03.01.2023 Welcome To 2023

Welcome to 2023…  traders and investors are heavily debating the Chinese reopening.

Bulls argue there is massive pent-up demand as Chinese consumers have been restrained for almost three years. There are also reports circulating that the Chinese consumer is sitting on nearly double the amount of money they had prior to Covid and their interest rates are the lowest they have been.

China

Meaning the underlying landscape might be right for explosive growth inside China. Bears on the other hand argue that the Chinese reopening could create increasing inflationary problems around the world as the Chinese consumer comes out of hibernation.

Bears also argue that various new strains of Covid could now start circulating and making their way out of China causing even greater concern and complications.

In fact, some argue that China’s reopening will cause a major uptick in global demand for various commodities and other goods but at the same time we could see some major bottlenecks again in the supply chain as Covid spreads more easily and rapidly among the Chinese workers.

In other words, many Chinese factories might be very shorthanded for several months as the virus works its way through the Chinese people. The other global wild-card is obviously Russia and how Putin opts to play his hand regarding Ukraine and the West.

Russia

Currently, I am seeing no significant signs of an end to the war with heavy fighting continuing in the eastern and southern part of Ukraine. At the same time, Russian leaders are still making demands for the “demilitarization and denazification” of Ukraine, which experts say really means that they want a regime change in Ukraine. Russian President Vladimir Putin has recently claimed he is open to peace talks but experts believe this is just a tactic to mislead the West and possibly win Russia some concessions on sanctions.

There are also some worries that Belarus may be leaning toward joining Russia in its fight. However, the Belarusian military isn’t very large or sophisticated so this may not be as big a threat as it might appear on the surface. The bigger worry is still how far a desperate Putin might go to save face in a war that has not gone as planned and looks increasingly less likely to result in any material gains for Russia.

USA

In the USA, I want to argue that we have seen peak hawkishness from the Fed, but perhaps not peak inflation, especially if the Chinese reopening causes the demand and manufacturing complications many are suggesting.

Let’s. keep in mind, stock indexes are coming off a rough 2022 that left both the S&P 500 and Nasdaq with double-digit losses. In fact, the energy sector was the only S&P 500 sector to end 2022 higher, with a gain of +59.0%.

Bulls believe the bleeding will end in 2023, though, pointing to expectations for the Federal Reserve to end its tightening campaign by the second half of the year, as well as more optimistic outlooks for US and global economic growth.

Many bulls believe that negative sentiment has actually gone too far and that corporate earnings in the first half of 2023 won’t be nearly as bad as investors are perhaps braced for thanks to companies’ aggressive cost cutting, and still strong consumer spending.

On the other hand, bears continue to argue that earnings expectations remain overly optimistic in the face of a hawkish Fed that has vowed to keep rates higher for longer in order to tame inflation that remains stubbornly elevated.

The latest PCE Price Index shows year-over-year inflation was up +5.5% in November while “core” PCE, one of the Fed’s favorite gauges, was up +4.7%, both far above the Fed’s target rate of +2%. While those rates did mark meaningful declines from the previous month, bears believe the key areas currently driving inflation – housing and service sector wages – will be much tougher to rein in and consequently work to buoy inflation.

Several key pieces of economic data are due out this week that could have a big influence on investor expectations for Fed policy in 2023. One of the top highlights will be the “minutes” from the Fed’s December meeting, due out on Wednesday.

Investors will be looking for signs of growing divisions between Fed officials over the pace and scale of their tightening campaign. Some Fed officials have expressed concerns about raising rates too high, too fast, and not giving the work done so far enough time to filter through the system.

Over-tightening runs the risk of deepening any economic slowdown that results from the Fed’s actions. At the same time, other Fed officials are focused on the risks of not tightening enough, which could extend the high inflation/high interest rate era even longer. Investors will get updates on inflation trends via ISM Manufacturing on Wednesday and ISM Services on Friday.

Meanwhile, fresh insights into the labor market will come from the Job Openings and Labor Turnover Survey on Wednesday and the December Employment Report on Friday.

In Addition

Data today includes PMI Manufacturing and Construction Spending. On the earnings front, Thursday brings this week’s key releases with Conagra, Constellation Brands, and Walgreens scheduled to report.

Personally, I’ve lightened up on some of my short hedges as we start the new year. I still think there is more downside ahead, but perhaps we could see some money coming off the sidelines and being put to work early in 2023.

Keep in mind, since 1928, the S&P 500 has experienced 21 bear markets (not including the current downturn). The average length of a bear market is about 388 days. The S&P 500 began its descent in early January, but it didn’t officially enter a bear market until June 13, 2022. For reference, we are currently just over 200 days into this bear market. In case you are wondering, the longest bear market in history occurred in the wake of the dot-com bubble bursting in the early 2000s, lasting a total of 929 days. The 208-09 bear market lasted 517 days. The 1987 bear market lasted 101 days. The 1980-82 bear market lasted 622 days. The 73-74 bear market lasted 630 days.

Welcome To 2023

Wishing you a great week!