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THIS WEEK'S UPDATE

| January 03, 2023
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The Week On Wall Street

In a holiday-shortened week, erratic trading left stocks marginally down for the week. 

The Dow Jones Industrial Average lost 0.17%, while the Standard & Poor’s 500 slipped

0.14%. The Nasdaq Composite index fell 0.30%. The MSCI EAFE index, which tracks

developed overseas stock markets, edged 0.61% higher.
 

Stocks End Lower

Steps by China to move past its zero-Covid policies triggered concerns that its economic

reopening might aggravate inflation pressures, sending stocks lower and bond yields higher

to begin the week. Technology stocks saw the most significant hit. With dimming prospects

of a Santa Claus rally (the historical tendency of stocks to rise in the final trading days of

the year and the first two days of the new year), stocks rebounded strongly on Thursday to

erase the losses of the previous two days. However, stocks again turned lower to end the

week with small losses.

 
Lower Risk Appetite Amid Uncertainty 

In an otherwise slow week for news, two monthly reports were released highlighting the

market's headwinds. The first was State Street’s Investor Confidence Index, which measures

the risk appetite of institutional investors. The December report showed the confidence of

large asset managers in investing in risk assets, like stocks, has dropped over the past two

months, explaining, in part, why stocks may have struggled of late. Meanwhile, the Atlanta

Fed released its Survey of Business Uncertainty, which reflected both declining expectations

around sales growth and employment, along with growing uncertainty about revenue and

employment growth over the next 12 months.
 

This Week: Key Economic Data

Tuesday: Purchasing Managers’ Index (PMI)-Manufacturing. Institute of Supply Management

(ISM) Manufacturing. Job Openings and Labor Turnover Survey (JOLTS).

Thursday: Jobless Claims. Automated Data Processing (ADP) Employment Report.

Purchasing Managers’ Index (PMI)-Services.

Friday: Employment Situation.
 

This Week: Notable Companies Reporting Earnings

Thursday: Constellation Brands, Inc. (STZ), Walgreens Boots Alliance, Inc. (WBA), Conagra

Brands (CAG).
 

Final Thoughts

We didn’t get a Santa Claus rally in December.  Quite the contrary, the broad market fell almost

6% during the month.  2022 was an ugly year, no doubt about it.  The main question I will hear

this time of year, every year, is what should we do different in the new year?  
 

I’ll share a few thoughts, but first I must let you in on a secret I learned in the gym that is apropos

to investing.  It’s also that time of year again.  New Year’s resolutions.  So, consider this a twofer.  

Almost everyone (men worse than women, I suppose it’s our caveman brain) tries to lift the

heaviest weights possible.  They sling them around with poor mechanics just to appease their ego.  

Over the long term, most of these folks fizzle out because they either get hurt or don’t see much

progress after the first few months.  Some also just lose their motivation, but we aren’t talking

about those folks.  Anyway, I digress.  Back to the lifting the heaviest weights possible to satisfy

one’s ego…  I’ve always believed in the thought process of finding someone who is better at

something than you and learning from them.  One day, many years ago I was talking to a guy at

the gym who had it figured out.  Probably the most fit individual I’ve ever seen in person and he

is probably 20 years older than me.  I never saw him pick up super heavy weights.  Rather, he used

lighter weights and looked like a machine when he moved, he was so methodical.  Anyway, he told

me “Nick, your muscles can’t read.  They don’t see the numbers on those weights.”  What he meant

was set your ego and what you think is important aside and just do it right.  That has made all the

difference for me over time.
 

How does this have anything to do with investing and the New Year?  Well, the market and economy

doesn’t wear a watch and doesn’t know or care that it is 2023.  It still cares about what it cared about

in late 2022, which is the Fed, interest rates and earnings.  While the Fed is probably nearing the end

of its interest rate hikes for this cycle it should remain clear that corporate earnings will once again

dictate where stock prices are headed.  The trend in inflation is down and we are starting to hear more

rumblings of the economy slowing.  Those rate hikes take time to work their way through the system.  

Economic activity slowing isn’t the end of the world as the Covid stimulus became rocket fuel that

propelled things along way too fast causing the high inflation the Fed has been working to quell.

However, the market isn’t going to go up much without earnings to support it and I would think at

least a mild slowdown is already priced in as the market is forward looking.  Obviously if the facts

change what the market prices in will change.
 
Having said all that, we have shifted some of our holdings towards more value-oriented companies

with high free cash flow.  Free cash flow is kind of like what surplus you have left in your checking

after you pay all your expenses including saving and investing (yes, those should be treated like

expenses).  It means you’re making more than you’re spending on a consistent basis and adding to

your overall bottom line.  We still want some growth-oriented companies as one never knows when

the market will turn, and the market does love growth.  However, if we are in market purgatory a

little longer where things are just sort of drifting sideways, companies with high free cash flow will

fare better.  We’ve also added a little heavier weighting to certain commodities which could do well

if we are nearing the peak in interest rates.  We have seen this movie before and the ending has always

been the same where the market eventually moved on to greener pastures.  When, is out of our control.
 
We’ll have more to say in our 2023 first quarter outlook that will be published and sent out in the next

week or so.  In the meantime, the market doesn’t know what time it is, and we are probably in for more

of the same back and forth for at least another quarter or so unless some other catalyst comes along to

change the status quo sooner.
 

Have a great week.  I look forward to catching up with you soon.

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