January 22nd, 2023

U.S. stock markets came out of the Martin Luther King break riding early 2023 gains. Investor sentiment remained buoyed by optimism that the Fed was nearing an end to its tightening cycle, married with hopes of an upcoming boost from the reopening of the Chinese economy. Earnings season broke into a stride with more financial firms and select consumer companies reporting Q4 results. Organic sales growth largely remained robust for many of these companies but remained almost solely predicated on their ability to continue raising prices. The U.S. dollar held near 8-month lows while commodity prices like copper and oil maintained recent strength supported by China’s reopening. Midweek investors saw some of the first real instability of 2023. Outside of weekly jobless claims, the U.S. economic data remained worryingly soft. The S&P 500 briefly tested below the 3900 and U.S. yields moved to the lowest levels since September. Recession fears appeared to resurface alongside a litany of ECB and Fed officials who remained adamant rates still need to go higher for longer to squash inflation. As the week progressed some of the comments from Fed officials seemed to become a bit more two-sided. Notably, on Thursday Fed Vice-Chair Brainard spoke extensively for the first time since late November. She emphasized that the Fed would stay the course and inflation remained too high, but also acknowledged inflation has been declining in recent months and believes we are now in restrictive territory, probing for a sufficiently restrictive level. The following day, the Fed’s Waller endorsed slowing hikes to 25 bps increments, and went a step farther musing that the slower tempo would also make it easier to reverse course and cut rates if policy turns out to be wrong this year. Stock sentiment improved into Friday’s options expiration, lifting indices significantly off their lows

 For the week, the S&P edged down 0.7%, the DJIA fell 2.7%, the 50/50 Nasdaq/Russell benchmark slipped 0.2%, the European bourses lost 0.4%, and the Asia Pacific stock markets gained between 1% and 2%. Your BSD Global Tech Hedge Fund L.P. gained 0.6% this past week. Corporate news last week was dominated by more corporate layoffs, particularly in big tech. Both Google and Microsoft announced they would let go more than 5% of their workforces, amounting to tens of thousands of jobs. Online furniture retailer Wayfair also announced significant job cuts, but coupled the announcement with news of improving revenue trends since late last year. United Airlines continued a largely positive trend seen among airlines, reporting strong Q4 results and providing FY23 guidance substantially above expectations. Netflix’s quarterly results were also taken positively, as it reported strong subscriber additions and said it’s on track to achieve positive annual free cash flow going forward. P&G was the first major consumer staples name to report what appeared to be continued momentum in organic growth driven by a double digit increase in prices, raising questions about how sustainable that really is. Shares of Goldman Sachs took a double-whammy after the firm announced subpar results and reports suggested the Fed is continuing to scrutinize its consumer unit for inadequate monitoring and safeguards. T-mobile was another loser last week after disclosing that a ‘bad actor’ had stolen data from millions of customer accounts. On the M&A front, National Instruments received an improved $7B takeover proposal from Emerson but may continue to field other offers as reports suggest there are other potential interested bidders.

Earnings reports will dominate the conversation around stocks this coming week with Tesla, Microsoft, Visa, Mastercard, Johnson & Johnson and Boeing some of the heavyweights due to report. Federal Reserve speakers will be in a blackout period ahead of the February FOMC meeting, but economic reports will still pour in. Updates on the S&P Case-Shiller Home Price Index, U.S. new home sales, durable goods orders, and consumer sentiment could reinforce the expectation for a recession in the U.S. and set the table for a 25-point rate increase from the Fed, instead of a 50-point hike. Watch for the Bank of Canada monetary policy meeting announcement on Wednesday. All of the U.S. broad market indices are on the threshold of either formidable resistance, or ready to signal a bullish outlook. This past Saturday was Chinese New Year’s Eve, followed by the Spring Festival. The New Year atmosphere which generally extends until at least the end of January may further stimulate domestic consumption and investment in China.  

Our BSD Global Tech Hedge Fund is 95% invested across a couple dozen tech vendors and tech end-users, thereby allowing the Fund to participate if this stock market moves higher, and We have a 57% short equity indice hedge on the notional value of the invested stock portfolio that will incrementally grow (from the laddered Nasdaq put options strategy) if the market deteriorates. Even though your BSD portfolio management team believes the stock market has the fundamental, technical and capital flow tailwinds to rally sometime soon, we also appreciate that fighting the Fed and the bear market momentum is a battle that is not worth fighting. We will keep a defensive position until a positive risk-on sentiment takes hold.