The Monday Report – 16 January 2023

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By Rudi Filapek-Vandyck

There's a saying: those who do not learn from history are likely to repeat the same mistakes.

If there's one industry that constantly refers to history, it is the global finance sector. Comparisons with the 1930s, the 1970s, the 1980s, the early nineties, the GFC and other pivotal points are made on a daily basis.

At times all one needs is the ability to overlay one chart with another, or so it seems.

Similar reflections are fueling investor optimism early into the fresh calendar year because history shows the year after a Grand Disappointment (a la 2022) most likely offers an attractive return. The fact US inflation is now widely believed to be deflating further adds to the positive thesis.
 
And so it is that US equities continue trending upwards while the US dollar has a gradual slide south written in the stars. China has awoken too now the world can start looking forward to a re-opening economy, freed-up from the shackles of a too stringent anti-covid policy approach.

Fears for much higher and longer Fed tightening have been relegated to 2022. Value seekers are looking towards energy, commodities and emerging markets, Europe possibly, while continuing the debate about US equities beyond the current positive momentum.

Australian equities are poised to continue the positive lead from Wall Street on Friday, while US investors enjoy a long weekend celebrating the author of the I had a dream-speech.

There's very little discussion left about the earnings recession that awaits US markets; the numbers today speak for themselves. Yet another quarterly reporting season is upon us and market consensus has put earnings growth, on average, on a negative -2.2%. Take out the energy sector and that number drops to -6.6%, according to Refinitiv.

Earnings recessions are not as rare as they once upon a time used to be. The previous one occurred in 2020, less than three years ago.

How much of this retreat has already been priced in? When exactly can investors start looking forward, beyond this earnings recession? Those are the two questions that matter most, unless those numbers are still too high and need further re-adjustment. The coming weeks might provide some timely insights.

There's still a debate going on whether the US economy might see negative economic growth this year. JP Morgan Chase, for once, announced on Friday the bank had put aside additional reserves for an expected 'mild' US recession later this year.

Post today's MLK Jr celebrations, companies including Goldman Sachs, Netflix, Procter & Gamble, United Airlines, Morgan Stanley and Alcoa are scheduled to release their financials this week.

There's a gaggle of Fed heads speaking too.

On Friday in the US, all of equities, oil, gold and most other commodities enjoyed a positive session, with the yield on the 10-year rising to 3.5% (up 6bp). The S&P500 gained 2.7% over the week.

A provisional January University of Michigan consumer sentiment survey recorded a rise of 4.9pts to 64.6; the highest level in nine months (more optimism).

In Australia today we have the Melbourne Institute inflation survey and in Japan PPI will be released.

More details about the calendar for the week ahead can be obtained here: https://www.fnarena.com/index.php/financial-news/calendar/

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