Weekly Notes (Jan. 30)

By HMA Team on January 30, 2023

• Not So Fast

After a strong start to the year, stocks pulled back last week on signs of slowing economic activity, including December retail sales, which fell -1.1% from the previous month. Sales were also revised lower in November and have fallen three of the past four months.[i] The S&P 500 fell -0.7% week over week, despite a 1.9% rebound on Friday.[ii]

• Wishful Brink-ing

Investors remain at odds with the Fed, pricing in policy near the brink of moving from tighter to looser. As measured by 30-day Fed futures pricing, there is a roughly 80% chance that the Fed’s target rate will be at or below its current level (4.25% – 4.50%) by December.[iii] However, official Fed projections from the December meeting forecast interest rates continuing to rise to around 5.1% this year, with no cuts.[iv] Many investment professionals believe this divergence could cause further market volatility this year.[v]

• EM Ahead Again

Emerging markets (EM) have continued to rally this year, encouraged by China lifting its COVID-19 restrictions, a weaker U.S. dollar and slowing interest rate increases (i.e., a weaker dollar attracts more money toward EM investments, and lower interest rates make it easier for emerging markets to pay their dollar-denominated debts).[vi] The MSCI Emerging Market Index has gained 8.4% this year, outperforming U.S. stocks by 4%. Since their most recent trough in October 2022, EM stocks have gained 23%.[vii]

• Real-ing from Inflation

While nominal average hourly earnings rose last year (4.6% year over year[viii]), real average hourly earnings (earnings adjusted for inflation) for all employees decreased 1.7%. The change in real average hourly earnings combined with a decrease of 1.4% in the average workweek resulted in a 3.1% decrease in real average weekly earnings over this period.[ix]

• Missing a High Hurdle

Of the S&P 500 companies that have reported 4Q22 earnings result so far, their (blended) net profit margin is 11.4%. This is below the year-ago net profit margin for all S&P companies of 12.4% but equal to the five-year average. A couple main factors are contributing to lower margins: higher costs (i.e., inflation) and a difficult year-over-year comparison. In 4Q2021, the S&P 500 recorded the fourth-highest net profit margin (12.4%) since FactSet began tracking this metric in 2008.[x]

• Educational Refrainment

Despite the well documented benefits of a college degree, postsecondary enrollment has been declining since 2010. Increases in private nonprofit and public four-year college enrollmentbetween 2010 and 2019 were more than offset by decreases in public two-year and private for-profit four-year colleges, resulting in a total average decline of 0.8% per year. Following the onset of COVID-19, the enrollment decline accelerated — falling 3.3% between 2019 and 2020 and an additional 2.7% between 2020 and 2021. Recent data suggests that enrollments may be reverting to the pre-pandemic trend — still falling, but at a slower rate.[xi]

• Emergen-Z Spending

The U.S.’s 110 million Gen Zs and millennials have become a major part of the economy — they spent $2.7 trillion in 2021, around 30% of the total spending — but their financial habits and attitudes may provide cause for concern. They have accumulated less wealth than Gen X or Boomers at the same age. Perhaps that’s why about 25% of surveyed Gen Zs doubt they will be able to afford retirement and less than 50% believe they will ever own a home. But that hasn’t necessarily stopped them from indulging: The average Gen Z shopper makes their first luxury purchase when they are 15, compared with 19 for people now in their thirties.[xii]

• Crypto Spring or Fling?

The price of Bitcoin has rallied 45% since its most recent trough in November 2022 despite a growing list of bankruptcies plaguing the cryptocurrency space.[xiii] This has caused some to call an end to the “crypto winter,” although others disagree. For perspective, the price of Bitcoin is still more than 50% below its March 2022 peak but roughly 170% higher than it was just three years ago.[xiv]

• Broken Tokens

According to the director of research at Proof.xyz, of 300 non-fungible token (NFT) projects that had at least one sale at 1 Ethereum (ETH) — currently trading at about $1,625[xv] — or higher in 2021, 65% of them haven’t had a single sale above 0.1 ETH in the past three months.[xvi]

• Bucket List

LeBron James will likely soon best Kareem Abdul-Jabbar’s all-time NBA scoring mark of 38,387 career points. At his current 29.3 point-per-game season average, he is nine games away from doing so. Here are a few records he most likely won’t break[xvii]:

• Abdul-Jabbar’s NBA all-time mark for 15,837 made field goals; James is currently 1,882 behind
• Career rebounding records set by Wilt Chamberlain (23,924) and Bill Russell (21,620)
• Wilt Chamberlain’s 100-point game

Disclosure:

Hummer Mower Associates is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. All information referenced herein is from sources believed to be reliable. Hummer Mower Associates and Hightower Advisors, LLC have not independently verified the accuracy or completeness of the information contained in this document. Hummer Mower Associates and Hightower Advisors, LLC or any of its affiliates make no representations or warranties, express or implied, as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Hummer Mower Associates and Hightower Advisors, LLC or any of its affiliates assume no liability for any action made or taken in reliance on or relating in any way to the information. This document and the materials contained herein were created for informational purposes only; the opinions expressed are solely those of the author(s), and do not represent those of Hightower Advisors, LLC or any of its affiliates. Hummer Mower Associates and Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax or legal advice. Clients are urged to consult their tax and/or legal advisor for related questions.

References

[i] U.S. Census Bureau, Advance Monthly Sales for Retail and Food Services December 2022, January 18, 2022, https://www.census.gov/retail/sales.html. Accessed January 24, 2023.

[ii] FactSet, total returns, as of January 20, 2023.

[iii] CME Group, FedWatch Tool, https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html. Accessed January 23, 2023.

[iv] FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target level for the federal funds rate, December 15, 2023, https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm. Accessed January 23, 2023.

[v] Grossman, Matt. “Market Recovery Hinges on Quick Inflation Drop.” The Wall Street Journal, January 23, 2023.

[vi] Esteva, Marcello. “Three Ways a Strong Dollar Impacts Emerging Markets.” World Bank Blog, August 4, 2022, https://blogs.worldbank.org/voices/three-ways-strong-dollar-impacts-emerging-markets. Accessed January 23, 2023.

[vii] FactSet, emerging markets stocks as measured by the total return of the MSCI Emerging Market Index and U.S. stocks as measured by the S&P 500 as of January 20, 2023.

[viii] U.S. Bureau of Labor Statistics, “Employment Situation Summary,” January 6, 2023, https://www.bls.gov/news.release/empsit.nr0.htm. Accessed January 23, 2023.

[ix] Bureau of Labor Statistics, U.S. Department of Labor, The Economics Daily, Real average hourly earnings down 1.7 percent from December 2021 to December 2022 at https://www.bls.gov/opub/ted/2023/real-average-hourly-earnings-down-1-7-percent-from-december-2021-to-december-2022.htm. Accessed January 24, 2023.  

[x] Butters, John. “S&P 500 Reporting a Lower Net Profit Margin for 6^th Straight Quarter,” FactSet, January 23, 2023, https://insight.factset.com/sp-500-reporting-a-lower-net-profit-margin-for-6th-straight-quarter. Accessed January 23, 2023. 

[xi] Barrow, Lisa; Lee, Victoria; Perry, Ryan. “What Is Happening to Higher-Ed Enrollment?” Federal Reserve Bank of Chicago, https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/higher-ed-enroll. Accessed January 23, 2023.

[xii] The Economist, “Buying Time,” January 21, 2023.

[xiii] Tellez, Anthony. “Crypto Lender Genesis Files For Bankruptcy: Here Are The Companies That Have Collapsed So Far.” Forbes, January 21, 2023.

[xiv] Yahoo Finance, as of January 23, 2023, https://finance.yahoo.com/quote/BTC-USD/history?period1=1516665600&period2=1674432000&interval=1d&filter=history&frequency=1d&includeAdjustedClose=true. Accessed January 23, 2023.

[xv] Coinbase, as of January 23, 2023, https://www.coinbase.com/price/ethereum. Accessed January 23, 2023.

[xvi] Twitter, January 20, 2023, https://twitter.com/punk9059/status/1616605714511974400?s=20&t=Ji-77cmTnRDErboptQLTFQ. Accessed January 23, 2023.

[xvii] Fuller, Ethan. What Are the Most Unbreakable Individual Records in Sports History? Basketballnews.com, January 22, 2023, https://www.basketballnews.com/stories/what-are-the-most-unbreakable-individual-records-in-sports-history. Accessed January 24, 2023.