Published January 20, 2023
Fidelity Investments presents information in the context of the longer-term business cycle. The current look at the business cycle shows all global economies in or approaching recession. Recessionary action is defined on the upper right of the chart. China is shown possibly coming OUT of recession. That is pushing prices of global commodities and causing market outperformance from commodity-driven countries and sectors.
The disruptive impact of the pandemic has muddled the cycle a bit as has the war in Ukraine. The war had already pushed up prices of several commodities earlier than this business cycle look would have suggested. So we might see a more muted 2023 run in commodities given how strong 2022 was in that area.
Further, we have the impact of the U.S. dollar, which we wrote about recently. The dollar has been falling in recent months after a big surge throughout much of 2021-2022. The falling dollar further supports stock market values outside the U.S.
Combine the falling U.S. dollar with the business cycle observations above and you get the sort of performance gaps we have seen in recent weeks. Below is a chart of Australia (commodity-driven) and South Korea (economically sensitive to China) compared to the Nasdaq 100 (QQQ) which is driven by the market’s previous leaders (Apple, Microsoft, Google, et al). It’s a big gap!
Corporate earnings reports ramped up this week with markets still caught in a web of uncertainty surrounding the pace of interest rate hikes and a possible looming recession. Coming back from Monday’s MLK holiday, stocks dipped -0.2%. Earnings announcements from big investment houses Goldman Sachs and Morgan Stanley noted a very weak environment for deal-making which hurt their earnings. Both companies have joined other banks in announcing sharp bonus reductions and cutting payrolls. Wednesday brought a -1.6% loss for stocks as the December retail report showed falling sales during the holiday-rich month thus feeding recessionary concerns. Also, some Fed officials noted a need to go above 5% interest rates to truly break inflation. Thursday brought an -0.8% dip with reports from Alcoa and Procter & Gamble both highlighting weakness in sales. The P&G news slammed the often defensive consumer staples sector, a group that has outperformed in recent months. Friday brought a positive reversal from a surprising quarter as beaten-down tech stocks supplied leadership. A strong earnings report from Netflix combined with substantial layoffs at Google parent, Alphabet, to encourage tech/consumer bulls. Stocks rose +2% on the day with the Nasdaq 100 (QQQ) posting its best showing in three months.
Stock indexes failed this week in their first test to overcome stout technical resistance. The S&P 500 (SPY) got turned away at the 4000 level this week closing with a -0.66% weekly dip. The Nasdaq 100 (QQQ) rode a strong Friday session to a slim +0.61% weekly gain. Smallcap stocks (IWM) tumbled -1.07% this week.
Warm wishes and until next week.