Daily Market Notes: 2-27-2023

Once again, another reminder that inflation is not coming down to the extent that market participants had hoped for sent the market into a downside frenzy on Friday as the Dow finished its fourth straight lower week, the S&P its third straight negative week and the worst overall week since December 9th.

The Dow got to as much as a 510 point low before recovering a bit to end with a closing decline of 337 to 32,816 led by losses in AMGN, BA, MCD, MSFT and UNH. It is now negative for the year. The S&P was off by as much as 63 before it also ended with another large decline of 42 down to 3970 after holding just above its 200-day moving average at 3940, while the Nasdaq once again did the worst of all with a 195 point loss to 11,395 led by selling in ADBE on regulatory issues, in addition to NFLX, TSLA and ADSK.

The Russell 2000 Index of small stocks ended down by 17 to 1890 while the VIX rose again on this lower day in stocks and ended at 21.67, remaining in its perpetually narrow range for the longest time.

After a fabulous start to the year in January with a gain of 9% and a 17% rise from the mid-October low, the market has declined since the first week of February to a monthly loss of 5% as a stream of reports have shown everything from inflation to the job market to spending by shoppers is staying hotter than expected. That has forced investors to raise their forecasts for how high the Federal Reserve will have to take interest rates and then how long to keep them there.

Let us also remember that Fed Chair Powell said at the February meeting that the “disinflationary process has begun,” so this appears to be another statement from him that does not seem to be consistent with what has taken place lately, as right after that the market made its high for the year so far at around 4140.

The latest reminder came Friday after the Fed’s preferred measure of inflation, otherwise known as the January PCE (Personal Consumption Expenditures) came in higher with a 5.4% annual gain and a 4.7% core rate excluding food and  energy. That was an acceleration from December’s inflation rate, indicating that things are going the wrong way, and it was higher than economists’ expectations for 4.3%.

It echoed other reports from earlier in the month that showed inflation at both the consumer and wholesale levels was higher than expected in January.

Other data Friday showed that consumer spending returned to growth in January, rising by 1.8% from December. That is important because spending by consumers makes up the largest part of the economy. A separate reading on sentiment among consumers came in slightly stronger than earlier thought, while sales of new homes improved a bit more than expected.

Such strength paired with the remarkably resilient job market raises hope that the economy can avoid a recession in the near term.

But it can also feed into upward pressure on inflation, and worries could push the Fed to raise rates even higher and keep them there even longer than it otherwise would.

It puts the final nail in the coffin in the shift seen over the last several weeks where the market has come around to what the Fed has been saying for a while, namely that rates above 5% are going to be around for longer.

After earlier doubting that the Fed would raise its key overnight rate as high as it was saying, and believing that it may even cut rates later this year, traders are increasing bets on the federal funds rate rising to at least 5.25% and staying that high through the end of the year. The current range is 4.50% to 4.75%, and it was at virtually zero a year ago.

High rates and inflation increase the risk of a recession down the line, even if the most important part of the economy has been resilient.

The yield on the 10-year Treasury rose to 3.94% from 3.89% late Thursday while the 2-year Note rose to 4.79% from 4.71% and is near its highest level since 2007.

Software company ADSK fell for the largest loss in the S&P, down 13% despite reporting stronger profit and revenue for the latest quarter than expected. Analysts said investors were disappointed with its forecasts for upcoming results. BA lost 5% after it stopped deliveries of its 787 passenger jet because of questions around a supplier’s analysis of a part near the front of the plane.

The fourth-quarter earnings reporting season is coming to an end with the following lineup: tonight  – OXY, WDAY, GRPN, LI. RIDE and ZM; Tuesday – AMC,. AZO, A, CBRL, MNST, NCLH, RIVN, ROST, SEAS, SPCE, WRBY,TGT; Wednesday – DLTR, LOW, ANF, JACK, KSS, NIO, OKTA, SNOW, TUP, WEN and Dow component CRM; Thursday – BUD, BBY, BIGG, HPE, M, JWN, SIX, VSCO VME, COST, DELL, HRL, KR, MRVL; Friday – HIBB.

Economic reports will have: today – January preliminary durable goods orders fell by4.8% which is the lowest since April 2000 but excluding transportation were up by 0.7%, January pending home sales rose by 8.1% to the highest since June 2020;  Tuesday – February Consumer Confidence, December CaseShiller Home Price Index, ISM February Chicago Business Barometer, ISM February Purchasing Managers’ Manufacturing Index, February Richmond Fed Index; Thursday – Weekly jobless claims; Friday – ISM February Services Index.

Donald M. Selkin

Chief Market Strategist


 Don Selkin is the Chief Market Strategist at Newbridge Securities Corporation, member FINRA/SIPC and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our current or potential customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analysis concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, and Associated Press}. It is possible that at any given point in time, the author, Newbridge Securities, or one or more of its employees or registered individuals associated with Newbridge Securities, may hold a position, either long, or short, as well as options, bonds or other instruments in the companies mentioned in this report.