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Slow and Steady… Will Win This Race

by | Jan 6, 2023 | Market Outlook

Dear Reader,

This is a brutal trading environment. 

Yesterday, the markets took a bath after private jobs data showed an uptick in wages and hiring. Today, the markets rallied because there was an uptick in hiring and wage growth came in lower than expected. After the S&P 500 hit 3,880 resistance in early trading today, it turned right around and started sinking lower.  

Make up your mind, Mr. Market. 

Today, we want to discuss why this market chaos will be the norm of 2023. 

And what you should do about it.


The Fed’s Balance Sheet Is ALL That Matters


As I’ve noted, this trend of intraday swings will not change until the Federal Reserve completes its Quantitative Tightening (QT) program. And based on yesterday’s announcement, the Fed is cutting its balance sheet at the most aggressive level since its efforts started. The Fed slashed more than $40 billion – that’s right, with a B – from its balance sheet last week. 

There’s a direct causal relationship between the Federal Reserve’s balance sheet and the performance of the S&P 500. 

The market pushed higher largely on the back of lower rate hike expectations. The odds of a Fed funds rate hike by 50 basis points dropped from 50% to 33%. 

Markets will celebrate any short-term news, and with put holdings at levels we haven’t seen in more than a decade, there is always a chance of a brutal short squeeze. 

It’s important to note – in this macroeconomic environment – that job growth isn’t slowing down. That’s bearish for the market. The Fed wants to cool job growth to a crawl. 

Meanwhile, investors are very excited about the slowdown in wage growth. Markets will look ahead to next week’s December Consumer Price Index. The overall forecast from Kalshi shows that investors anticipate a 0.1% decrease in consumer prices for December. 

That said, collapsing energy prices in December is largely responsible for this forecast. Stripping out energy and food prices, expectations call for a 0.2% increase in core inflation, month-over-month. 

The challenge is that we can’t rely on energy prices to remain subdued for the foreseeable future, barring a steep drop in consumption. China will eventually reopen, Russia’s war in Ukraine could take a nasty turn at any moment, and there remain capital challenges for the energy sector in the years ahead. 

I anticipate that the Fed will continue to push forward with higher rates throughout the year. With this stubborn action, the markets can start to see compression in earnings expectations as we head into the season in a week. 

Expect a volatile earnings season with many forecast changes that fuel big swings in stock prices. If you’re not actively trading this mess, there’s a better alternative.


Go Long… Very Long


This will be a volatile year overall, even after the Fed eventually pivots. But it’s a reminder that plenty of strong companies exist that can make you a decent amount of money while you focus on the economic recovery in the year ahead. 

There are ample numbers of firms trading at incredible values. Last week, I outlined roughly a dozen with strong F scores and Z scores for this environment. Companies with strong balance sheets are the best protection against the downside presented in this market. 

A new company to join the roster of “Winning” balance sheet stocks is Epsilon Energy (EPSN). The company has an F score of 9, and a Z score of 5.37. 

The company operates in the world of oil-and-gas development in the Marcellus basin in northeast Pennsylvania and the Anadarko basin in Oklahoma. It trades at a ridiculous EV-to-EBIT of 2.2, while its Price-to-Earnings ratio sits under 5. 

In addition, EPSN pays a dividend of nearly 4%. The stock has a market capitalization of just $144 million, which is why its value goes ignored by institutional investors. It’s very difficult for large funds to deploy small amounts of capital, and an investment of just $8 million would trigger filing requirements.

That said, this company has upside of roughly $8.00 from its current level under $6.40. If you’re looking for great ideas like this, check out my Tactical Wealth Investor, which takes advantage of value and income opportunities that slide under the radar. 

To your wealth,

Garrett signature



Garrett Baldwin

WRITTEN BY<br>Garrett Baldwin

Garrett Baldwin

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