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Cyclical Stocks to Outperform as Inflation Drops to 3.5%: Barry Knapp’s 2023 Outlook (Szn 5, Ep. 1)

Published January 9, 2023

Barry Knapp of Ironsides Macroeconomics rejoins the podcast to discuss his surprisingly sanguine view of the economy in 2023: Why cyclical stocks should outperform the technology and defensive sectors, and why he’s expecting inflation to drop to 3.5% by the second half of the year.

Content Highlights

  • Inflationary recessions are different from deflationary ones. The last four were the latter. If there is a recession this year, it will be the former (02:18);
  • Earnings downside is limited in this scenario, by 5% based on what happened in similar situations in the past, and earnings should actually go up (5:56);
  • Tech margins should continue to be under pressure but economically-sensitive cyclical stocks should see margin expansion (10:50);
  • The US labor market has actually started to weaken considerably — and not due to Fed policy (12:18);
  • There have been some big adjustments in the labor market post-pandemic (16:47);
  • The ‘wealth destruction effect’ from tech stocks selling off is negligible (27:35);
  • One point of concern: the deficit. This is where the implosion in wealth could affect things (32:59);
  • The coming budget battle in Congress is worth paying attention to (34:41);
  • The ‘higher for longer’ Fed interest rate hike thesis has gained traction. What this means for stocks (43:27);
  • Inflation: Expect 3.5% CPI by mid-year (47:37).

More Information About the Guest

Not intended as investment advice!

Quick Video Highlights

MoreCyclical Stocks to Outperform as Inflation Drops to 3.5%: Barry Knapp’s 2023 Outlook (Szn 5, Ep. 1)
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Recession Fears Ascendant as Trading Gets Underway in 2023

Published January 3, 2023

The following is an amended version of the Jan. 3 Daily Contrarian. This briefing and accompanying podcast are released to premium subscribers each market day morning by 0700. To subscribe, visit our Substack or Supercast.

Last year was ugly. Stocks got beat up, bonds were bludgeoned, and the way markets limped through the last few weeks of 2022 was particularly disconcerting.

So far 2023 is looking no better. Economic concerns are paramount. Two-thirds of sell-side economists are now predicting a recession in 2023. While one can be forgiven for wanting to treat this as a contrarian indicator, the issues they cite are real: Americans are spending down their pandemic savings, the housing market is slowly falling apart, and banks are tightening lending standards.

These would normally be the necessary ingredients for a recession, but the labor market remained strong through 2022 — and may be the one thing that has kept the economy from rolling over. How much longer? Our last podcast guest says this can continue for a while. He may be right seeing as he has primary data to support the argument — hiring practices of his firm’s clients.

This is little consolation as stocks continue to drop. The selling has been especially pronounced in tech, with the Nasdaq now down 1% on the day at the time of this writing.

Buying opportunity? Fortune favors the brave, but it’s extremely hard to make this case right now. Buyer beware, more like. Besides, stocks aren’t even particularly cheap yet.

Maybe the next couple of days will provide some clarity. We’ll get crucial readings on the labor market tomorrow (JOLTS) and Friday (non-farm payrolls). Not much in earnings this week.

Below the free audio:

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Investors May Be Overreacting to the Fed

Published December 16, 2022

Stocks haven’t stopped dropping since the December FOMC meeting. But nothing about Fed policy has changed….

The following is an amended version of the Dec. 16 Daily Contrarian. This briefing and accompanying podcast are released to premium subscribers each market day morning by 0700. To subscribe, visit our Substack or Supercast.

Stocks sold off dramatically yesterday with the Nasdaq dropping more than 3% and S&P 500 down 2.5%. Today the selling appears to be continuing, and perhaps event intensifying a bit. That would make for three straight days of losses dating to Wednesday’s Federal Open Market Committee meeting.

One can’t help but think that all this risk-off is a bit of an overreaction. Nothing about official Fed policy changed, we just had Fed officials increase their expectations of interest rates for next year. That means nothing. These views are not binding. They are not tied to them in any way and can be expected to adjust them when and if the data changes. You know, exactly like they did this year.

If one is bullishly inclined, then one would probably want to take this opportunity to add to one’s positions or perhaps even take out more exposure to risk assets. There has not been any new data to undermine the ’soft landing’ thesis this week — in fact quite the opposite, with Tuesday’s CPI coming in softer than anticipated and showing that inflation is clearly on a downward trend.

Caution Advisory

Make no mistake: There are multiple reasons to be concerned about the economy and the Fed next year and what that would mean for risk assets. We have talked about those ad nauseum for months. If this narrative begins to win over the hearts and minds of investors, then the data won’t matter anyway. Markets are irrational beasts and once fear takes hold it tends to drown out anything else anyway. Plus, we all know markets can stay irrational longer than we can stay solvent.

But from the looks of it, this has the making of a classic overreaction for the simple reason that no underlying data has changed. If anything, the dot plots are contrarian indicators as Fed officials tend to change their views more frequently than they stick to them.

Our YouTube channel has a short clip from today’s podcast if you care to listen to it.

Nothing here is intended as investment advice. Do your own research. Make your own decisions.

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