The Week Ahead and Model Musings
January 16, 2024
With US equity markets closed yesterday to observe the Martin Luther King Jr. holiday, we have another shortened trading week ahead. US equity futures are pointing to a lower open as the yield on the 10-year Treasury moves back above 4%. Yields are moving higher on fresh comments from both Fed and European Central Bank officials that push back on market expectations for rate cuts to begin later this quarter.
European Central Bank interest rates are likely to come down from record highs this year but there is a cloud of uncertainty over the timing of the moves. Similar to expectations for the US Federal Reserve, the market sees six rate cuts by the ECB this year with the first move coming in March or April, a timeline some policymakers have openly rejected as too aggressive.
Raphael Bostic, the Atlanta Fed president and Federal Open Market Committee voting member this year expects “to see much slower progression of inflation moving forward” and noted there are “some risks that inflation may stall out altogether.” Bostic, according to reports, believes rates may need to stay on hold until at least summer to prevent prices from rising again.
Supporting that stance, more companies are starting to warn about the impact of shipping disruptions in the Red Sea, something we are likely to hear much more about as we move further into the December quarter earnings season. Joining Tesla (TSLA), Tractor Supply (TSCO) shared deliveries to the company have been delayed anywhere from two to 20-plus days as major container ship operators re-route vessels away from the Suez Canal.
The escalating conflict in the Middle East, specifically in and around Red Sea shipping lanes, is leading oil prices to move higher, another headwind for continued inflation progress. And geopolitical tensions are climbing following comments from Yemen's Houthi movement that it will expand its targets in the Red Sea region to include US ships, and that it would keep up attacks after U.S.-led strikes in Yemen. This is likely to extend Red Sea disruptions, supply chain issues, and elevated shipping rates, issues that are likely to be cited by companies as the December quarter earnings season heats up.
This week we also swap last week’s AI-filled CES 2024 for the 2024 World Economic Forum in Davos. And the risk of a government shutdown looks like it may be off the board as US lawmakers agreed on yet another temporary spending bill that will keep the government funded till early March.
Economic Data
Staring down the second half of January, we will get the finishing pieces of data that will factor into 4Q 2023 GDP expectations. The Atlanta Fed’s GDPNow model currently puts GDP for the final quarter of last year at 2.2%. The December Retail Sales report this week will cap the holiday shopping season and investors will string together various reports to determine not only how much consumers spent, but which companies prospered, and which ones were left behind.
Following quarterly earnings last week from KB Home (KBH)that showed a 21% sequential drop in its housing backlog, eyes will be on the December Housing Starts data and what it says about single-family activity.
As that data is reported and investors update GDP expectations, they will also be watching for any shift in tone from Fed officials making the rounds this week. Despite recent comments from those officials and data that argues against any near-term rate-cutting action, the market narrative continues to call for rate cuts starting with the Fed’s March policy meeting.
Earnings
Big bank earnings continue this week with Morgan Stanley (MS), Goldman Sach (GS), PNC (PNC), and Comerica (CMA) reporting. Building on other big bank earnings last week, these results will round out thoughts on loan activity, consumer credit, and investment banking deals, but also allow for eagle-eyed investors to recognize share gains across those activities. Tying to big bank comments on consumer spending, quarterly results from Discover Financial Services (DFS) will offer another perspective and set the stage for upcoming results from Mastercard (MA), Visa (V), and American Express (AXP).
Questions over smartphone demand, a rebound in the PC market, and the explosion in AI chip demand set the stage for quarterly results later this week from Taiwan Semiconductor (TSM). That report and forward guidance have the potential to reshape expectations for Apple (AAPL), Qualcomm (QCOM), Nvidia, Nvidia (NVDA), AMD (AMD), and others. Investors in semi-cap equipment companies, such as Applied Materials (AMAT), Lam Research (LRCX), and ASML (ASML) will be interested in Taiwan Semi’s comments on its chip capacity and capital spending forecast for the coming year.
For more, be sure to read our Daily Markets column published each day by Nasdaq.
Model Musings
Artificial Intelligence - “Companies big and small showed off new AI-powered products and their AI-inspired visions for the future at the world’s biggest tech convention this week in Las Vegas. There were pillows that can reduce snoring, mirrors that can detect your mood and innovations from pet-like companions to cars that integrate with viral chatbot ChatGPT. But this year’s announcements hit differently from previous buzzy developments, such as the Metaverse or adding voice assistant technology to appliances. That’s because nearly every company appeared to be on the same page in 2024.” Read more here…
Market Hedge - “The Conference Board released a survey of more than 1,200 executives on Wednesday and it listed a recession as their top concern. It showed that 37% of US chief executives are prepared for a recession in the year ahead. The economy is certainly contending with some headwinds: Americans are racking up debt as they continue to draw down their pandemic savings while banks are toughening their lending standards.” Read more here…
Safety & Security - “Much of Europe’s industrial capacity to make weapons has eroded over years of budget cuts, and turning that around is a challenge at a time when most governments face budget constraints amid slow economic growth and aging populations, as well as large political opposition to cutting back on welfare spending to fund defense. Europe has “systematically demilitarized itself because it didn’t need to spend the money,” thanks to the lack of an apparent threat and U.S. military dominance around the globe, said Anthony King, a professor of war studies at the University of Warwick. “They have basically gone to sleep.” Read more here…
The strategies behind our Thematic Models:
Aging of the Population - Capturing the demographic wave of the aging population and the changing demands it brings with it.
Artificial Intelligence – Software, chips, and related companies that facilitate the collection and analysis of large data sets and autonomous generation of solutions given non-machine language prompts.
CHIPs Act – Capturing the reshoring of the US semiconductor industry and the $52.7 billion poised to be spent on semiconductor manufacturing.
Cloud Computing – Companies that provide hardware and services that enhance the cloud computing experience for users, such as co-location, security, and edge computing.
Consumer Inflation Fighters - Companies poised to benefit as consumers stretch the disposable spending dollars they do have.
Core Holdings – Companies that reflect economic activity and are large enough to not get pushed around by day-to-day market trends. Low-beta, large-cap names able to better withstand economic turmoil.
Digital Infrastructure & Connectivity -The buildout and upgrading of our Networks, Data Storage Facilities, and Equipment.
Data Privacy & Digital Identity - Companies providing the tools and services that verify authorized users and safeguard personal data privacy.
EV Transition - Capturing the transition to EVs and related infrastructure from combustion engine vehicles.
Guilty Pleasure – Companies that produce/provide food and drink products that consumers tend to enjoy regardless of the economic environment and potential long-term health hazards associated with excessive consumption.
Homebuilding & Materials – Ranging from homebuilders to key building product companies that serve the housing market, this model looks to capture the rising demand for housing, one that should benefit as the Fed returns monetary policy to more normalized levels.
Luxury Buying Boom - Tapping into aspirational buying and affluent buyers amid rising global wealth.Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
Nuclear Energy & Uranium – Companies that either build and maintain nuclear power plants or are involved in the production of uranium.
Precision Ag & Agri Science – Companies that look to address shrinking arable land by helping maximize crop yields utilizing technology, science, or both.
Rebuilding America - Turning the focused spending on rebuilding US infrastructure into revenue and profits.
Safety & Security – Targeted exposure to companies that provide goods and services primarily to the Defense and security sectors of the economy.
Space Economy – Companies that focus on the launch and operation of satellite networks.
The strategies behind our Dividend Income Models:
Monthly Dividend Model – Pretty much what the name says – this model invests in companies that pay monthly dividends to shareholders.
ETF Dividend Model – High-yielding ETFs that provide a range of exposures from domestic equities, international equities, emerging market equities, MLPS, and REITs.
ETF Enhanced Dividend Model – A group of high-yielding ETFs that utilize options to enhance yield through collecting option income.