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Saturday, January 14, 2022
These companies collectively sent a clear message to investors – we are preparing for a downturn.
As a group, these banks set aside more than $4 billion in loan loss provisions, or money they expect will not be repaid by borrowers.
JPMorgan (JPM) allocated $1.85 billion in provisions for credit losses, saying that these reserves were built as the company’s outlook is “today reflecting a slight recession in the central case”.
Initially, investors saw these reserve builds as a negative sign for banks and the economy more broadly. Futures were lower earlier Friday, as were shares of every bank.
By the time the closing bell rang on Friday, however, each company’s shares were higher with the wider market.
An investor reaction that is consistent with the initial trade in 2023.
And perhaps indicative of a more constructive background in the coming months.
In a note to clients earlier this week, Fundstrat’s Tom Lee noted that market history says the S&P 500’s rally in the first few days of the year — a period that ended last Tuesday — is a unequivocal positive.
Citing the “The first five days” rule, Lee notes that in seven previous cases in which the S&P 500 rose 1.4% or more in the first five trading days of the year. later a losing year, the index recorded annual gains each time – with an average gain of 26%.
“In other words, the ‘base’ case for 2023 is [the] S&P 500 could gain >25%,” Lee wrote. “And that’s it completely against the consensus what do you see [the S&P 500] falling to 3,000 in the first half of 2023, before recovering to be flat. In short, 2023 should see much stronger returns than many expect.”
Now, a recovery in the stock market after traders have suffered the most challenging environment in a generation should not be just a mild surprise. The stock market may not mean to return, but stocks tend to go up over time.
Also, investors tend not to react to what is happening, but rather what they think is happening.
Apply this logic to the case of the bank’s shares on Friday, and the market action suggests that investors feared even worse news. If some investors think this is a “bad news is bad news“Type of market, then it seems that the reverse is also true – good news was good news on Friday.
And if we look away from the financial giants and towards the more speculative pockets of the market, we find that the energy of risk is definitely percolating below the surface.
Frantic meetings in meme stock once such as Bed Bath & Beyond (BBBY) and caravans (CVNA) this week – and to a lesser extent names like Coinbase (COINS) and Cathie Wood’s flagship ARK Innovation ETF (ARKK) – suggests that some investors are entering 2023 with a “new year, new year” mentality. after a hard 2022.
And whether you consider yourself a market historian or not, anyone paying even cursory attention to daily price action in early 2023 can see that things look very different from how we ended last year. .
Now, the hurry in swimming stocks increase over time is that the impetus behind these stable earnings are in constant growth of corporate profits. And many on Wall Street still do not think that investors are conservative enough in the model of a drop of profits this year.
But if stock prices tell us what investors believe about the future, then corporate profits tell us what we know about the past.
In the fourth quarter of 2021, JPMorgan, Bank of America and Citigroup, for example, all released reserves that had been set aside for credit losses amid a growing economy and healthy consumer balance sheets. In the following year, inflation reached 40-year highs, and an impending recession became the consensus view on Wall Street and Main Street.
Against this recent history, therefore, the reaction of the market on Friday serves as a reminder that investors are already prepared for this bad news from the banks. That’s what it was all last year.
And what all the optimism is about until this year.