The Weekend Edition # 117 - Weakest Start since 2008

Welcome to another issue of the Weekend Edition and the last one for 2023!

Thank you to all who’ve read and welcome to all the new subscribers this week!

Here's what we cover

• Market Recap - Weakest Start since 2008

• Macro - Healthcare Employment Deep-dive

• Earnings Season Q4, 2023 Starts - Outlook

• The Week Ahead - Calendars

• Closing Thoughts - The Way Ahead

Market Recap - Weakest Start since 2008

January 02 - January 5, 2023

Happy New Year! Well, not exactly the happiest of new years for the markets though. US Broad Market Indices all closed in the red for the week. In fact, the Nasdaq had one of the worst starts of any year since 2008.

Yields inched higher for the week, with the 10Y yield crossing 4% for a gain of +4.8% for the week. FOMC minutes came out and it would seem that rate cuts were not firmly on the table just yet. This pared bets on rate cuts for 2024 and pushed yields up higher. There were also $60B in corporate bond issuance that put pressure on yields.

Some of the declines were due to profit-taking to start the week but, positioning was also stretched after the euphoria we saw at the end of the year.

Interestingly, animal spirits still prevail and the market remains call-heavy with fewer people hedging downside exposure. GS did, however, comment that some Nasdaq hedging activity was seen towards the end of the week, as did bonds, according to MUFG. This means that people were very optimistic about only catching upside but, are gradually becoming worried about downside in the markets.

The US Dollar saw some recovery to start the year. Q1 usually favors the dollar and after being oversold in December, we’re seeing the much-needed relief bounce. Not to mention, the Red Sea escalations and higher oil, also gave it some strength.

We saw a fair bit of rotation in the market with Healthcare taking the lead for the week, after being the worst-performing sector in 2023. In fact, market surveys now suggest that healthcare remains a top pick for the catch-up trade in 2024.

Global Markets also saw a relatively ugly start to the year with China resuming its decline even after President Xi gave a grand speech about reforms. Japan was closed for most of the week.

Commodities

The Red Sea issue escalated over the week and there was some risk-off, flight to safety, with oil seeing spikes throughout the week. But the winner this week was NatGas, after almost 8 weeks of decline. Positioning was extremely stretched to the downside.

Some of the charts in the recap section have been sponsored by Koyfin. We have a special discount of 15% for MacroVisor readers for any new sign-ups to Koyfin. To take advantage of this promo please sign up here - Koyfin MacroVisor Discount

Macro - Healthcare Employment Deep-dive

This week was all about the labor report.

The NFP increase came in at 216k vs. an expectation of about 175k. While there were revisions to the previous numbers (about 70k for Oct & Nov), we need to remember that the consensus estimate is also based on preliminary numbers and not revised numbers. So, the number did come in stronger.

As usual, the 3 strongest categories were Government, Healthcare, and Leisure & Hospitality and this was the case for the whole year. Since these were December numbers, we now have the full-year job creation data.

The Healthcare Sector was one of the most affected sectors post-pandemic. Working in healthcare has become very difficult during and after the pandemic. People wanted to stay home to protect their families, and many were averse to taking the vaccine which was a pre-requisite to go back to work.

We’ve been hearing about labor shortages for a long time and 2023 was the “catch-up” year for hiring. The chart below shows that the YoY change in Healthcare Payrolls was higher in 2023 than the change in total payroll creation.

But this hiring came at a cost. Given the adverse circumstances in the healthcare industry, employers have had to pay higher wages in general to attract employees back into the workforce. The chart below shows that YoY change in Employment Cost has peaked, in line with the total Index, but remains significantly higher.

However, we’re still not done. Job Openings in Healthcare have declined YoY by about -15%, but the overall Job Openings still remain much higher than the pre-pandemic average. The chart below shows the YoY change in Purple while the overall Job Openings number is in Grey.

Why it matters:

It’s not a surprise that after the pandemic, the US has a higher proportion of people who need healthcare for a variety of reasons. Delaying medical care has made health issues more serious. Also, Covid has left lasting ailments and many are suffering from vaccine injuries.

Given this situation, it’s important to keep an eye on the healthcare sector because:

• Higher wages will likely be a trend to attract more employees back into the workforce.

• In many sub-sectors, employees are being allowed to work fewer hours, which means more workers will be required

• Healthcare services will need to either absorb these costs leading to lower profitability or pass on the cost meaning people bear the burden.

This is a part of the services core inflation metric and these pressures could keep core inflation stickier for longer.

Earnings Season Q4, 2023 Starts - Outlook

Next week, we start Q4 earnings season. This is the first time since Q3, 2022 that we’re going into earnings season with a positive estimate on EPS for the quarter at +1.3%% YoY. While it would seem that the bar is set higher that usual, the earnings estimates have been revised down from 8% since Sep 30, 2023.

At the sector level, there’s a lot of optimism surrounding Utilities, which is set to be the second-best performer this quarter with an EPS growth of 33.7% YoY.

Revenues have not been revised lower by much coming in at +3.1% YoY vs. +3.4% as of 30 Sep.

The worst-performing sector is still expected to be Energy with a decline of -28% YoY. The comps for the Energy sector remain too high but, we’re likely to see some improvement in earnings this quarter and may even see some beats. After all the news of the US outperforming in terms of oil production, I’m certainly very interested in what the Energy companies have to say.

Margins are expected to decline about -0.14% YoY and -0.90% QoQ. According to GS, this seems too pessimistic. Most companies discussed defending their margins last quarter, particularly in the retail sector.

One issue that could defend margins is tailwinds from a weaker dollar. 41% of the companies in the S&P500 derive their revenues from overseas, and the US Dollar Index declined almost -4% during the quarter.

Finally, as always, we start off earnings season with the big banks and since these are the year-end results, it would be prudent to pay some attention to what they have to say about the state of the economy and where we’re headed. This is what I will be watching for:

• Movement in total volume of loans, non-performing loans, and delinquencies to assess the health of the consumer.

• Movement in trading revenues to understand the impact of markets and where they see M&A and IPO activity going.

• We’re up against a significant debt maturity wall this year and refinancing + new corporate bond issuances should bode well for fee income

• Fee income will be important in 2024 if the Fed starts cutting rates and the banks see pressure on their Net Interest Margins

• Where the discussion around increased capital reserves is going. Higher reserves mean lower lending.

The Week Ahead - Calendars

US Earnings

US Economic Calendar in Eastern Time (Source: Trading Economics)

Closing Thoughts - The Way Ahead

I suspect that the market action we saw on Friday will be what we will see more of until the Fed announces rate cuts. We saw a strong move down after the labor market report was released and then a strong move up when the ISM Services data was released.

While it’s true we’ve seen moves like these throughout 2023, they were reserved for the bigger data points such as Labor Data or Inflation data. Activity data hasn’t had the same reaction since 2022. 

Now, we’ll probably be scrutinizing every macro data point for a glimpse into what the Fed may be thinking about the policy path. 

We have the CPI report out on Thursday and the PPI report out on Friday. I’d be careful trading around these data points until the dust has settled.

Here’s wishing you safe investing.

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.