The WELL-TH Notes

By Alexandria | Hightower on March 1, 2023

Weekly data-driven insights on the markets and economy

First Week of March 2023

• Soured Fete

Stocks turned in their worst weekly performance of 2023 last week as inflation-related data continued to crash the soft-landing, hopes-for-a-dovish-Fed market party that fueled market returns earlier this year. U.S. stocks lost -2.7%. Year-to-date (YTD) they have now gained 3.4%. U.S. bonds lost -1.0% as yields rose sharply, reducing their YTD return to -0.1%.[i]

• Caught in the Heat

Recent inflation data puts the Fed in a tough position, likely making it more difficult to please markets with rate decisions this spring. The Fed’s preferred inflation measure — the personal-consumption expenditures price index — increased 5.4% in January from a year earlier, up from 5.3% in December. The core index (excluding food and energy) rose 4.7%, up from 4.6% in December.[ii] Consensus estimates were for the core index to rise only 4.3% and extend its three-month cooling stretch.[iii]

• Rating Longer

After last week’s inflation data, investors are pricing in a higher-for-longer fed funds rate. The probability of a 0.50% increase (rather than a smaller 0.25% hike) at the next meeting in March, as implied by fed funds futures pricing, has risen to 26%. One month ago, it was 0.0%. And the implied probability that the rate ends the year somewhere above 5.25% (as opposed to somewhere lower) now stands at roughly 63%, up from 0.2% one month prior.[iv]

• More Money, More Problems

One factor that likely continues to support consumer spending — and thus, inflation — is the amount of liquidity that remains in the system from COVID-19 government stimulus. U.S. money supply (M2), which includes cash on hand, checking and savings accounts, and other short-term savings vehicles, is about 40% higher than it was three years ago prior to the pandemic. However, it is starting to come down, falling 1.8% year-over-year in 2022. On average, it has grown about 6.5% annually over the last 40 years.[v]

• Overpromising, Underdelivering

Based on more than 80% of S&P 500 companies that had reported 4Q2022 earnings as of last week, the earnings surprise percentage (1.3%) — the percentage by which companies outperform earnings estimates — was below the one-year (+3.7%), five-year (+8.6%) and 10-year average (+6.4%). It also marks the second-lowest earnings surprise percentage since 4Q2008, trailing only 1Q2020 (+1.1%). Notable contributors to this trend include negative earnings-per-share surprises that have been reported by behemoths Alphabet ($1.05 vs. $1.18), Meta ($1.76 vs. $2.26) and Amazon.com ($0.03 vs. $0.17).[vi]

• On the Double

The U.S. government’s net interest expenses — the amount it pays in interest payments on its debt offset by interest it receives — is expected to nearly double over the next decade, rising from $739 billion in 2024 to $1.4 trillion in 2033, and from 2.7% of GDP in 2024 to 3.6% in 2033, which would be 1.6% higher than the 50-year average. Increases in the average interest rate that the U.S. pays on its debt is expected to account for about three-quarters of this increase.[vii]

• Taking Charge

The market share of plug-in vehicles in the U.S. — hybrids or those powered fully by battery or fuel cells — increased to 4.3% and 6.7% in 2021 and 2022, respectively, from less than 2.1% in 2020. When combined with non-plug-in hybrid vehicles, the jump was from more than 5% market share in 2020 to more than 12% in 2022. Going forward, plug-in vehicle options are expected to increase rapidly; some expect the number of plug-in vehicles made by North American plants (currently 20 models) to increase 10 times by 2030.[viii]

• A No-Other-Day, Another Dollar

The 40% of U.S. companies that were surveyed last year and indicated they had either started using a four-day workweek or were in the process of implementing one[ix] will be pleased with the results of a recent pilot program in the U.K. Of the 61 companies who participated in a four-day workweek pilot program from June to December 2022, 56 are continuing with the four-day week (92%). 71% of employees involved in the trial reported reduced levels of burnout, while the companies’ revenue, when compared to a similar period from previous years, increased by 35% on average.[x]

• Fresh Starts

The U.S. start-up rate, the proportion of start-ups relative to the total number of firms, has been declining over the past four decades, falling from 13.7% in 1978 to 8.4% in 2020. Many researchers believe this has an outsize negative impact on the economy; one study found that if the start-up rate had remained constant between 1987 and 2012, aggregate employment would have been, for example, 11.4% higher in 2008. However, this trend may be shifting.[xi] Another measure of new businesses starts, applications to the IRS for Employer Identification Numbers (EINs), reached an all-time high in July 2020 and remains roughly 80% higher than the average since 2006.[xii]

• Hoop Scoop

The Los Angeles Clippers and Sacramento Kings played the second-highest scoring game in NBA history on Saturday, a 176-175 double-overtime win for the Kings. The game finished 19 points short of the 186-184 triple-overtime win for the Detroit Pistons over the Denver Nuggets in 1983.[xiii] In other basketball news, Damian Lillard of the Portland Trail Blazers also made NBA history by becoming the first to score more than 70 points in less than 40 minutes and the only player over the age of 30 to hit the 70-point mark.[xiv]

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[i] FactSet total returns as of February 24, 2023. U.S. stocks as measured by the S&P 500 Index and U.S. bonds as measured by the Bloomberg U.S. Aggregate Bond Index.

[ii] U.S. Bureau of Economic Analysis, Personal Income and Outlays, January 2023, https://www.bea.gov/news/2023/personal-income-and-outlays-january-2023. Accessed February 28, 2023.

[iii] Wallace, Alicia, “Inflation surprisingly rose in January, according to the Fed’s preferred gauge,” CNN Business, February 24, 2023, https://www.cnn.com/2023/02/24/economy/pce-inflation-january/index.html. Accessed February 28, 2023.

[iv] CME Group, https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html. Accessed February 26, 2023. CME FedWatch Tool estimates probabilities of changes to the fed funds rate, as implied by 30-day fed funds futures pricing data.

[v] As of January 1, 2023 and based on weekly levels dating back to November 1981. Board of Governors of the Federal Reserve System (US), M2 [M2SL], retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/M2SL. Accessed February 27, 2023.

[vi] Butters, John, “S&P 500 Companies Are Reporting Smaller EPS Surprises for the 7th Straight Quarter in Q4,” FactSet, February 21, 2023, https://insight.factset.com/sp-500-companies-are-reporting-smaller-eps-surprises-for-7th-straight-quarter-in-q4. Accessed February 28, 2023.

[vii] Congressional Budget Office, “The Budget and Economic Outlook: 2023 to 2033,” February 2023, https://www.cbo.gov/publication/58946#_idTextAnchor015. Accessed February 28, 2023.

[viii] Federal Reserve Bank of Chicago, “Automotive Outlook 2023: Seven Issues to Watch,” Chicago Fed Insights, February 17, 2023, https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/2023-ais-keynote. Accessed February 28, 2023.

[ix] PR Newswire, “EY Future Workplace Index reveals surprisingly rosy attitudes on commercial real estate investment despite economic tightening,” November 16, 2022, https://www.prnewswire.com/news-releases/ey-future-workplace-index-reveals-surprisingly-rosy-attitudes-on-commercial-real-estate-investment-despite-economic-tightening-301679287.html. Accessed February 28, 2023.

[x] Autonomy Research LTD, “The Results Are In: The UK’s Four-Day Week Pilot,” February 2023, https://www.4dayweek.com/uk-pilot-results. Accessed February 28, 2023.

[xi] Yeh, Chen. (February 2023) “Why Are Startups Important for the Economy? ” Federal Reserve Bank of Richmond Economic Brief, No. 23-06.

[xii] Based on weekly data from January 7, 2006, through February 18, 2023. U.S. Census Bureau, Business Applications: Total for All NAICS in the United States [BABATOTALSAUS], retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/BABATOTALSAUS. Accessed February 28, 2023.

[xiii] Baer, Jack, “Clippers and Kings Combine for 2nd-Highest Scoring Game in NBA History in Russell Westbrook’s Debut,” Yahoo! Sports, February 25, 2023.

[xiv] Howorth, Alasdair, “Damian Lillard becomes first player in NBA history to score over 70 points in under 40 minutes in Portland Trail Blazers’ win over Houston Rockets,” CNN, February 27, 2023, https://www.cnn.com/2023/02/27/sport/damian-lillard-71-points-record-nba-spt-intl/index. Accessed February 28, 2023.