Stocks ended last Friday in the green after the Fed’s favorite gauge of inflation eased as expected. However, a second indicator showed a less than expected increase in personal spending which is typically viewed as being negative for the economy, especially in the month before Christmas.
The other side. Last week as we were all rushing to finalize plans for the holiday weekend and prepping for wacky weather, it happened. Yes, indeed the Winter Solstice came last Wednesday… if you are in the northern hemisphere, of course. You probably didn’t know if you don’t watch your local weather news. That’s ok if you don’t because you have me to remind you. Starting last Thursday, the light in your life began to overtake the dark. That is a fancy way of saying that our daylight hours are getting longer. Ok, I personally, am a fan of more light, especially as we enter the cold winter months that lie ahead. There are, of course, many metaphorical opportunities for me to exploit here, given the tough market year that is about to end. Actually, the year has not quite ended just yet which means that these next few days will be filled with a lot of looking back and getting ready for what is next.
The abbreviated market week ahead is typically marked by lower volume sessions as many traders take time off. Since The Great Recession, those final weeks of the year were likely marked with celebration in all but 4 of them if you include 2008. That was a rough year for stocks as the S&P500 ended the year down by -38.5%. A few years later in 2011, we broke even for the year, which was hardly worth a celebration, but it could certainly have been worse. After 3 years of greater than average results, 2015 was a challenging one. The energy sector was faltering after the price of crude tumbled throughout the latter half of 2014 and continued its decline through 2015. Energy was an important driver for the recovery from The Great Recession providing many jobs to the limping labor market at the time. Those challenges were compounded by a slowdown in corporate earnings growth. Some would classify that as an earnings recession. We would experience another one of those in 2018 which also witnessed another loss for the S&P500. Wait, can there be a correlation between earnings growth and stock market returns? Let’s check out the chart and see if we can find a pattern. The orange bars are quarterly EPS (earnings per share) for the entire S&P500. I circled in red the loss years for the S&P500 Index. The drawn in red arrows show a sideways or negative trend while the green arrows highlight positive trends. I don’t know about you, but I can certainly spot a pattern here. In each of the four years where the S&P posted losses, EPS growth was either flat or falling. Check out the chart and keep reading.
So, there is a discernable correlation between EPS growth and stock market performance. I am hoping that you are not surprised by this. That brings us back to the Solstice and the few days left before we call it a year. After logging a +26.89% gain in 2021, this year looks like it will end up a disappointment with a decline of -19.33% through last Thursday. We do still have 4 more trading days to rectify this, but that is a lot of ground to cover. What about this current slowdown in earnings and the potential for recession next year. Well, if we stick to our chart for some clues, you may notice the brown colored bars to the right of the chart. Those represent the expected EPS for the quarter. The last 2 represent Q1 and Q2 of 2023. If those analyst expectations are met, the first quarter would have minimal growth, while the second would post a nice increase. If markets do, indeed, reflect earnings growth, 2023 may possibly prove to be a better one than the one we are about to send into the history books. Of course, it is way too early to tell. We still have high inflation to contend with along with a still-angry Fed. Now, I know this sounds crazy, but earnings season starts up once again in just 2 weeks! I am sure that we will get plenty of guidance for the year ahead. That may be the moment if we truly know whether the darker days are behind us.
FRIDAY’S MARKETS
Stocks traded higher last Friday after mixed economic numbers that showed moderating inflation (positive) along with slowing consumption (negative). The S&P500 gained +0.59%, the Dow Jones Industrial Average climbed by +0.53%, the Nasdaq Composite Index traded higher by +0.21%, and the Russell 2000 Index advanced by +0.39%. Bonds pulled back and 10-year Treasury Note yields climbed by +6 basis points to 3.74%. Cryptos added +0.18% and Bitcoin inched higher by +0.11%.
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