The week ahead 01/23/2023
So… is a recession going to happen?
We’re not sure we’ve ever seen folks as conflicted on their investing convictions as they are right now. Investors are simply confused.
If you were able to read yesterday’s Week in Review — you saw that we presented both bearish and bullish cases. Give it a read!
You shouldn’t hold your breath for an official announcement of a recession. Since 1979, the official ‘declarer’ of recessions — the National Bureau of Economic Research — hasn’t declared major economic contractions until an average of 234 days after they had started.
Additionally — if a recession has officially begun, that doesn’t mean that all stocks go down. See above for the historical returns of Consumer Staples and Healthcare. Historically, a portfolio full of those two categories would be plenty fine during the average recession.
Takeaway — the results of a pivot toward loose monetary policy by the Fed are much more important if their existing tight monetary policy actually caused a recession.
We love the graphic above from T. Rowe Price. We’ve shared a few times now that when the Fed pivots, market lows typically arrive in the subsequent months. However, we love how they broke it down between the years that truly led to a recession.
Now that the ‘soft landing’ gang is getting some serious optimism — there could be a argument made that the market lows came in October 2022.
Is that our base case?
No. We think there are too many headwinds at play right now — U.S. GDP looking rough; earnings skepticism; war in Ukraine; inflation still being high; “bad news still being good news” — you get the idea.
However, we’re well aware that we could be wrong. As you can see above, JPMorgan’s market-implied odds of a recession have dropped across the board.
The market lows could be in — but either way we’ve been sticking with the plan outlined in the Portfolio Updates we shared with you all yesterday.
Key Earnings Announcements:
Microsoft invests $10B in OpenAI and Tesla has started a price war.
Monday (1/23): Baker Hughes, Crane Holdings, First National Bank, Logitech, Synchrony Financial
Tuesday (1/24): 3M, F5, General Electric, Halliburton, Intuitive Surgical, Johnson & Johnson, Lockheed Martin, Microsoft, Texas Instruments, Verizon
Wednesday (1/25): Abbott Labs, ASML, AT&T, Boeing, IBM, Progressive, ServiceNow, Tesla
Thursday (1/26): American Airlines, Blackstone, Comcast, Intel, JetBlue, Mastercard, Nokia, Northrop Grumman, Southwest, Tractor Supply, Valero, Visa,
Friday (1/27): American Express, Booz Allen Hamilton, Chevron, Colgate-Palmolive, HCA Healthcare
What We’re Watching:
Let’s think about what Microsoft has been up to for a moment.
First, there were rumors that they may want to take a stake in OpenAI’s ChatGPT technology. Initial releases indicated that it would allow Microsoft’s Bing to rise back to relevance. If you haven’t checked out Chat GPT — you really should.
Last week, Microsoft cut 10,000 jobs — nearly 5% of total workforce.
Then this morning, Microsoft announces that it will officially be pouring $10 BILLION into OpenAI — the company behind ChatGPT, in which Microsoft previously invested during 2019 and 2021 funding rounds.
It’s wild to see how quickly AI has come to the forefront of every company’s C-suite discussion. For example, check out Google CEO Sundar Pichai’s memo to the 12,000 employees that were recently laid off. He mentions AI three times in the short note.
If you want to learn more about AI, listen to this 35-minute YouTube video about the future of AGI. Sam Altman, the CEO of OpenAI, answers some very interesting questions about the future of work, universal basic income as a result of AI, and much more. Don’t get left behind.
We want to be very clear about something — Tesla gets way too much hate. I’m actively building a position in both my taxable brokerage account (as shown in the Portfolio Tracker) and retirement accounts.
There’s been criticism of the price cuts implemented across Tesla models.
See below from the WSJ:
For now, traditional auto makers, which don’t have the EV scale of Tesla, have thin profit margins or lose money on their plug-in models, Bank of America analyst John Murphy said. “Tesla’s price reductions likely will pressure car companies to further reduce their EV costs and ultimately could lead to a price war.”
“These price cuts are likely to make business even more difficult, just as they are attempting to ramp production of EV offerings,” he said.
And of course, Tesla will make less profit on each sale — which is spooking investors. However, they already have great margins:
Tesla earned a whopping $15,653 in gross profit per vehicle in third quarter of 2022.
2X more than Volkswagen.
4X more than Toyota.
5X more than Ford.
It may have been expedited in its arrival, but the plan was always for Tesla to achieve economies of scale and undercut competitors’ prices as they arrived closer to mass production.
The people who went ‘all in’ on Tesla years ago likely will never want to do that again with all of the new players and variables in the EV market today — but we still believe this company will have a lot of wins for years to come.
Investor Events / Global Affairs:
Europe’s energy situation and companies who have been exercising layoffs.
Europe Energy Update
For much of 2H’22, we discussed the potential disastrous energy situation in Europe.
Now as we are over half way through the winter months — it’s likely safe to say that Europe has dodged an energy apocalypse for this winter. Over the past few weeks, European natural gas suppliers have been increasing their reserves at a time when they’re usually being drawn down.
As of a couple of weeks ago, short-term utilities prices have fallen from record highs — as high as 18x what they were pre-Russia vs. Ukraine — to around 4x higher than they used to be.
Problems Still Need Fixin’
The buoying of European energy concerns has been a huge relief for investors around the world. However, this isn’t to say that they’re “out of the woods” just yet. Colder periods like the one Northern Europe is currently experiencing will test the newly-laid foundations of European energy.
For example, nuclear energy was in the process of being phased out in Europe prior to the Russia situation.
There’s also still the possibility of Russia ‘turning off the faucet’ on Europe — something that would hurt all parties involved (so it seems unlikely), but is still possible.
Layoffs — Bad News is Still “Good News”
There’s a lot to digest above, showing both the percentage growth in employees at Big Tech companies and the actual numbers from Google, Amazon, Microsoft, and Meta below.
Below are some other notable layoffs of late:
Spotify (SPOT): ~600 jobs cut, or ~6% of total workforce (link)
Wayfair (W): ~1,750 jobs cut, or ~10% of total workforce (link)
Capital One (COF): ~1,100 jobs cuts, or ~2% of total workforce (link)
Unity Software (U): ~284 jobs cut, or ~3% of total workforce (link)
Lending Club (LC): ~225 jobs cut, or ~14% of total workforce (link)
Major Economic Events:
GDP contraction, The Conference Board releases its economic indicators, and we want to see good numbers out of both the Manufacturing & Services PMI readings.
Monday (1/23): Conference Board’s Leading Economic Indicators (LEI)
Tuesday (1/24): S&P Manufacturing PMI, S&P Services PMI
Wednesday (1/25): N/A
Thursday (1/26): Chicago Fed National Activity Index, Core Capital Goods Orders, Durable Goods Orders, GDP (First Estimate), New Home Sales (SAAR),
Friday (1/27): Consumer Spending, Disposable Incomes, PCE Price Index, Pending Home Sales, UMich Consumer Sentiment
What We’re Watching:
The Conference Board’s LEI
This reliable indicator is flashing that a recession is coming. Due to its release just this morning, we will break down the implications and considerations of this in the upcoming Week in Review. Consider subscribing below if you’d like to receive that report.
S&P Manufacturing and Services PMI
In December 2022, the U.S. Manufacturing PMI sat at just above 46 — pointing to the biggest contraction in factory activity since May of 2020, amid weak client demand. Output fell at the quickest pace in over two-and-a-half years and new orders fell at one of the fastest rates ever.
In December 2022, the U.S. Services PMI came in at 44.7 — pointing to the biggest contraction in the services sector in four months and the second-fastest contraction since May of 2020. Lower business activity was commonly attributed to a further reduction in new orders, as client demand weakened due to the impact of higher interest rates and inflation on customer spending.
Bad readings from either (or both) of these metrics this week is not good for the economic outlook.
Which stocks moved the most last week.
Our friends at LevelFields scrub through thousands of data points each week to determine how events impact stock prices.
Re: WeWork (WE) — some humor for you on this beautiful Monday:
If you’re starting your investing journey or want to change to a cleaner, social-focused investing platform, consider visiting Public.com.
Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.