It turned out to be a winning week in the markets last week, despite Microsoft's very gloomy outlook for 2023 spooking investors for some time and driving down the NASDAQ over -2%. In an odd mix of reactions, MSFT stock fell -5% before fully recovering over the course of the trading day. The NASDAQ 100 index, which holds a large percent of MSFT, also recovered despite MSFT reporting only 2% sales growth for the quarter and forecasting slow growth for the remainder of the year due to lackluster demand for PCs and cloud servers from corporate clients.
The economic picture was coming into focus after MSFT's guidance paired with last week's retail report which showed slowing retail sales and an abysmal earnings report from Goldman Sachs.
What turned the frowns around?
The U.S. GDP report was higher than expected for December at 2.9%, meaning the economy was growing at a strong rate. Good news also came from a Commerce report on personal consumption expenditures (excluding food and energy) which increased 4.4% from a year ago, down from the 4.7% reading in November and the lowest since October 2021. This shows consumer demand is cooling.
Another report showed consumer spending slowing by .2% for December, adding to the narrative that the economy is no longer speeding out of control.
The data supported a bullish case for a soft landing - an economic slowdown without a recession. But historically, the Fed has been successful at this only once after raising rates this quickly. In most cases, it ends in recession and a market selloff.
What's Next?
There was an interesting tweet last week from Michael Burry who seemed to indicate we were about 60% through the selloff and following the pattern of the 2000-2002 market correction where there was a bear rally followed by some brief stability for a few months before things fell apart again. Not known for words, Burry - a hedge fund manager who called the 2008 financial crisis and 2022 selloff correctly - simply said "maybe" next to the graph.
Burry is one of many bears calling for the market to retrace down to October lows. They believe the impact of interest rates takes about a year to truly impact the economy and that we have not yet seen the effects on earnings yet. They are telling clients to sell these rallies and not to buy them.
We are watching the data and thus far it does look headed in that direction. With savings rates for the average American near depleted, housing costs at record highs relative to income (see chart above), rising credit card debt, and slowing corporate demand, it hardly seems like the right time to have a bull market that chases a new high. We'll go into this in more detail in our Level 2 newsletter.
Events move stock prices. We know this and we measure it. It's easy to understand the correlation between an event and a share price movement for the day it impacts the stock. But what about after that? How do we forecast the event's impact on the stock and can LevelFields' platform help with that?
The short answer is yes. It just takes a few more clicks.
Before we show you how to do this, we need to talk a bit about fundamentals. By that, we mean the revenue, profits, growth rates, and debt situation of a company. High quality companies that are profitable, growing revenue, and have loan interest they can easily afford will do better longer term after an event that is significant and bullish.
These types of companies will typically perform better over the months that follow an event like a large dividend increase, large buyback, or activist investor's investment. They also tend to handle bearish events more easily, like a lawsuit (Google gets them all the time).
By using the filters inside a scenario, and using the table view, you can see how better performing companies in their financials also perform better after catalyzing, bullish events.
Investing in any company is a gamble because we never really know what is happening inside the company. We get a snapshot from earnings reports and the events. At any point, things can change.
The longer the period of time between the event and the date, the greater the likelihood that the company will be impacted by some other event. That is why we do not put win rates on for longer periods of time: it would simply be misleading.
Just because we don't put the win rates on for longer periods doesn't mean it's not possible to get a better understanding of the probability of success for a stock over a longer period. The data can indicate that inside the Table View.
Some scenarios include events that should be viewed over the longer term. Breakthrough therapies, for instance, do accompany a short term bounce in the stock price. But the significance of these events is that they are markers of a potential blockbuster drug if they get through final FDA approval.
That process of approval and marketing the drug can take a year or years, but the results can be much more significant than the short term bounce.
Less is More
Pfizer is negotiating prices for its COVID products with various countries including the EU for a once a year COVID vaccine at a higher price. While this will lower revenue for Pfizer, it will contribute to higher profit margins. The company remains positioned to announce their next blockbuster vaccine as soon as they receive FDA approval for it. We've covered this in detail in our Level 2 alerts.
Rushing Ahead
Our Quick Sprints scenario picked up momentum in adtech company SEMRush (SEMR) which helps advertisers more productively deploy their marketing dollars. The stock was up 6% following the alert and is up 18% in the past week after coming off a double bottom. It's been growing revenue 33% year over year, and as the appetite for growth stocks rises, investors are starting to snap this one up. We sent an alert last week to our Level 2 members with a detailed breakdown of the company.
SOHO Goes North
Southerly hotel stock soared 22% from the open over several days following the reinstatement of a dividend program.
Intel Outside
Shares of chip maker Intel tanked after one of the biggest earnings misses in recent history. Intel's earnings were 50% below estimates. The stock fell -6.4% after reporting a 32% year-over-year decline in revenue and a net loss of $644 million for the quarter.
“No words can portray or explain the historic collapse of Intel, with management attempting to blame a worst-ever PC inventory digestion dynamic and macro/China/enterprise to an over 20% q/q decline in sales,” a Rosenblatt analyst wrote.
Don't Leave Home Without It
Shares of American Express soared over +10% despite missing earnings estimates and reporting a 9% decrease in profits for the 4th quarter. The stock rose because of upbeat guidance on 2023 revenue and a dividend increase.
Significant to the story of a deteriorating consumer was the following information: AXP set aside $1 billion to cover potential credit losses - an increase of 95% from 2021. The company also wrote off 1.3% of its loans, compared to 0.8% in 2021.
You're Hot and You're Cold. You're Yes Then You're No
Katy Perry could have been singing about SAP's relationship with Qualtrics (XM), which SAP purchased in 2018 just before Qualitrics was about to go public. They then let Qualtrics IPO in 2021 and last week noted they now plan to sell Qualtrics.
Shares of XM jumped 33% on the news, picked up in our Quick Sprints scenario.
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