This Week in Review:
How Will Inflation Impact Earnings?
The U.S. economy is growing, and it’s slowing. Yesterday’s initial read on fourth-quarter GDP had something for everyone: It showed a U.S. economy that remains in growth mode—up 2.9% on an annualized basis—but is up just 1.0% over the past 12 months (the slowest pace in two years). In a period when recession fears are running wild, the news was better than expected, and stock markets initially took it as a bullish sign.
This doesn’t indicate a recession later this year is off the table by any means, but it does reflect resilient consumerism in the face of higher prices and rising interest rates. And speaking of resilience, with just three trading days left in the month, stocks are on course for the best January in four years.
While inflation’s influence on Federal Reserve monetary policy remains an overarching theme on Wall Street, the current earnings-reporting season provides a concrete glimpse into how corporate profits have fared as interest rates have climbed—and, just as importantly, how business leaders are managing higher borrowing costs and consumers’ and businesses’ abilities to spend.
Here’s what we’re watching this week and why it matters:
- Tech titan Microsoft posted its slowest quarterly sales growth since 2016 on the heels of announcing that it would cut 10,000 jobs. The move to shed payroll reflects a wider trend in the PC, software and cloud computing ecosystem as industry entrants respond to slower global growth by tightening up expenses that ran amok during the COVID-19 recovery period.
- Other notable earnings reports this week revealed the following:
- Railroad operators CSX, Norfolk Southern and Union Pacific all noted that their biggest customers, manufacturers, are experiencing reduced demand, while the transportation sector is facing higher labor and fuel costs, which may become obstacles to generating profits this year.
- IT giant IBM posted flat fourth-quarter sales, largely because the U.S. dollar’s strength trimmed foreign revenues. It also joined the tech-layoff club with plans to cut 3,900 employees, about 1.5% of its workforce.
- Aircraft manufacturer Boeing reported its fourth consecutive annual loss. The company grappled with higher production costs and parts shortages as the air-travel industry continues to recover from the pandemic slump.
- The Conference Board’s Leading Economic Indicators index (LEI)—a compilation of 10 economic reads including building permits, manufacturers’ new orders, unemployment claims and consumer expectations—fell 1.0% in December and is down 7.4% since this time last year. The index is now at its lowest point since 2008’s financial crisis. The LEI has only dropped to these levels six times since the 1960s, and each of those times preceded a recession. But, so far, not this time…
Chart of the Week: When Losers Become Winners
By Brett Miller, CFA, CFP®, Portfolio Manager
2021 was a high-flying year in the markets. Unprofitable companies soared to valuations no one thought possible. Bitcoin topped $60K. Investors’ appetite for risk seemed insatiable—returns for higher-beta, or higher-risk, investments left their safer, low-volatility counterparts in the dust. But what goes up must come down.
In 2022, issues like rising interest rates and recession fears drove investors away from risk and into the safest parts of the stock market. Last year, the S&P 500 High Beta Index (which tracks the 100 most volatile stocks in the S&P 500) declined nearly twice as much as the MSCI USA Minimum Volatility Index (the least volatile stocks in the U.S. markets).
If you were looking at the headlines, you’d think that 2023 was set to be a repeat of 2022. The Fed’s outlook is still hawkish, with more rate hikes on the cards. And the risk of a recession remains heightened, with many companies warning of near-term revenue declines as earnings season kicks off.
Given those factors, a reasonable investor might assume that high-risk securities will resume their sell-off. But something strange is happening, as our chart of the week explains.
Since the start of this year, buyers are scooping up last year’s losers at a blistering pace. What was last is now first. The High Beta Index is up 13% in the first three weeks of the year, while the Minimum Volatility Index is up a measly 1%.
We’d like to see a few more weeks of data before declaring that the risk-on trend we’re seeing now will set the course for all of 2023. But we think the significant jump in risky assets is worth paying attention to. Is the market signaling the Fed will cut interest rates by year-end? Will the U.S. avoid the recession everyone feared in 2022? Only time will tell, but investors’ renewed appetite for risk is a reminder that the market often moves well ahead of the economy—and the headlines. If the bad news we’re reading now has already been priced in, we could be positioned for a bullish 2023.
Divorce Planning: Financial First Steps
By Diana Linn, CFP®, CDFA®, Wealth Adviser
The majority of couples who file for divorce do so between January and March. And while it may not be the cheeriest way to ring in the new year, it’s important to think about the financial aspects of the transition as soon as possible—we can help.
After you make the decision to divorce, some of your first calls should be to trusted professionals, including a lawyer and financial adviser. Here are a few things your wealth management team at Polaris can help you do right away:
Get organized. Gather all the documents your lawyer or certified divorce financial analyst (CDFA®) might need, including a list of all your assets and debts, Social Security statements, paystubs, and all employee benefit information (W-2s, 1099s, and anticipated raises or bonuses expected for you or your spouse). You will also need a copy of all financial statements, the past three years of income tax returns, up-to-date credit card statements and insurance information.
Calculate your (and your spouse’s) expenses. We can help you create a comprehensive breakdown of debt and spending, both individual and joint, on a monthly and annual basis. You and your partner must complete this process separately, as your respective lawyers will need it as part of the financial affidavit process.
Plan for property. If you are a homeowner, have your properties appraised. Make sure you have the original date of purchase, the purchase price, a tally of home improvements, and the original mortgage amount as well as the remaining balance. All this information will be crucial in deciding if one partner will maintain ownership of properties or if you will sell them and divide the proceeds.
Consider dependent accounts. Gather all information on dependents’ savings accounts, 529 plans and UTMA accounts (Uniform Transfers to Minors Act). Research the guidelines for determining child support in your state—the noncustodial parent is usually ordered to pay child support, and each state has its own rules and tables.
Know your account numbers. Make sure you have access to account logins and passwords. Know when bills are due and keep tabs on everything from credit cards and cryptocurrency wallets to airline rewards points.
Divorce can be a stressful and lengthy process. Make sure you have the right people in your corner: Friends, family and professionals. Contact your Polaris wealth management team if you have any questions. We’re here to help.
Earnings season rolls on next week, including market-moving fourth-quarter results from tech titans Apple, Alphabet (Google) and Amazon. We’ll also get helpful reads on home prices, consumer confidence, manufacturing, job openings and quits, construction spending, vehicle sales, the service sector and the job market, including the January unemployment rate.
If you’d like to learn more about our tactical or fundamental strategies, please contact our team at 800-268-9046 or email@example.com.
Please note: This update was prepared on Friday, January 27, 2022, prior to the market’s close.
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