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Saturday, January 14, 2022
Today’s newsletter is by Myles Udland, Head of News at Yahoo Finance. Follow him on Twitter @MylesUdland and on LinkedIn. Read this and more market news on the go along with Yahoo Finance App.
Big banks including JPMorgan, Wells Fargo, Citigroup, and Bank of America all reported quarterly results on Friday.
These firms collectively sent a transparent message to investors — we’re preparing for a downturn.
As a bunch, these banks put aside greater than $4 billion in loan-loss provisions, or money they expect won’t be paid back by borrowers.
JPMorgan (JPM) put aside $1.85 billion in provisions for credit losses, saying these reserves were built because the firm’s outlook is “now reflecting a gentle recession within the central case.”
Bank of America (BAC), for its part, put aside $1.1 billion for credit losses within the fourth quarter, Wells Fargo (WFC) $936 million, and Citigroup (C) one other $640 million.
Initially, investors saw these reserve builds as a negative sign for banks and the economy more broadly. Futures were lower early Friday, as were shares of every bank.
By the point the closing bell rang on Friday, nevertheless, shares of every company were higher together with the broader market.
A response from investors that’s consistent with early trading in 2023.
And maybe indicative of a more constructive backdrop within the months to return.
In a note to clients earlier this week, Fundstrat’s Tom Lee observed that market history says the S&P 500’s rally in the primary few days of the 12 months — a period that wrapped up last Tuesday — is an unequivocal positive.
Citing the “First Five Days” rule, Lee notes that in seven prior instances wherein the S&P 500 rose 1.4% or more in the primary five trading days of the 12 months after a losing 12 months, the index logged annual gains every time — with a median gain of 26%.
“In other words, the ‘base’ case for 2023 is [the] S&P 500 could gain >25%,” Lee wrote. “And that is completely counter to consensus which sees [the S&P 500] falling to three,000 in first half 2023, before recovering to be flat. In brief, 2023 should see far stronger returns than many expect.”
Now, a rebound within the stock market after traders endured essentially the most difficult environment in a generation should come as only a gentle surprise. The stock market will not be mean reverting, but stocks do are inclined to go up over time.
Furthermore, investors tend to not react to what is going on but somewhat what they think will occur.
Apply this logic to the case of bank stocks on Friday, and the market motion suggests investors feared even worse news. If some investors think it is a “bad news is bad news” form of market, then it seems the inverse is true as well — excellent news was excellent news on Friday.
And if we glance away from financial giants and towards more speculative pockets of the market, we discover that risk-on energy is certainly percolating beneath the surface.
Frantic rallies in one-time meme stocks like Bed Bath & Beyond (BBBY) and Carvana (CVNA) this week — and to a lesser extent names like Coinbase (COIN) and Cathie Wood’s flagship ARK Innovation ETF (ARKK) — suggest some investors have entered 2023 with a “latest 12 months, latest you” mindset after a rough 2022.
And whether you think about yourself a market historian or not, anyone paying even cursory attention to every day price motion in early 2023 can see things look quite different from how we ended last 12 months.
Now, the rub in noting stocks go up over time is that the impulse behind these regular gains are steadily rising corporate profits. And lots of on Wall Street still don’t think investors are being conservative enough in modeling a drop in profits this 12 months.
But when stock prices tell us what investors consider in regards to the future, then corporate profits tell us what we all know in regards to the past.
Within the fourth quarter of 2021, JPMorgan, Bank of America, and Citigroup, for example, all released reserves that had been put aside for credit losses amid a booming economy and healthy consumer balance sheets. Within the 12 months that followed, inflation surged to 40-year highs, and an imminent recession became the consensus view on Wall Street and Principal Street.
Against this recent history, then, Friday’s market response serves as a reminder investors already prepped for this bad news from banks. That is what all of the fuss was about last 12 months.
And what all of the optimism is about thus far this 12 months.
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