1) In the US, the soft landing versus recession debate continues, even as traders expect the terminal fed-funds interest rate to now peak at between 5% and 5.25%.
Goldman slashes US recession risk odds to 25 per cent, according to the AFR.
"We have cut our subjective probability that the US economy will enter a recession in the next 12 months from 35 per cent to 25 per cent, less than half the 65 per cent consensus estimate in the latest Wall Street Journal survey," Goldman's chief economist Jan Hatzius said.
Labour markets remain tight both in the US and here in Australia, almost the exact opposite conditions that traditionally signal an imminent recession. Combined with a slowdown in the rate of inflation, and the goldilocks soft landing scenario is well and truly in play.
Last week, US federal reserve Chairman Jerome Powell said he continues to think there's a path to getting inflation back down to 2% without a really significant economic decline or a significant increase in unemployment.
No wonder equity markets have had a strong start to 2023. The S&P/ASX 200 Index (ASX: XJO) is within a whisker of its all time highs, and up over 7% so far this year. The S&P/ASX All Technology Index (ASX: XTX) is an even more impressive 12.7%, with Block Inc (ASX: SQ2) shares up over 30% since the start of the year.
2) Doomsayers are never far from the headlines, especially in the US, as epitomised by this headline on MarketWatch…
"Look for stocks to lose 30% from here, says strategist David Rosenberg. And don't even think about turning bullish until 2024."
The former chief North American economist at Merrill Lynch said the US recession is just starting, and that investors can expect to endure more uncertainty leading up to the time when the Federal Reserve first pauses its current run of interest rate hikes and then begins to cut.
Excerpt:
Fortunately for investors, the Fed's pause and perhaps even cuts will come in 2023, Rosenberg predicts. Unfortunately, he added, the S&P 500 Index (SP: .INX) could drop 30% from its current level before that happens. Said Rosenberg: "You're left with the S&P 500 bottoming out somewhere close to 2,900."
At that point, Rosenberg added, stocks will look attractive again. But that's a story for 2024.
I'd be taking the other side of that "30% drop" bet, not because I'm incredibly bullish, but because such falls are very rare, and more so coming after a year where the S&P 500 index sank almost 20%, with the tech heavy Nasdaq Composite Index (NASDAQ: .IXIC) tumbling 33%.
3) Here in Australia, according to the AFR, UBS equity strategist Richard Schellbach says share prices have rallied too hard, with the investment bank believing they're factoring in too much optimism.
"The reality is over the next six months we have the laggard impact of higher interest rates coming through, and fixed-rate mortgages getting priced higher and consumers starting to run down their savings significantly.
"Some of these profit results, which we think will be okay, are likely to see a muted share price reaction because prices have run up so hard, they've already factored in that earnings story."
It's not "the market is going to fall 30% rhetoric," but suggesting investors don't go all-on just because the ASX 200 has had a strong start to 2023. There's a long way to go… and that's just to get us to the end of February and this earnings season.
4) Speaking of earnings season, growth is going to be hard to come by for a lot of companies as year on year comparisons are still impacted by abnormal COVID trading conditions in 2022.
Yesterday, Nick Scali Limited (ASX: NCK) reported a stunning 70% increase in first half profit on the back of record deliveries due to the large outstanding order bank at 30 June 2022.
Yet despite January being the strongest trading month for the furniture retailer, and being better than the company's expectations, Nick Scali brand written wales orders were down 12% from January 2022.
The Nick Scali share price sank 13% yesterday, and is down another 3.9% today to $10.38. Despite being one of the highest quality retailers on the ASX, Nick Scali shares are now down 35% from its November 2021 high.
Stock picking can be tough.
Based on consensus estimates, Nick Scali shares trade on a forecast FY24 earnings multiple of 11.5 times and fully franked dividend yield of 6.5%. The shares look good value on those numbers, but the coming "mortgage cliff" is the great unknown, with Nick Scali themselves saying "at this point it is difficult to provide further guidance" for the rest of this financial year.
5) As widely expected, the Reserve Bank of Australia have hiked interest rates by another 25 basis points, bringing the cash rate to 3.35%.
It's more good news for savers, with at-call savings accounts paying around 4% interest rates widely available. If you are not making your cash work hard for you, it's time to shop around for a better interest rate on your savings.
While higher interest rates naturally slows the economy – and is soon to inflict some serious pain on mortgage-holders – the good news is that with each RBA monthly meeting, we're closer to peak interest rates for this cycle.
No longer will interest rates and inflation be the driver of share prices – 2023 will be all about earnings.
Leading fund manager QVG Capital says it believes the job to be done in 2023 "is to own the relatively small number of companies run by motivated insiders that produce growing free cash flows."
The fund's top holdings include Hansen Technologies Limited (ASX: HSN), Johns Lyng Group Ltd (ASX: JLG) and Lovisa Holdings Ltd (ASX: LOV).
