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Saturday, January 14, 2022

Today’s bulletin by: Miles Woodland, head of news at Yahoo Finance. Follow him on Twitter @MylesUdland and on and on LinkedIn:. Read this and more market news right away Yahoo Finance app.

Major banks including JPMorgan, Wells Fargo, Citigroup and Bank of America all reported quarterly results on Friday.

Together, these companies sent a clear message to investors: We’re headed for a recession.

As a group, these banks set aside more than $4 billion in loan loss reserves, or the amount they expect will not be repaid by borrowers.

JPMorgan ( JPM ) set aside $1.85 billion in loan loss provisions, saying these provisions were created because the company’s outlook “now reflects a mild downturn in the central case.”

Bank of America ( BAC ), for its part, set aside $1.1 billion for loan losses in the fourth quarter, Wells Fargo ( WFC ) $936 million, and Citigroup ( C ) another $640 million.

At first, investors saw these reserve accumulations as a negative sign for banks and the broader economy. Futures were lower on Friday, as were shares in every bank.

By the closing bell on Friday, however, shares of every company were higher, along with the broader market.

Investor reaction consistent with early 2023 trading.

And perhaps an indication of a more constructive backdrop in the coming months.

JPMorgan Chase & Co. Chairman and CEO Jamie Dimon attends a U.S. House Financial Services Committee hearing titled “Holding Mega Banks Accountable: Oversight of America’s Largest Consumer-Faced Banks” on Capitol Hill, Washington, DC, September 21, 2022. REUTERS/Elisabeth Franz.

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, was decidedly positive.

Invoking the “first five days” rule, Lee notes that in the previous seven times the S&P 500 has risen 1.4% or more in the first five trading days of the year; after In the losing year, the index posted annual gains each time, with an average gain of 26%.

“That is, it is the case of the “base” of 2023 [the] S&P 500 could gain more than 25%,” Lee wrote. “And it completely contradicts the consensus that sees. [the S&P 500] falling to 3,000 in the first half of 2023 before recovering and becoming flat. In short, 2023 should see much stronger earnings than many expect.”

Now, the recovery in the stock market after traders endured the toughest environment in a generation should come as only a mild surprise. The stock market may not go down, but stocks tend to go up over time.

Furthermore, investors tend to react not to what happens, but to what they think will happen.

Apply this logic to banking stocks on Friday, and market action suggests that investors feared more bad news. If some investors think this is a “bad news is bad news” type of market, it seems the opposite is also true. On Friday, good news was good news.

And if we look beyond the financial giants and into the more speculative pockets of the market, we find that risk-taking energy is definitely seeping beneath the surface.

This week has seen wild rallies in once-meme stocks like Bed Bath & Beyond ( BBBY ) and Carvana ( CVNA ) and, to a lesser extent, names like Coinbase ( COIN ) and Cathie Wood’s flagship ARK Innovation ETF ( ARKK ) — some investors have suggested. 2023 entered with a new year, new you mentality after a rough 2022.

And whether you consider yourself a market historian or not, anyone who pays even cursory attention to daily price action in early 2023 can see that things are very different than how we ended last year.

Now, the reason stocks are rising over time is because the driving force behind these steady gains is a steady increase in corporate profits. Many on Wall Street still don’t think investors are being conservative enough to model a decline in earnings this year.

But if stock prices tell us what investors believe about the future, corporate earnings 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 booming economy and a healthy consumer balance sheet. In the following year, inflation rose to a 40-year high, and an impending recession became the consensus view on Wall Street and Main Street.

Against this latest story, then, Friday’s market reaction serves as a reminder that investors have already braced themselves for this bad bank news. That’s what all the fuss was about last year.

And what is all the optimism about this year?

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