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It was a short week so I will attempt to provide a succinct weekend wrap up. Stocks got off to a rocky start with the prospect of higher interest rates lasting for longer than consensus estimates. The hawkish view was confirmed on Wednesday after the release of the latest policy minutes from the US Federal Reserve. To make matters worse, ADP payroll data released yesterday confirmed an already strong jobs market would likely keep the Fed from reducing rates anytime soon. That in turn caused the US trade weighted dollar to rebound taking most commodities lower on the day. Gold for example plunged $19 ounce on Thursday only to rebound $29 bucks today.

When you combine record high temperatures in many parts of Europe with higher than average weather in the US, sent natural gas prices tumbling as traders fought to exit positions as quickly as possible. Oil in turn also dropped this week, again due to commodity traders unwinding contracts, on rising recession fears. We discount these fears after reading the most recent reports from OPEC. Yes, US GDP is forecast to drop from 1.7% in 2022 to 0.8% in 2023, but we see the Chinese economy rebounding from 3.1% last year to 4.8% in 2023. So, any temporary supply problems will likely dissipate as Asian and non OECD economies recover.

Turning to stocks, today’s strong bounce may have had more to do with short sellers covering positions from Wednesday and Thursday as investors got a goldilocks jobs report that supports the theory of a soft landing rather than a recession. Nonfarm payrolls fell from 256,000 jobs in November to 223,000 in December. More importantly average hourly earnings increased by 0.3% versus 0.4% in November, which btw, was revised down from 0.6%. So decent jobs growth with moderating wage inflation. What is not to like?

Apparently mega cap tech stocks, at least a couple of them it seems. Tesla is off 9% this week after failing to meet production quotas and Microsoft downgrades on expected weakness in their cloud division. Of the two I have more faith in Microsoft hands down. It is still trading at a price earnings premium to the S&P but at 23 times earnings it is a lot cheaper than where it was trading a year ago. Meanwhile, last year’s laggards, are this year’s winners… so far. Both Netflix and Meta aka Facebook bottomed out late last year and have been steadily rising. Meta for example is trading at 14 times earnings versus the S&P at 20 times.

In Canada, The TSX outperformed its US peers thanks to a heavier weighting in commodities especially gold, plus a surprising rally in healthcare (Bausch Health not pot stocks), and discretionary consumer stocks led by Magna, Canada Goose and Canadian Tire.

Next week all eyes will be on the US CPI data Thursday plus the start of US Bank earnings on Friday. Fingers Crossed.

Happy New year.

Steve Bokor and the Ocean Wealth Team.

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