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Nasdaq up ~0.6%, S&P 500 up ~0.3%, DJI down ~0.3%
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Real estate leads S&P 500 sector gainers; energy weakest
group
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Dollar edges up; bitcoin ~flat; gold gains, crude up ~2%
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U.S. 10-Year Treasury yield edges up to ~3.94%
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DID COVID MAKE TRADERS CRANKIER? NY FED FINDS DECLINE IN
NONCOGNITIVE SKILLS (1332 EST/1832 GMT)
The spread of Covid-19 and related business shutdowns
created widespread economic disruption. According to a recent
New York Federal Reserve paper it also dented the skills of
professional traders in ways that could be economically harmful.
Researchers at the regional bank studied the noncognitive
skills of a group of finance professionals and found “a
significant decrease in agreeableness and locus of control and a
moderate decrease in grit” at the onset of covid.
The researchers studied the same group of people, comprised
of professional traders and portfolio managers, in 2019, and
then again in April 2020 with the same experiment. In 2020 they
also asked participants about the impact of covid on their
lives.
“Our findings provide evidence against the stability of
noncognitive skills, particularly among professional traders,”
the researchers concluded.
“Given the existing empirical relationship between
noncognitive skills and individuals’ financial decision making,
the changes in noncognitive skills documented in this paper may
have non-trivial consequences for economic outcomes, especially
if they are permanent,” they added.
Meanwhile, while some of the traders’ noncognitive abilities
declined, other skills such as trust, conscientiousness, and
self-monitoring were unchanged. The NY Fed also examined a group
of undergraduate students and found that their noncognitive
skills remained constant except for an increase in
conscientiousness.
(Karen Brettell)
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PLAY WITH SPECULATION, YOU MAY BURN YOUR FINGERS -RBA (1210 EST/1710 GMT) The stock market rally so far this year seems based largely on speculation rather than fundamentals. At least that's how Richard Bernstein Advisors (RBA) sees it.
According to RBA, economic fundamentals do not point to the Fed soon changing course and easing credit conditions or lowering interest rates. Therefore, RBA doesn't want to load up on those assets most likely to fizzle out. RBA is noting a number of factors which they say do not support speculation at this time. First off, with the Fed and other central banks making a concerted effort to withdraw liquidity from the global economy, it is a bad time to speculate based on these efforts. Another factor is that with inflation well above the Fed’s 2% target and the labor markets historically tight, the Fed "no longer has the flexibility to save the day for financial market participants." Therefore, "The Fed Put is dead." RBA says it has historically been more profitable to speculate when corporate cash flows were improving than when they were deteriorating, and cash flows are increasingly under pressure. Additionally, RBA says that big year-to-date gains in bitcoin and meme stocks, suggest "speculation rather than true economic or profit fundamentals have been driving performance." Finally, RBA says that equity market volatility generally signals a change in leadership. However, investors rarely embrace this recurring “changing of the guard,” and instead cling to the old leadership hoping for a return to form. RBA believes this year's strength is a perfect example of investors in denial over a changing economy. RBA says that they remain defensively positioned away from more speculative sectors like technology, communication services, and consumer discretionary, while at the same time they view opportunities outside the U.S. to be quite broad because most countries are far less concentrated in these three sectors. Longer-term, RBA continues "to see a shift from 'cute wiener dogs in the metaverse' to real productive assets," and remains more positive on cyclical sectors such as energy, materials, and industrials than they normally might be at this point in the cycle.
(Terence Gabriel)
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GOOD NEWS: THE ECONOMY IS SOFTENING - BAD NEWS: THE ECONOMY IS SOFTENING (1110 EST/1610 GMT) A quartet of economic data cooperated on Tuesday by marching in unison and all of them were headed downhill. Ordinarily that would cramp investors' moods. But at a time of increasingly restrictive Fed policy, economic softening suggests that policy is having its intended effect.
The outlook of the American consumer has unexpectedly soured this month, per the good folks at The Conference Board (CB). Its Consumer Confidence Index shed 3.1 points to land at 102.9. "The decrease reflected large drops in confidence for households aged 35 to 54 and for households earning $35,000 or more," said Ataman Ozyildirim, Senior Director, Economics at The Conference Board. "Consumers may be showing early signs of pulling back spending in the face of high prices and rising interest rates," Ozyildirim adds, a notion supported by the rising saving rate seen in Friday's PCE report. The gap between near-term expectations and the current conditions component grew wider, a state of affairs which tends to be a harbinger of recession, as seen in the graphic below. Home price growth cooled significantly as we headed into winter. The S&P Case-Shiller 20-city composite dropped 0.5% on a monthly basis, pulling the year-on-year print down 2.2 percentage points to 4.6%. This marked the annual measure's eight consecutive decline. In the world of economic indicators, December is ancient history. But it does mark the slowest annual pace of home price growth since July 2020, which was just prior to its being launched into the stratosphere amid a demand explosion as potential buyers fled the cities for the more socially distant suburbs. That price boom, combined with steadily climbing mortgage rates, have since tossed cold water on demand and affordability. "The prospect of stable, or higher, interest rates means that mortgage financing remains a headwind for home prices, while economic weakness, including the possibility of a recession, may also constrain potential buyers," says Craig Lazzara, managing director at S&P DJI. "Given these prospects for a challenging macroeconomic environment, home prices may well continue to weaken." Next, the Commerce Department took its initial "advance" stab at January goods trade balance and wholesale inventories . The difference in the value of merchandise imported to the United States versus that which was imported abroad last month yawned 2% wider last month to %94.50 billion. The widening was held in check by a 4.2% increase in exports, the biggest monthly increase in ten months. But a broad-based 3.4% increase in exports - the larger piece of the trade pie - was enough to send the deficit higher. "The small increase in the January goods trade deficit pales in comparison to the huge swings over the past year, supporting our view that net trade will make a far smaller contribution to headline GDP growth during 2023," says Kieran Clancy, senior U.S. economist at Pantheon Macroeconomics.
Speaking of goods, the value of the stuff stored in wholesaler warehouses decreased by 0.4% in January, notching its first monthly decline since July 2020. This bodes ill for first quarter GDP.
In the Commerce Department's most recent reading on economic growth for the last three months of 2022, private inventories contributed 0.7% to the topline number after having been a net GDP drag for two quarters straight. "Inventory accumulation and the trade deficit are on course to be negative for real GDP growth in the first quarter after being big supports in the fourth quarter of last year," says Bill Adams, chief economist at Comerica Bank. Staying aboard the goods train, midwest factory activity contraction unexpectedly steepened in the second month of the year. The Chicago purchasing managers' index (PMI) landed at 43.1, weaker the January's 44.3 reading and moving in the opposite direction of the 45 consensus. This marks the index's sixth straight month below 50, the PMI dividing line between expansion and contraction, puts it just a hair above 43, which is generally considered recessionary. On Wednesday, the Institute for Supply Management's (ISM) broader, nationwide PMI reading is seen contracting at a shallower rate, rising from 47.4 to 48.
(Stephen Culp)
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U.S. STOCKS MIXED AHEAD OF MONTH-END (1000 EST/1500 GMT) U.S. stocks are mixed on Tuesday as investors rebalanced for month-end after a volatile month that saw risk appetite dented by rising rates. Investors have repriced for the likelihood that the Federal Reserve will hike rates higher and hold them there for longer as inflation remains stubbornly elevated and other economic releases show a still strong economy. Benchmark 10-year Treasury yields rose as high as 3.983% on Tuesday, the highest since Nov. 10. The Nasdaq Composite is the strongest of Wall Street’s main indexes, gaining 0.3%, while the S&P 500 is roughly flat and the Dow Jones Industrial Average is dipping 0.3%. Here’s is Tuesday’s opening snapshot:
(Karen Brettell)
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S&P 500 TECH: AFTER TUMULTUOUS 2022, TRADERS TAKE NOTE OF A TURN (0900 EST/1400 GMT) Going into the last trading day of the month, the S&P 500 tech sector is on track to be the only S&P 500 sector to post a rise in February. SPLRCT is clinging to a 0.5% gain for the month vs an SPX drop of 2.3%. For the year, tech is up about 10% vs a 3.7% rise for the SPX. Last year, tech lost about 29% vs a 19% decline for the S&P 500. This year's tech strength coming as chips and FANGs make a big comeback. The Philadelphia semiconductor index is up about 17% already this year, while the NYSE FANG+TM index is up 23% so far in 2023. NYFANG counts four SPLRCT names among its 10 members. Meanwhile, of note, the SPLRCT/SPX ratio topped in December 2021 exactly at its year-2000 peak:
With its Y2K top, tech then suffered a multi-year collapse and relative strength decline into its 2002 low. More recently, in early January, the SPLRCT/SPX ratio fell to its lowest level since June 2020. However, since then, tech is clearly back in favor. The ratio has reclaimed its 50 and 200-day moving averages, and overwhelmed the resistance line from its high. The ratio has since dipped back, but is so far using the broken resistance line as support. Bulls will now want to see the ratio quickly thrust higher again. Clearing the early-August high would break the pattern of lower peaks and troughs from late 2021.
(Terence Gabriel)
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(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)
