After a rocky 2022, mega-cap stocks deserve a relief rally in 2023, don’t they? Let’s be careful in our assumptions because the market doesn’t owe investors anything and data shows that January’s rally was driven by hype and hope rather than fundamental strength in the economy.
While all eyes are on the Federal Reserve’s next move, an underreported earnings recession is already in progress. After a precipitous decline in 4Q2022 corporate earnings, back-to-back declines are inevitable at this point. It’s not a question of “if” but “how bad.”
We’ll probably see at least three consecutive quarters of decline. Analysts are currently modeling S&P 500 earnings falling 3.7% year-over-year in the first quarter of 2023 and then 3.1% in the second quarter.
The problem isn’t with corporate revenues but with margins. It’s awfully hard for businesses to turn a profit when input costs are high, so inflation is breaking the backs of businesses and consumers alike and putting pressure on the economy at both ends.
Making matters worse is the exceptionally strong employment report for January. That month’s 3.4% unemployment rate is the lowest since 1969, and it’s now a foregone conclusion that the Federal Reserve will have a perfect excuse to tighten the screws by keeping interest rates higher for longer.
If you’re counting on the principle of “so goes January, so goes the year” to hold up in 2023, you’re better off doing your due diligence and reconsidering your investment strategy. January’s discrepancy between corporate earnings and stock prices may be indicative of short-term trader sentiment, but it doesn’t reflect the stark reality of America’s economy.
Another indication of cracks in the economy’s foundation – and one that the Fed will continue to monitor carefully – is housing affordability in the U.S. Inflation may have cooled off somewhat in a handful of pricing segments, but this doesn’t mean the American dream of homeownership is more attainable now.
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If anything, it’s less attainable than ever. There’s been a post-pandemic domino effect of events sparked by global supply chain disruptions and unprecedented government money printing that has conspired to make housing input costs (lumber, copper, steel, etc.) prohibitively expensive in some areas.
It’s stunning to consider this, but U.S. housing affordability declined for three consecutive quarters in 2022 and is currently at its lowest level since the National Association of Home Builders started tracking it on a consistent basis in 2012.
Here’s what the NAHB/Wells Fargo Housing Opportunity Index shows. Shockingly, only 38.1% of new and existing homes sold between the beginning of October and the end of December were affordable to families earning the U.S. median income of $90,000.
This is what has happened to the American dream. Most average-earning U.S. families can’t afford to buy a home, and it’s undoubtedly worse for families that earn less. Thus, the middle class is again facing the unfortunate consequences of the government’s policy errors and stopgap “stimulus” spending.
None of these considerations prevented amateur traders from hitting the “buy” button on mega-cap stocks last month. That’s a story that won’t end well even though dead-cat bounces in bear markets always feel euphoric for a moment or two.
Chief Editor, CrushTheStreet.com
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