We're Done Talking About the Fed (We Hope): Jarvis® Update February 3, 2023

Investors have put 2022 very much in the rearview mirror, and the tone has shifted heavily to optimism. We cover that and much more in this week's Jarvis Update. I'm your host, Brian Dress, Director of Research here at Left Brain, joined as always by our CEO and Chief Investment Officer, Nolan Langford. Nolan, welcome to the program.

Hey, Brian, it's nice to be back with the listeners, the viewers. Let's do it.

Absolutely. It's been a few weeks. We're happy to be back with you. Uh, first of all, we'd like to ask you humbly for a like and to share the video if you find it useful. It really does help other investors find the video and also subscribe and hit the bell for notifications. That way you can find out every time we're out with these videos and we're out biweekly now in 2023. First, a quick preview. Markets led by growth investments showing the type of strength we haven't seen in 2 years after the Fed meeting this week. We've got two topics for you, as we usually do. The first is the Fed and inflation, and the second is market rotation. Uh, before we get started, a few announcements. First of all, we produce this show for you, the everyday investor, whether you've got a 401k or an IRA. If you manage your own money or if you work with an advisor, we'd love to be a resource for you and provide a second opinion on what you're doing. Uh, if you'd like that second opinion on how to position yourself for a possible market recovery here in 2023, make sure to give us a call on the number below. We'd love to talk and, uh, see if we could be a fit for you. Also, if you're an institutional investor, we've got something for you as well, and that's our Investment Research Service. We put out 6 to 8 of our full-length research reports per month, and also our Chosen— that's our favorite stock and bond for each quarter. So check that out. We'll put the link at the bottom of the screen for you on that as well. Either way, we'd love to have you sign up for our mailing list to receive all of our content, including our monthly newsletter and the second monthly newsletter for 2023 will come out next week. So look for that as well. We'll jump right into the market recap. First of all, of course, we've covered 3 indices here. The first is the S&P 500. That was up 3.2% this week. The NASDAQ was leading the charge this week with a 6.2% increase over the last 5 days of trading. And finally, the Russell 2000, that's the small-cap index, was up 5.3%. This is one of the best weeks we've had in recent memory. We also see Treasury rates squeezing down quite rapidly. They were over 4% at some point in late 2022. We're all the way back down below 3.4%. So interest rates are moving down quite steadily and quite rapidly. Nolan, any thoughts on this week's action as we look at those index numbers?

No, it's all good. For the most part, the strength is where you would expect it to be. Looks like we're got the top on rates. And the market's comfortable with that. And now the market's looking at last year's losers and looking for places to put money to work. So I think it's really, really good.

Absolutely. No one— we're very excited to have a little bit of a change in tone in the markets. It's been a tough couple of years. We'll jump right into our topics. So topic one is we talk the Fed and hopefully for the last time we had yet another 25 basis point increase, quarter point. Out of the Fed this week. We had a much anticipated Fed meeting. Everyone was not only looking for what are they going to do with rates, but kind of what was the tone coming out of the meeting. Jay Powell seemed to indicate that he knows the Fed is beginning to win versus inflation and that they're going to be much more data dependent going forward, taking into account that inflation does seem to be abating somewhat. Nolan, what are your thoughts after the Fed meeting and are we done reading the Fed tea leaves and worrying about inflation?

Absolutely. Here at Left Brain, we can finally sign off the Fed speak as we've been the most of, most of existence as a firm. And we're back to doing what we do, is ignoring the macro and paying attention to the micro. We have earnings seasons here and we're much more interested in what CEOs tell us, how business conditions are, what's happening with earnings and what they're going to do with their cash. But yes, we're past the critical moments as it relates to inflation and the Fed.

Wonderful. I'm sure Jay Powell's family loves him, but I think we're done talking about him here for a little while. We'll leave topic 1 short on the Fed and we'll move on to what matters, topic 2. So topic 2 is a violent market rotation. We've seen quite a bit of rotation out of more value-oriented sectors that have dominated over the last couple of years, that being healthcare, energy, insurance, and a number of other sectors, consumer staples. And we've seen a lot of rotation in the first month of the year into more growth-oriented sectors, whether that be consumer discretionary or information technology, two of the more traditional growth sectors. Like I said, over the last couple years, there's been a very pronounced shift from value, from growth into value. And we're starting to hear from companies in the form of Q4 earnings reports. As Nolan and I often say, our favorite time of year is earnings season, and we're right in the thick of it. And we're looking at annual reports from 2022. Last week we saw quite a dismal report from Intel. That's one of the bigger semiconductor chip makers out there, INTC. But we did see quite a kind of a muted reaction to earnings. It wasn't as much of a disaster in the stock price as we might have expected. Yesterday we heard from Meta, the artist formerly known as Facebook, and they gave us quite a remarkable report. What was even more remarkable was the market reaction to that report, and the stock was up over 20% in Thursday's trading. Nolan, what are your, what takeaways from the early returns and earnings?

You know, uh, you mentioned 2 years ago, that's what generally the top happened in the growth sector. If you go back to February 2021, most stocks hit their highs and started to come down from there. So it's been a 2-year of an expectation reset. Back then, expectations were unbelievably high. Now, valuations were high as well, but investors expected a lot. And stocks fell for a couple, couple years for two reasons. One is, you know, interest rates. You have to, even if they are going to do spectacular, the earnings and revenues and cash, you have to discount it at a higher rate when interest rates go up. So that sort of was the first cord that was cut. But the second one is coming out of COVID a lot of companies that looked like they had durable business models coming out of COVID when the economy normalized, so did their business. and it went from being a spectacular, wonderful business to just a very good one. And that was the second reset. But we're 2 years into it. Expectations have been reset, both from what you can expect, uh, but especially from a numerical standpoint as far as earnings expectations. And so now the earnings expectations are a lot more moderate. So you're seeing this phenomenon where you get companies that even that don't do well on earnings, but still do okay. You know, Intel comes to mind. Snapchat a couple of days ago, not very well on earnings, but if you take a look at the stocks, they're still holding up fairly well. And then you'll have other companies that report, as long as they don't belly flop, the stocks seem to be working, which tells us that investors now are, are looking past this short 1 or 2 quarter period, looking back toward the long term, and that's a really positive development.

Hey man, looking back toward the long term, that's music to our ears at our shop. That's the type of investing we want to be doing, and it looks like the rest of the market is starting to move that direction too. I wrote down here, Nolan, a little bit of, is this a market's corollary to gravity? What comes— what goes down must come back up. Certainly seems like, like you mentioned, a lot of these stocks, expectations for the business were certainly reset in a certain way, and we are looking at clearing a little bit of a lower bar, and that seems to be working in the first few weeks of this, of this year. Is the market rotation on for 2023? So we've seen over the last few weeks, in the first few weeks of 2023, that rotation that I was mentioning from out of value sectors and back into growth. What signs are you seeing and how should investors approach investing in the coming year?

So I, I think one of the things that's important is just to take a look at where we are today and just think about the portfolio 2 to 3 years from now. And I think you want to go back and look at long-term winners, not from a stock price standpoint, but companies who've been able to consistently grow revenues at a good clip, the earnings are there, very low levels of debt, and who have a business model where competition's really not an issue, and they're going to continue to get a tailwind from everything that's happening. You know, we tend to think about inflation and interest rates that we were talking about, but people forget that technology itself is disinflationary and deflationary. It helps, you know, we're hearing a lot about layoffs. Company want to cut their costs because they want to preserve margin to continue to boost those earnings. Well, one of the ways, if you're a business, that you can cut costs is be more productive, and technology definitely helps you do that.

Absolutely, Nolan. That's the theme that we're going to be looking toward in 2023. A lot of the stocks that we liked in years past were trading at absolutely nosebleed valuations. That certainly has reset, and we're excited to start taking a look and seeing where we could find opportunity in some of the businesses that we think are going to be long-term winners in tech and other, uh, in other areas. So I want to thank the viewers for being with us. It's been a few weeks. We're happy to have you back. We want to send a special shout out to the Chiefs. What a win last week against the— in the— against the Bengals. And we'll be rooting for them against the Eagles in next week's Super Bowl. Nolan, thanks for being with us. Any final thoughts?

It should be an epic contest, the Super Bowl. But now we're in the midst of earnings season. We're about a third of the way through. We had some real big Earnings coming up here momentarily, uh, this week. Amazon, Apple, and then for the next 2 weeks we're going to be full go with, with earnings, and that'll tell us what to expect from a fundamental standpoint. So really good time.

Wonderful. We bet we'll be back with you for the next earnings update, and until then, have a great week.