The Week Behind

In the week ahead of the Christmas Holiday, as expected, volume was lean. I think this contributed to the magnitude of the volatility experienced as the Bank of Japan (BoJ) made a major policy change, influential companies reported earnings, and economic data was hotter than expected. Only the DOW managed to eke out a gain, adding ~0.86%. The S&P dropped ~0.20%. Damage continued to mount in the NASDAQ, losing ~2%.  

 Highlights

• The BoJ joined central banks around the world in tightening financial conditions to fight inflation. While Japanese inflation tends to trend lower than the rest of the world, it has finally reached a level warranting action. Prior to this week’s announcement, the BoJ had been dovish.
• On Wednesday, FedEx (FDX) and Nike (NKE) both reported earnings. Given the geographic reach of their end markets, the results suggest the consumer is still resilient and that the reopening of the Chinese economy is underway. Their guidance implies each company’s management team believes these trends will continue.
• Thursday, U.S. Final QoQ GDP growth printed above the 2.9% consensus at 3.2%, which implies the Fed may need to be harsher than anticipated. 

From Tax-Loss Selling to Buying

For those of you not familiar, tax-loss selling (or tax-loss harvesting) occurs when an investor sells all or part of a stock position at a loss to offset taxable gains made in that same position or elsewhere in the portfolio. The funds raised are typically reallocated to a better-suited company in the same space (exchanging LYFT for UBER, FDX for UPS, etc…) or to other places in the portfolio depending on the manager’s macroeconomic thesis. 

Given the abysmal year for equities, some theorize there may be more investors participating in tax-loss selling this year than in recent years past. Backing this hypothesis, BofA (Bank of America) reported the largest ever recorded equity fund outflows last week. Assuming this hypothesis is true, then stock prices have experienced more downward pressure than usual. Ultimately, when there are more sellers than buyers, prices go down. However, it is then also true that there is more dry powder than usual to redeploy as the calendar turns from 2022 to 2023. 

There is technically still one week left in 2023, but, given the BofA report and my expectation that many fund managers will still be on holiday, I think the worst of the tax-loss selling pressure is behind us. While I cannot promise these tax-loss sellers will become tax-loss buyers, it is reasonable to expect that this incremental seller is done selling, which is bullish. 

The Week Ahead  

With everyone on a well-deserved vacation, there is no one to host and attend earnings calls or Fed speakers. We’ll get the bare minimum from economic releases. Wednesday, pending home sales hits. Thursday, weekly jobless update. Friday, Chicago PMI.  

What News Is Bullish?

Last week, we covered why the relationship between yields and equities had reversed. It made me wonder if the goal posts had shifted elsewhere. Specifically, now that declining yields are bearish because they signal growth is slowing too much at the hands of the Fed, I thought that economic data indicating the same economic weakness might begin to be interpreted similarly. For now, that does not appear to be the case. Bad news is still bullish. Economic data suggesting the economy is slowing and jobs data suggesting unemployment is rising are both still perceived as bullish because both still imply the Fed will stop sooner rather than later. At some point, I imagine bad news for the economy will be bad news for the stock market. Clearly, given Thursday’s downward action on a positive GDP revision, we are not there yet. I have some theories as to when that may occur but none with enough rigor worth putting stock into.

I hope you all had a relaxing Christmas Holiday surrounded by family and friends. I appreciate your willingness to support my writing by receiving these emails. In the new year, I look forward to unveiling a website with all of the prior briefs as well as additional notes and opportunities I see forming in the market. When I get it done, you all will be the first to know. Thank you again. Merry Christmas, Happy Holidays, and a Happy New Year.