2/19/23 Newsletter – It’s Just a Little Turbulence

Amanda Greenbrier
All Posts

Stocks have hit a little turbulence in February after shooting higher in January… (But keep reading to see why we’re not worried )

Wall Street closed another bumpy week with a mixed performance on Friday amid worries that inflation is not cooling as quickly or as smoothly as hoped…

The S&P fell 0.3% after pairing a bigger loss from the morning. 

The Dow Jones Industrial Average rose 129 points, or 0.4%, after coming back from an early loss of 179 points, while the Nasdaq composite fell 0.6%.

Stocks have hit turbulence in February after shooting higher in January with hopes that cooling inflation could get the Federal Reserve to take it easier on interest rates and that the economy could avoid a severe recession. 

Reports recently have shown more strength than expected in everything from the job market to retail sales to inflation itself, raising worries that the Federal Reserve will have to get tougher on interest rates.

That’s forced a sharp recalibration on Wall Street as investors move their forecasts for rates closer to the “higher for longer” stance that the Federal Reserve has long been espousing. 

The hope is that high rates can drive down inflation, but they also hurt investment prices and risk causing a severe recession.

But like we’ve said in the past… We’re not afraid of recessions because we focus on individual stock research. 

Economists at Goldman Sachs added one more hike by the Fed in June to their forecast, meaning they see its key short-term rate ultimately rising to a range of 5.25% to 5.50%. 

That rate was at virtually zero a year ago, and it hasn’t topped 5.25% since the dot-com bubble was deflating in 2001. It’s currently at a range of 4.50% to 4.75%.

The fear is that if inflation proves stickier than expected, it could push the Fed to get even more aggressive than it’s prepared the market for. 

Such movements have been most clear in the bond market, where yields have soared this month on expectations for a firmer Fed.

Still offering some support to the stock market are remaining hopes among investors that the economy can avoid a worst-case recession. 

Jobs are still plentiful, and shoppers are still spending to prop up the most important part of the economy, consumer spending. 

That’s helped the S&P 500 index hold onto a gain of 6.2% since the start of the year. (Not bad considering 2/19 marks the 50th day so far in 2023.)

But critics say many of those areas also tend to be among the last to feel the effects of higher interest rates and may still crack. 

And the Fed has already raised rates by the most aggressive pace in decades.ties will hold up as the Federal Reserve hikes rates to tame stubbornly high inflation.

Last month, the Labor Department reported the consumer price index (CPI) rose 6.5% in December, down from a 7.1% gain in November and a 40-year high of 9.1% in June.

Last week, the Commerce Department reported the core personal consumption expenditures price index (PCE) was up 4.4% in December, down from a 4.7% year-over-year gain in November and a 2022 peak of 5.3% in February. Core PCE is the Federal Reserve’s preferred inflation measure, and its long-term target for core PCE inflation is just 2%.

“While recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path,” Fed Chair Jerome Powell recently said. 

The U.S. labor market has remained tight, making the Fed’s fight against inflation more difficult. 

The Labor Department reported the U.S. economy added 223,000 jobs in December, exceeding economist expectations of 200,000 new jobs. 

Wages were up 4.6% year-over-year in December, and companies often pass on higher labor costs to customers by raising prices on goods and services.

“We continue to anticipate that ongoing increases in the target range for the federal funds rate will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time,” Powell said last week.

Powell said it’s good news that declines in inflation in recent months have not come at the expense of a weaker labor market but acknowledged that the impact of the Fed’s tightening measures will likely have a lagging negative impact on the economy.

“Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions,” he said.

Fed economists are anticipating a difficult year for the U.S. economy in 2023. In December, Fed officials projected a terminal fed funds interest rate of 5.1% in 2023 and indicated the FOMC would not pivot from rate hikes to rate cuts until 2024.

The committee projects a 2023 U.S. unemployment rate of 4.6%, up from the 3.5% level the Labor Department recently reported. U.S. GDP grew 2.9% in the fourth quarter, but the Fed projects that growth will slow to just 0.5% in 2023 and 1.6% in 2024.

While inflation will likely continue to trend lower, the Fed projects core PCE inflation of 3.5% this year, still well above its 2% target.

Rising interest rates triggered a sell-off in stocks and other risk assets in 2022. The S&P 500 generated a total return of negative 18.1% in 2022, its worst annual performance since the global financial crisis in 2008.

The stock market is off to a strong start in 2023 thanks in large part to fourth-quarter earnings numbers that aren’t as bad as many investors had feared. 

S&P 500 companies are on track to report a 5% year-over-year decline in earnings in the fourth quarter. Analysts are expecting negative earnings growth to continue through at least the first two quarters of 2023.

Earnings Spotlight For Week of 2/19/2023  

On Tuesday, 2/21/2023 (Monday is a Holiday)

Home Depot (NYSE: HD)will kick off a busy stretch of retail earnings when it unveils fourth-quarter results ahead of Tuesday’s open. Consensus estimates are for the home improvement retailer to report earnings per share (EPS) of $3.27, up 1.9% year-over-year (YoY), and revenue of $35.97 billion (+0.7% YoY).

Jefferies analyst Jonathan Matuszewski lowered the price target on Home Depot (NYSE: HD) to $377.00 (from $381.00) while maintaining a Buy rating.

Walmart (NYSE: WMT) is another blue-chip retailer that will report earnings next week. The company is slated to release its fourth-quarter results ahead of the Feb. 21 open. WMT reported top- and bottom-line beats in its Q3 report thanks to strong grocery sales. This time around, analysts, on average, expect the retailer to report earnings of $1.51 per share (-1.3% YoY) and revenue of $159.76 billion (+4.5% YoY). Last week, Credit Suisse analyst Karen Short maintained a Buy rating on Walmart (NYSE: WMT) and set a price target of $170.00.

On Wednesday, 2/22/2023 

Nvidia (Nasdaq: NVDA) is one of the semiconductor stocks that everyone on Wall Street seems to love – and with good reason. Semiconductor stocks have had a strong start to 2023 and Nvidia (Nasdaq: NVDA) has been no exception. Shares are up 50% for the year-to-date to trade at levels not seen since last April. In a report released on Friday 2/17, John Vinh from KeyBanc maintained a Buy rating on Nvidia, with a price target of $280.00.

Who Made New 52-Week Highs This Week?

Here are some notable new highs as of Friday, February 17, 2023…

(A new high is recorded when a security’s price reaches its highest level in 52 weeks.)

Taking the cake this week is Meihua International Medical (Nasdaq: MHUA)  after climbing over 900% from its 52-week low.

Coming in second place this week is Terns Pharmaceuticals (Nasdaq: TERN) after moving up over 631% from its 52-week low.

Third place goes to Professional Diversity Network (Nasdaq: IPDN) who climbed over 561% from its 52-week low.  

Fourth place goes to Prometheus Biosciences (Nasdaq: RXDX) after they climbed over 478% from their 52-week low.

And rounding out the top 5 for our list of new 52-week highs is Muscle Maker (Nasdaq: GRIL) as they are up over 363% from their 52-week low. 

If you’re interested in discovery stocks that have the potential for making 900%, 631%, 561%, 478%, and 363% moves like the top 5 stocks above, then you’re in luck…

Because we have been hard at work uncovering what could be the next big stock play for you.

You need to stay tuned and stay engaged because we just identified what could be our next pick for 2023… 

So clear your plate and get ready.

Our next pick could be coming any day…

– Editor of the Virtus Junxit Newsletter

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