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Thursday, January 19, 2023
Despite Wednesday's losses in the major U.S. indexes, stocks are flying out of the gate in 2023.
And in enjoying these gains in the new year, stocks are diverging from the trends that emerged in the second half of 2022. A move that has important implications for investors.
Start with the biggest loser of the day, the Dow Jones Industrial Average (^DJI), which was down 1.81%, or 614 points, on Wednesday, its worst showing in over a month. As of late December, the Dow had outperformed the Nasdaq by 20 percentage points — the most since the dot-com bubble crash two decades prior.
Despite this outperformance, however, the Dow ended 2022 down nearly 9%. There were few places for investors to hide in 2022.
But Wednesday, the Nasdaq outperformed the Dow by 57 basis points. Particularly notable coming on such a negative day for the market. In the first 11 trading days of the year, the Nasdaq is already up 4.69% compared to the Dow's meager 0.45% gain.
If we dive inside the benchmark S&P 500 and look at relative sector performance, 2023's year-to-date sector chart is nearly the inverse of 2022.
Last year's second-worst-performing sector is this year's best: Consumer Discretionary (XLY).
And let's not gloss over the strength in Real Estate (XLRE), which is up more than 5% after having just endured one of the most challenging housing markets in a generation last year. Another big narrative shift after 2022.
On the flip side, those red sectors in the above heat map — Utilities (XLU), Health Care (XLV), and Consumer Staples (XLP) — were the least-bad sectors after Energy last year. These sectors are also commonly referred to as defensive areas of the market for investors to find shelter in a storm. In the 2023 market, however, it seems safe trades aren't quite safe.
The bond market is also confirming moves back into these formerly unloved, growthy areas of the market that took the biggest hits a year ago.
On Wednesday, the yield 10-year on U.S. Treasury notes (^TNX) plummeted 16 basis points to 3.375%, a four-month low. All else equal, sinking bond yields favor growth stocks that depend on lower interest rates.
And although buying bonds is often seen as investors fleeing to safety, right now the bond bid appears firmly part of a risk on trade.
Finally, throw in Wednesday's market reaction to economic news.
December retail sales surprised to the downside with a drop of 1.1%, which follows a similar negative print in November. Investors seem to be pricing in this objectively bad news for what it is — bad news — instead of trying to play 4D chess with Jay Powell and the Federal Reserve.
Speaking of the Fed, the market's new favorite macro risk assets, bitcoin (BTC-USD) and ethereum (ETH-USD), are each up about 25% this year. Bitcoin and crypto have been particularly volatile around important Fed decisions and inflation data — leading risk markets to the upside at times, and downside at others.
Bottom line: Bitcoin is a clear leader this year among the "fringier" parts of the markets, and, currently, the direction is up.
Now, some of these pockets of the markets have been exhibiting strength since late last year. Under different leadership, this could change.
But this is a market starting to show the hands of winners over losers.
As Steven Strazza, director of research at All Star Charts tweeted this week: "Breakouts are sticking. Breakdowns are failing. It's not bear market behavior."
What to Watch Today
8:30 a.m. ET: Housing Starts, December (1.358 million expected, 1.427 during prior month)
8:30 a.m. ET: Building Permits, December (1.365 million expected, 1.342 million during prior month, revised to 1.351 million)
8:30 a.m. ET: Housing Starts, month-over-month, December (-4.8% expected, -0.5% during prior month)
8:30 a.m. ET: Building Permits, month-over-month, December (1.0% expected, -11.2% during prior month, revised to -10.6%)
8:30 a.m. ET: Philadelphia Fed Business Outlook Index, January (-11.0 expected, -13.8 during prior month, revised to -13.7)
8:30 a.m. ET: Initial Jobless Claims, week ended Jan. 14 (214,000 expected, 205,000 during prior week)
8:30 a.m. ET: Continuing Claims, week ended Jan. 7 (1.655 million expected, 1.634 million during prior week)
Netflix (NFLX), Procter & Gamble (PG), American Airlines (AAL), Comerica Inc. (CMA), Truist Financial Corp. (TFC), PPG Industries Inc. (PPG), Fastenal Company (FAST), M&T Bank (MTB), Fifth Third Bancorp (FITB), Northern Trust Corporation (NTRS), KeyCorp (KEY), SVB Financial Group (SIVB)