As the sun breaks, above the ground
An old man stands on the hill

As the ground warms, to the first rays of light
A birdsong shatters the still

His eyes are ablaze
See the madman in his gaze

Fly on your way, like an eagle
Fly as high as the sun
On your way, like an eagle
Fly and touch the sun

— “Flight of Icarus” Smith, Dickenson (Iron Maiden), 1983

Where & When

How will you know? How will any of us?

Equity index futures have been trading a bit on the weak side overnight. Yields seem to be back on the rise, hand in hand with the U.S. dollar. One foot in front of the other. The Wall Street rank and file… file in. Traders head to their desks and their morning meetings.

The Nasdaq Composite, after last week’s narrow victory, now stands up 12.62% year to date. This nearly outrageous performance is not even top dog on your screen. Both the Dow Transports (+13.02%), and the Nasdaq 100 (+12.97%) appear to be enjoying 2023 to an even greater degree.

Yet, we know that February can get rough. The “January Effect ‘ has its reputation for a reason. Part of that reason would be that things tend to cool as winter drags on.

Going back to the turn of the century/millennium (23 Februaries), the S&P 500 has returned a mean of -0.46% in February, which is the second worst monthly average over that time frame, only to be underperformed by September. They tell you to “Sell in May,” but June has returned a mean of -0.34% since 2000. August has been negative on average since 2000 as well. Bet you didn’t know that four months out of the 12, since 2000 have been on average unfriendly to the S&P 500.

We know that financial conditions have eased significantly since October when equity markets hit the bottom for this cycle. We know that M2 Money Supply has increased by the equivalent of some $6T since then, boosted primarily by expansion of this metric in both China and Japan. Can this oxygen that has put a bid under global equities keep on keeping on?

Only if the spigot stays open. Forward-looking valuations for the S&P 500 had contracted to 15 times and then reflated to more than 18 times. As forward-looking earnings expectations have contracted, most of your favorite equity indexes are actually sideways to down month to date. We know that on average, the second half of February is typically weaker than the first half. Todd Campbell told you in his Street Smarts column on Friday, that according to Refinitiv/Lipper, U.S. equity funds suffered net redemptions of $3.56B, as investors broadly pushed $6.9B into money market funds and $2.9B into short-to-intermediate investment-grade (bond) funds.

What’s Todd telling you? Same thing as Doug Kass on Real Money Pro. That there is indeed someplace risk-free, ex-FX to go with your cash. All as the Fed appears ready to reassess its recent change in posture. All as there is a change in leadership at the Bank of Japan.

Does all this impact global financial conditions in a big way? I’m not so bold as to proceed carefully, without protection. As to choosing an alternative to equities for at least the short-term? I’m all over that. Cash is not just cash anymore, and it’s certainly not dead money.

Last Week

From above, it might look like not much happened last week. At least as far as equity markets are concerned.

The U.S. Dollar Index popped, trading above 104.50, as mentioned above. U.S. Treasuries sold off fairly hard, driving yields higher. Equities had rallied for the first part of last week, and then at least for the large-cap indexes, gave much of it back by week’s end. The smaller-cap indexes did outperform broader markets for the five-day period.

Much of this indecisive feeling action, which took place close enough to the top of the charts for these indexes, has been caused by some better or one might say “hotter” than expected macroeconomic data that has hit the tape of late. This has forced economists to rethink their timing or even the likelihood of any potential U.S. recession, while also forcing investors to second-guess how the Federal Reserve Bank might reshape its thoughts on monetary policy as we move into the second half of the first quarter.

First, let’s look at what brought the heat.

The Bureau of Labor Statistics published its data for January CPI on Tuesday and its January PPI on Thursday. The fact is that while CPI cooled less than expected on an annual basis, month over month this data-point simply sizzled. That goes for the headline number as well as the core. As for Producer Prices, the results were very similar. Month-over-month heat that led to disappointment in the pace of annual cooling. Even more disappointing might be the fact that the services side of the economy is not yet showing much disinflation at all. That’s what will provoke the central bank.

Reinforcing fears that the FOMC may have to get re-energized in its effort to tighten policy have been factors coming from several angles. One would be the growth this year so far in global M2 Money Supply that appears to be counteracting the Fed’s efforts. We discussed this above and last week. The Chicago Fed showed us this in its weekly report on all-around financial conditions. This report illustrates that conditions are significantly looser 2023 to date after hitting nearly (but not quite) restrictive conditions back in October (as equities nadired).

This was expressed through the January U.S. Retail Sales numbers posted by the Census Bureau last Wednesday. These numbers showed almost incredible strength, rebounding significantly off of a rather disappointing stretch through the November/December holiday period. Isn’t that a bit odd? Is it not incredible that Department Store sales were up 17.5% month over month for January from December?

While this was all going on, the media was still talking about and distracted by the shooting down of a Chinese military balloon off the coast of South Carolina that drew criticism from Beijing as tensions between the planet’s two largest economies and two most capable militaries intensified.

Speaking of the Fed

The surprisingly warm macroeconomic results put the Fed front and center. Sure, those rooting against the U.S. economy still had some weakness in Industrial Production and Capacity Utilization to cheer about, but that’s not really all that related to service sector inflation.

Several of our central bankers hit the circuit last week, but there were only two speakers and one news event that really mattered. The Fed’s two leading hawks spoke quite frankly last week, after January’s numbers had strengthened their aggregate case for the trajectory of policy. Though neither is an official voter on policy in 2023, I must admit that while they speak about the 50 basis point rate hike not chosen (in favor of 25 bps) at the February 1 meeting, the probability for a 50 basis point hike on March 22 has increased.

Additionally, Fed Vice Chair Lael Brainard has been selected by President Joe Biden to succeed Brian Deese as Director of the National Economic Council. What that means is that Brainard will become the leading economic advisor to the White House, but also that the Federal Reserve Board of Governors will be losing someone probably seen as the Fed’s thought leader on the dovish side of the policy divide just as the hawks gain influence.

Fed Funds futures trading in Chicago are currently pricing in just a 79% probability for a 25 basis point increase being made to the Fed Funds Rate on March 22. This means that these markets also show a 21% chance for a 50 bps rate hike at that time. This 21% number grew from almost nothing in a matter of just days.

Futures now show a 71% likelihood that what would be a terminal rate of 5.25% to 5.5% will be reached at some point this year and held for at least four meetings. This projected termal rate is 25 basis points higher than it was when I wrote this column a week ago. Surprisingly, futures now show a 63% chance for at least one rate cut late in 2023.


Earnings season is starting to wind down, though there is still enough left on the plate and nearly all of the retailers have yet to report. This means that these results are not done evolving and given how the holiday season treated those retailers, what we see could get uglier.

According to FactSet, with 82% of the S&P 500 having already reported, 68% of companies have beaten earnings expectations (down from 69% last week), while just 65% of companies have reported revenue generation ahead of estimates (up from 63% a week ago).

Staying with data provided by FactSet, the blended (results & estimates) year-over-year earnings decline for the S&P 500 is now -4.7%, which is an improvement over the -4.9% posted a week ago. Revenue growth is now running at 5.1%, up significantly from 4.6% last week. That’s a rather positive trend that has been in place for multiple weeks now. However, this is also reflective of poorer-than-expected margins.

What’s also not positive, according to FactSet, is that Q1 is seen at earnings growth of -5.4% (down from -5.1%) on revenue growth of 1.9% (flat from a week ago) and Q2 is seen at earnings growth of -3.4% (down from -3.3%) on revenue growth of -0.1% (also flat from last week). Hmm. Declining margins carried forward.

As has been the case, the nine months starting with the fourth quarter of 2022 and ending with the second quarter of 2023 are shaping up as a period of earnings and margin deterioration. For calendar year 2023, consensus view is now for earnings growth of 2.5% on revenue growth of 2.3%. The third and fourth quarters of calendar year 2023 would have to run almost without a hitch in order to meet these full-year numbers if projections for the first half prove close to accurate.


Equity markets really rallied last Monday, held those gains for most of the middle of the week, and then sold off selectively late Thursday into Friday. The Nasdaq Composite, after hitting some turbulence, added a positive week, not allowing one losing week to become a streak.

Last week, we mentioned that the Nasdaq Composite did not give up its 21-day exponential moving average (EMA) or its 200-day simple moving average (SMA), while also remaining well above its long-term trendline. These conditions held true, though, below, readers will see that the index did indeed test and actually made contact with its 21-day EMA.

The S&P 500, as readers can see here, below, not only pierced its 21-day EMA, but clung to that line as the bell rang on Friday afternoon. This green line, not quite surrendered on Friday, will be the one to watch on Monday morning.

For the past five trading days, the S&P 500 gave up exactly 0.28%, which is precisely what the index gave up on Friday. Incredible. The Nasdaq Composite was hit for a mild loss of 0.58% on Friday, but was able to finish the week up 0.59%. The Philadelphia Semiconductor Index, which readers know is something that I always watch closely, and is usually more volatile than most of the other indexes that we watch, sold off sharply (-1.62%) on Friday to end the week down small (-0.18%). This leaves us with the small-caps. The Russell 2000 rallied 0.21% on Friday to post a nice gain of 1.44% for the five-day period.

Five of the 11 S&P sector-select SPDR ETFs shaded green for the week past, as again there was no real pattern as to what kind of sectors over- or under-performed. Consumer Discretionaries (XLY) and the Utilities (XLU) were the market’s leaders, up 1.63% and 1.14%, respectively. The Energy (XLE) sector was the big loser this past week, badly underperforming the broader market at -6.34%.

According to FactSet, the S&P 500 still trades at 18.0 times forward-looking earnings, which is where it was last week. This ratio currently remains below the S&P 500’s five-year average of 18.5 times, but also significantly higher than its 10-year average (17.2).

On Point

Short weeks are always long. That is what “they” say. Why do “they” say this? Partially, at least, this is because on Wall Street most traders or brokers are not paid a set salary. Everyone works toward a weekly or monthly goal. Once that level is reached, those working with a P/L and those working for commission are profitable. Market holidays and short months like February only add pressure.

This forces one’s daily average (what must be made to meet one’s obligations) higher, sometimes significantly so, depending on where one is coming into said holiday. Traders then take more chances as they run out of time. Hence, there is some stress involved and thus… “Short weeks are always long” has been a Wall Street idiom since long before my time.

From a macroeconomic perspective, the week kicks off on Tuesday with S&P Global’s February flash PMIs for both the manufacturing and service sectors of the U.S. economy. On Thursday, the Bureau of Economic Analysis will revise the 2.9% (q/q SAAR) estimate for Q4 GDP. Then on Friday, the heavy stuff hits the tape. That day, we’ll see January numbers for Personal Income, and Personal Spending as well as PCE and Core PCE inflation. We’ll also hear from the University of Michigan as they revise their February print for Consumer Sentiment.

This week will be another heavy week of fourth-quarter earnings, but unlike last week, will have a few more heavy hitters in the line-up. Investors will hear from the likes of Home Depot (HD) and Walmart (WMT) this morning, followed in the p.m. by Palo Alto Networks (PANW) . After that, the intensity lets up a little, but we’ll still hear from powerhouse Nvidia (NVDA) on Wednesday afternoon, and Domino’s Pizza (DPZ) , Moderna (MRNA) , and Block (SQ) over Thursday and Friday.

The Fed will be out in force again this week. On Wednesday afternoon, the FOMC Minutes of the February 1 meeting will be published. As far as speakers are concerned, I have Williams, Bostic, Jefferson, and Mester all on my radar. Mester speaks Friday and what she says may just hold the key to this week’s final score.

Economics (All Times Eastern)

09:45 – S&P Global Manufacturing PMI (Feb-Flash): Expecting 47.3, Last 46.9.

09:45 – S&P Global Services PMI (Feb-Flash): Expecting 47.2, Last 46.8.

10:00 – Existing Home Sales (Jan): Expecting 4.1M, Last 4.02M SAAR.

The Fed (All Times Eastern)

No public appearances scheduled.

Today’s Earnings Highlights (Consensus EPS Expectations)

Before the Open: (HD) (3.29), (MDT) (1.27), (WMT) (2.30)

After the Close: (COIN) (-1.40), (FANG) (5.27), (PANW) (0.77)

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