Top traded counter in January 2023 February 23, 2023

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At a glance:

• The “January effect”
• Headwinds faced in 2022
• Russian-Ukraine conflict
• Oil and gas sector
• Employee layoffs across multiple firms
• Morgan Stanley (MS.US) and Microsoft (MSFT.US) tops earnings
• Goldman Sachs (GS.US), Alphabet (GOOGL.US), Amazon (AMZN.US) missed earnings

The three US major indices – the Dow Jones, S&P 500 and Nasdaq Composite had similar movements through January having bounced back from December’s lows.

Stocks generally rise because of the “January effect” at the start of the year.
In the US, capital gains tax must be paid by stockholders who sell stocks at a profit. However, capital losses suffered in the same year can be used to offset any capital gain made in that particular year. As such, investors start selling some of their portfolio losers in an effort to offset their rise in taxable income. Thereafter, with an artificially low stock price, investors start buying in January and stocks start rallying, creating the January effect.

However, is the rally sustainable?

The headwinds faced by the market in 2022 may affect its future performance in the coming year, for example, the headwinds in 2021 caused a bearish sentiment among investors last year.

● China’s COVID lockdown

As the world’s second largest economy, China partly caused the market downturn in 2022 due to its zero-COVID strategy. With many goods being made in China, its COVID restrictions had adversely affected the global supply chain.

In late 2022, after many countries started ‘living with COVID-19’, China finally abandoned its zero-COVID strategy and started softening its COVID-19 policies.

Moving into 2023, China’s re-opening can help prop up and cushion the global economy for a soft landing.

● Russia’s invasion of Ukraine

The war between Russia and Ukraine caused energy prices to soar in 2022. Investors were especially worried about oil prices soaring in the winter of 2022. But the winter of 2022 turned out to be milder than anticipated which led to a decline in oil prices¹.

There seems to be no end in sight to this war. Any further escalation could still negatively affect global confidence and weaken global growth.

● Sky-high inflation

Inflation in 2022 was high due to supply chain disruptions and pent-up demand caused by COVID-19 restrictions. With high inflation, the Fed raised the federal funds rate 7 times in 2022 pushing interest rates to the highest point in 15 years. The hawkishness of the Fed’s policies sent stock prices tumbling down.

However, high inflation may soon be something of the past as inflation has been falling steadily. The Federal Reserve’s favoured inflation indicator, the personal consumption expenditures (PCE) price index, rose 5% in December 2022, down from 5.5% in November 2022².

In 2023, apart from the Russian-Ukraine war, the market has a new concern, whether there is any hope of a soft landing. Investors are worried that the Fed has been too hawkish and the back-to-back rate hikes might drive the economy into a recession.

The effects of the rate hikes are being felt in the economy. The gradual decrease in inflation figures, the stalling of manufacturing activity and the housing sector tumbling under the weight of high mortgage rates are all the effects of the rate hikes. The falling manufacturing and housing sectors likely point to an economic downturn. If a recession is coming, it is likely due to the Fed’s hawkish stance.

However, if we look at the robust labour market, it is hard to believe that a recession is around the corner. Finally, the same can be said for corporate earnings; companies are still releasing good earnings reports.

Although there is still no clear answer on recession, there are still some opportunities available in the market. There is one sector that will be resilient in the coming year.

Oil and gas industry

The oil and gas industry is likely to stay resilient in the coming year. The International Energy Agency expects global oil demand to continue increasing until at least 2025³. According to the Energy Information Administration, the global oil consumption is expected to reach 125 million barrels per day by 2050⁴ which is around 25% higher than the global oil consumption per day for 2022.

Oil consumption in the US has returned to pre-COVID levels⁵ and China may soon follow suit with the relaxation of its COVID restrictions. China may take a shorter time to rebound with the Chinese government’s effort to spur the recovery of its economy⁶, further adding upward pressure on oil prices.

Looking at the supply side, Saudi Arabia and the US may have no difficulties expanding their production beyond their historical levels as their crude oil resources are developed unlike Canada, Iran and Russia which have largely undeveloped crude oil resources. In the long term, Canada, Iran and Russia should be able to meet the global demand of 2050. However, in the short-term, there may be difficulties ramping up oil supplies due to the conflict in Russia and Ukraine.

With supply unlikely to increase as fast as the global demand for oil, the price for crude oil is likely to remain elevate. Thus, there should be potential for the oil and gas industry going into 2023.

Here are some of the more popular US stocks – not ranked in any order – traded by POEMS customers in January 2023.

Morgan Stanley (NYSE: MS)

MS has seen a headcount increase in recent years. The bank’s employee ranks surged by 34% from the first quarter of 2020 to the third quarter of 2022. This caused operating costs to increase substantially. With the expectation of a slower economy this year, MS cut about 2% of its staff last month, which impacted 1,600 of the company’s 81,567 employees.⁷

In January, MS reported that their earnings topped estimates. EPS and revenue of US$1.26 and US$12.75 billion both beat estimates of US$1.19 and US$12.64 billion respectively. Though the reported earnings are still lower than the previous year’s, the firm managed to beat estimates, post record revenue at its wealth management business and saw higher revenue at its trading operation. The share price jumped nearly 6% after the results.⁸ MS opened at US$85.64 and gained 13.65% to close at US$97.33 in January.

Technical analysis

Status: Bullish

Support: 94.00

Resistance: 85.00

As long as price can sustain itself above the current zone, we should expect price to continue this bullish run.

Goldman Sachs Group (NYSE: GS)

The global investment bank laid off 3,200 employees earlier this month as the firm is concerned that the economy will slow down further this year from fears that stock, bond issuance and mergers do not rebound. The layoff is around 6.5% of the total employees GS had in October.⁹ Though the cut was less than the planned 8%¹⁰ it was still significant.

Later in the month, GS released earnings that failed to beat estimates. Earnings and revenue of US$3.32 and US$10.59 billion both missed estimates of US$5.48 and US$10.83 respectively. The reason for the miss was decreasing revenues and the increase in operating expenses by 11% due to higher compensation.¹¹ In January, GS opened at US$345.50 and gained 5.88% to close at US$ 365.81.

Technical analysis

Status: Neutral

Support: 335.00

Resistance: 382.50

GS was range-bound after a strong bullish price action. The price is sustaining itself well above US$340 and should see US$370.45 in the short term.

Alphabet Inc (NASDAQ: GOOGL)

As one of the biggest players in the digital advertising space, GOOGL was challenged by the Department of Justice (DOJ) for breaching the Antitrust Law in January. DOJ said that GOOGL used acquisitions and exclusionary strategies to fend off rivals and maintain monopoly power in the digital advertising space. If this is proven to be true, the courts would order a break-up of GOOGL’s digital advertising business. This will greatly affect GOOGL as it has generated more than US$50 billion in revenue in the last quarter.¹²

GOOGL also reported laying off 12,000 people, or 6% from its workforce. The reason for the layoff was due to an unexpected slowdown in GOOGL’s growth and to further streamline the firm’s procedures to achieve the company’s priorities.¹³

GOOGL reported disappointing earnings for the previous quarter. EPS and revenue of US$1.05 and US$76.05 billion missed estimates of US$1.18 and US$76.53 billion respectively. The disappointing earnings was likely due to an increase in operating expenses driven by headcount growth. For the next quarter, the firm is expected to take a charge between US$1.9 billion-US$2.3 billion related to the 12,000 who were laid off as well as incurring a US$500 million costs relating to reduced office space, and warned that other real-estate charges are possible going forward.¹⁴

GOOGL opened at US$89.59 and gained 10.32% to close at US$98.84 in January.

Technical analysis

Status: Neutral

Support: 86.00

Resistance: 104.00

Range-bound

Amazon Inc (NASDAQ: AMZN)

In January, AMZN’s CEO, Andy Jassy said that the company was looking to eliminate as many as 18,000 roles to trim the headcount that had swelled during the pandemic period. The company was also confronting a decreasing growth in sales, rising expenses and a worsening economic outlook.¹⁵

AMZN reported disappointing earnings in January. Though revenue of US$149.2 billion beat estimates of US$145.42 billion, EPS of US$0.03 missed estimates of US$0.18. Amazon Web Services (AWS) revenue of US$21.4 billion missed estimates of US$21.87 billion. The company expects revenue for the next quarter to be US$121 billion-US$ 126 billion compared to the estimates of US$125.1 billion.¹⁶

AMZN opened at US$85.46 and gained 20.68% to close at US$103.13 in January.

Technical analysis

Status: Neutral

Support: 84.00

Resistance: 111.70

Range-bound

Microsoft Corporation (NASDAQ: MSFT)

MSFT took a US$1.2 billion charge in connection with its decision to cut 10,000 jobs to brace for slower revenue growth, revise its hardware line-up and consolidate leases. The charge includes US$800 million in employee severance costs.¹⁷

The firm provided better-than-expected earnings but gave a disappointing revenue forecast in January. EPS was reported at US$2.32, beating estimates of US$2.29 while revenue of US$52.75 billion missed estimates of US$52.94 billion. For the next quarter, the firm called for US$50.5 billion-US$ 51.5 billion which is less than estimates of US$ 52.43 billion.¹⁸ For January, MSFT opened at US$243.08 and gained 1.95% to close at US$247.81.

According to a Phillip Research report dated 26 Jan 2023, the recommendation for MSFT stays as a Buy.

Technical analysis

Status: Neutral

Support: 220.00

Resistance: 264.00

Range-bound

CONCLUSION

Layoffs are seen in companies that grew too rapidly due to their forecast last year of an economy with high growth. The reality turned out to be an economy of slower growth, leading to the companies facing overstaffing issues which increased their operating costs. Having multiple layoffs in an economy is normally a sign of an impending recession but the job market as a whole still remains strong, lowering the probability of a recession. With that said, hedging a portion of the portfolio for the downside is always wise. Investors can consider investing in ETFs with an exposure to fixed income assets or gold.

Bloomberg analysts’ recommendations

The table below shows the consensus ratings and average ratings of all analysts updated on Bloomberg in the last 12 months. Consensus ratings have been computed by standardising analysts’ ratings from a scale of 1 (Strong Sell) to 5 (Strong Buy). The table also shows a number of analysts’ recommendations to buy, hold or sell the stocks, as well as their average target prices.

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