the Nasdaq is at the same level as mid-September, with a big valley of losses in the middle, the strong start to the year has a lot of technology bulls newly emboldened.

On Thursday, Meta, the parent of Facebook, Instagram and WhatsApp, reported a flurry of news, some good and some bad. Investors saw the good and pushed the stock price up 23%, the biggest jump in nearly 10 years. Meta's market capitalization (the share price times the number of shares outstanding) rose $100 billion to over $500 billion. For comparison, GE's total market cap is $90 billion, Citigroup and PayPal are $99 billion, BP is $107 billion.

The consumer finances are no longer as healthy as they were during the worst of the pandemic. Savings rates are way down. Historically Americans save 8.8% of income; now savings are 3.4%.

Retail sales have declined in three of the last four months. Home sales are at the lowest level since 2014, services spending is flat and car sales are in the tank. Employment has been remarkably resilient but for those looking for a job, it is getting increasingly difficult.

Unable to save and unable to spend at the same level, the share of U.S. adults across all income levels who say that their monthly expenses are more than their income is growing.

While inflation might be slowing its growth, prices are much higher than two years ago. There is scant chance that say a gallon of milk, today at $4.43, will ever go back to 2020 prices of $3.32. Thus it is hard to predict that the balance between income and expenses can improve in the near future, particularly for those in lower income brackets.

The SEC compensates whistleblowers for information that leads to a successful takedown of the wrongdoer(s). Already this year four people in a joint case have been rewarded $28 million for coming forward with complaints. In 2022 one person received $37 million for exposing bribery misdeeds by a European healthcare company. Names of involved parties are usually kept confidential.

It's good to be an NBA player where salaries are the highest in the world of professional athletes. Of course, only .03% of high school players ever make it to the NBA. Cricket players, or "cricketers" do not have much better odds. Some 54 million Indians play the game; only 273 are in the professional IPL (Indian Premier League) of 405 players total. Pay averages $5.3 million a year. Safe to say that in this rarified air of professional sports, inflation is not a common topic of discussion.

Disinflation + Rate Hikes = ?

Federal Reserve Chairman Jerome Powell used the word "disinflation" some twelve times on Wednesday in his press conference following a three-daymeeting of the Federal Open Market Committee (FOMC) which sets interest rates. The FOMC voted to raise rates by 0.25%, setting the main policy rate to a range of 4.50% - 4.75%. While throwing that word around, disinflation, Powell said that more interest rate hikes, and no 2023 reversal in rates, would be coming. And the stock market cheered.

On Wednesday, the Dow Jones had lost as much as 1.5% ahead of Powell's conference but came back over the last hour of trading to close with a small gain. The S&P 500 erased a 1% loss to gain over 1% and the Nasdaq rose 2% to end the trading day.

Powell's overall message was that inflation is coming down, thus "disinflation". If inflation is prices going up and deflation is prices going down, disinflation means prices rise at a slower pace.

There is progress there on several metrics. Wage growth is slowing to just 5.1% annually. Manufacturing is not growing and neither is retail demand. Core PCE was 4.4% annually as of December. The effects of the war in Ukraine, which will contribute to inflation as long as it continues, is not as much a concern although it contributes "to elevated global uncertainty." Fed policies are working and the economy is slowing.

Chair Powell's repeated assurance is that restrictive rate policies will stay in place until inflation falls back to 2%. The Fed believes that number is not exactly around the corner but the markets seem to think it could be. Or markets believe that the Fed will blink and lower rates before 2% is achieved. And it is this showdown that is moving markets, far more than even the current earnings announcement season, which still has a month to go before the majority of companies report.

An Unserious Investing Trend Returns

Bed, Bath & Beyond, the home-goods retailer and enthusiastic mailer of 20% off coupons, received a flurry of debt default notices late last month. Reuters and others report a bankruptcy filing is in the forecast. Bed Bath announced 87 more store closures, on top of the 150 closures last year. It is a sad day for discount shoppers, and the U.S. Postal Service who no doubt made plenty on those mailers. However, investors do not seem much deterred. The stock has risen nearly 40% year-to-date.

This is just a little bit of the proof that the meme stock trade has not taken its last breath - yet. “Meme” stocks, for a refresher, are holdings of companies that are hugely down on luck. Their core businesses are weak, like video game reseller GameStop, movie chain AMC, aging photography business Kodak and rental-car Hertz. They have sky-high debt and declining revenue. No one buying these equities seriously expects a business turnaround and probably do not even glance at the financials. They are buying for a fun gambling experience and because they relish being part of a self-declared "army" of mom-and-pop investors. When money was cheap to borrow, the gamblers came out in force. But now that money is much more expensive...the gamblers are still around.

Some of this is due to the previously mentioned optimism that the Federal Reserve may stop raising interest rates soon. Also the Reddit forum for day-traders, WallStreetBets, is firing up its readers again. Although the meme trade did not end well in 2021 with many, or most, investors losing all of their principle, surely they hope it will end differently this time. You can follow along by watching the exchange-traded fund ticker MEME. Started in late 2021, the ETF lost over 60% in 2022 but has risen over 40% this year.