Well, we started 2023 off well, and we now have odds that the year will end well. I always like to give you stats that give a very strong correlation to good news, so here is my chart of the week.
When the first 5 days of the year are up, since 1950 83% of the time the market finished in the black, with an average return of 14%. This year also coincides with the 3rd year of a Presidential cycle, which is somewhere around 90% positive. We (finally) have gridlock in DC, meaning from a policy standpoint, we have removed any drastic fiscal impact for taxes and govt spending.
With a lot of our headwinds priced into the market, my belief is to re-visit new lows, it will take something other than what is in the headlines. I really don’t see the Fed staying higher for longer, if as I anticipate, inflation drops at a rapid rate later in the year.
This chart gives me a few reasons to be excited. For the first time since we have started this bear run, we are having a Golden Cross that is following a higher low. Each of the past 4 times previously we had a positive Golden Cross, it was followed by a death cross, that created a new low. We made a low on October 14, made a Golden Cross on October 20, made the death cross on December 8 & made our most recent new low on December 29. This might all sound like gobbledygook, the takeaway for you is that when a new bear market appears, it needs to stop making new lows first. You need to “Break the Trend”.
A lot of talking heads will state that we need to break through the declining high, and that is correct, however you need to stop the bleeding before the recovery starts, and that is what I’m seeing when I’m looking at these charts.
Here comes earnings season. This week kicks off the major banks and I’m thinking there may be some guidance concerns on some of those earnings. You may recall from last weeks note I outlined our base case scenario of inflation coming down quicker than most anticipate, which will ultimately have the 10 year treasury trading at or below 3% by year end. If this happens to pan out the banks won’t likely be a happy place for investment dollars. In its simplest form, banks make more money when rates are higher. This earnings period may be too soon for the results to show on this headwind, however some of the astute CEO’s might start to point it out in their earnings calls. If they do you could see a quick retreat in some of those names.
Real Estate on the other hand may be the beneficiary of this playing out and for once I’m not talking about residential real estate. (Single family homes have had a great run, with increased valuations nationwide, a surge in rental receipts in 2022). Moving forward they will need to deal with the increases of inflation including city, county & state taxes, insurance etc. Think on the other hand of the large Real Estate Investment Trusts, that manage facilities such as medical, office space, self-storage etc. Most of these are what is known as Triple Net, simply meaning all of the associated costs get transferred straight to the lease holder. They just benefit fully from increased rent. Now hear comes the best part. If my base case is correct and rates do come down later in the year, these REIT’s will have a much lower borrowing cost, allowing more to flow through to shareholders.
I won’t bore you by going through all the sectors, just to say at some point through the year I expect a shift in leadership, and from now till then my job is to ensure we are in a position to capitalize on it.
I’m updating the Buy/Sell with some lower short-term forecasts, so bear with me while I work on that. As always should you have any questions, please feel free to give me a call.
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