gorodenkoff “An investor without investment objectives is like a traveler without a destination.” – Ralph Seger MY VIEW OF WALL STREET The ECONOMY Given the slower momentum in economic data and the fact that inflation has proved to be stickier than originally thought, talk of stagflation risks has entered the conversation. I’ve mentioned that it is too early to jump to that conclusion. The ‘stag’ part of stagflation represents stagnating economic growth. While there are most certainly signs to suggest that economic momentum has slowed, it’s far from certain that the economy is stagnating. Exhibit one is the latest estimate for Q2 GDP from the Atlanta Fed’s GDPNow model. In its latest update, Q2 GDP forecasts are at 3.1%. That’s almost twice the consensus forecast. While that 3.1% forecast is far from a guarantee, it would be hard to imagine GDP stagnating below 1 or 2%, given how high the current forecast is from the model. Speaking of the economy, one subject that is no longer part of the commentary is the yield curve. What used to be referred to as the most accurate forecasting tool for the economy has been written off as a relic of another economic era. When the yield curve first started to flatten and before it inverted in early 2022, Google searches for the term spiked higher, but they quickly pulled back and have flat-lined for more than a year now. The curve is still inverted, though, and inverted by a lot at -94 basis points (bps). Through Friday, the current streak of inversions was at 375 trading days, almost double the length of the next longest streak in 2007. So, is it still useless? I’ll admit that with GDP looking like it could grow by 3%-4% this quarter, it’s hard to put too much weight on the inverted yield curve. I would note, however, that in terms of calendar days, the yield curve first inverted 561 days ago, which is still 17 days less than the 589 average number of days that have historically elapsed between the first inversion and the start of a recession. CONSUMERS We’ve all heard about complacency lately; investors are too bullish on the market and banking on a soft landing in the economy. Both those outcomes certainly aren’t out of the question, but don’t tell that to the 1,300 households comprising April’s Survey of Consumer Expectations (SCE) from the New York Fed released recently-first, the stock market. Just 38.7% of those surveyed expect the stock market to be higher a year from now. That’s more than one percentage point below the survey’s historical average dating back to June 2013. Higher stock prices (www.bespokepremium.com) Sentiment towards the economy was even worse. Only half of those surveyed said they could find a new job within three months if they lost it. That reading hasn’t been this low since April 2021, and before Covid, you have to go back to 2014 to find a comparable reading. Job Search (www.bespokepremium.com) While unemployment remains near historically low levels, consumers aren’t particularly confident regarding their finances. Just under 13% reported that they could not make the minimum payment required to keep current on their debts. Debt payments (www.bespokepremium.com) It’s just one survey, but the results from this month’s SCE from the New York Fed didn’t show complacency towards the market or a ‘booming’ economy. INVESTORS That brings us to try and understand the fickle investment community. It has once again changed its approach to the economy. Not so long ago, the notion that the Fed was going to start cutting interest rates, investors were happy to see poor economic data. The sentiment changed, and the markets started to applaud resilient economic data, concluding the odds of a recession had declined significantly. However, we have recently seen another stark change in how equities have responded to economic data driven by a few consecutive hotter-than-expected inflation prints. Weaker data (employment, ISMs, consumer confidence, homebuilder confidence, retail sales, Leading Economic Indicators, etc.) recently, followed by a favorable move lower in bond yields, drove the S&P 500 to all-time highs. So, is it ‘bad news is good news’ again? The obvious answer is YES, but I would suggest this mindset better be temporary as the focus for equities needs to shift from inflation/rates back to economic growth and the impact on corporate fundamentals. The latter is required for stocks to maintain an upward trajectory. Small businesses are the backbone of the US economy. Today, over 33 million small businesses operate across the US, employing over 61 million employees-nearly half of the American workforce. This is why we track the Small Business Optimism Index. Unfortunately, we have seen Small Businesses struggling in the current economic backdrop. NFIB (www.nfib-sbet.org/) The index is so depressed it is BELOW pre-pandemic levels. Just as small businesses are a key barometer for the nation’s economic health, large public companies drive the trends in earnings. That is why we pay so much attention to earnings season. With the 1Q24 earnings season largely complete, here are the five biggest takeaways: EARNINGS 1.) Mega-Cap Tech Continues To Drive Earnings Despite elevated valuations, mega-cap tech earnings remain a bright spot, driving the bulk of the S&P 500’s earnings. The composite of MAGMAN’s earnings (i.e., Microsoft (MSFT), Apple (AAPL), Google (GOOG) (GOOGL), Meta (META), Amazon (AMZN), and NVIDIA (NVDA) that are tracked is on pace to climb over 50% YoY. Compare that to the other 494 stocks in the S&P 500, which have roughly flat earnings growth YoY. More importantly, MAGMAN’s earnings have outpaced the rest of the Index in the fifth consecutive quarter. In addition, MAGMAN has had greater top-line sales growth (over 5x higher), stronger net margins (~2.5x greater), and bigger earnings beats (~12% versus 8%) than the rest of the Index. MAGMAN has strongly outperformed the overall market (50.9% versus 25.4% over the last 12 months), with their outperformance supported by strong fundamentals and superior earnings results. 2.) Business Capex Spending Is On The Rise Early gains in the bull market in late 2022 and 2023 were driven by businesses being rewarded for pivoting to contain costs (i.e., tech layoffs, restructurings) amid an uncertain economic environment. Nearly 1.5 years later, businesses are pivoting again-shifting from cost containment to investing in growth areas (like AI and cloud computing) to support their businesses. This contributes to CEOs becoming more optimistic about the state of the economy. In fact, the Conference Board’s CEO Confidence survey moved back into expansionary territory (a level above 50) in Q1 for the first time in two years. Some of the biggest beneficiaries of the increased capex spend are tech-related Communication Services and select areas of Consumer Discretionary stocks. Let’s not forget industrials (a favored sector), which have continued to reap the benefits from all the fiscal spending via the CHIPS, IRA, and IIJA legislation in recent years. 3.) Buybacks Are Back With many S&P 500 companies still flush with cash on their balance sheets-to the tune of $2 trillion-management teams are re-focusing on delivering shareholder value. This is evident in dividend growth, which is running at an 8% YoY pace in 2024-above last year’s 5+% pace and the 10-year average of 6.6%. In addition, companies thus far have announced over $180B in stock buybacks in 1Q-yet another sign of improved confidence. Stock buybacks have remained above their 10-year average for 13 consecutive quarters. A continuation of this trend should serve as another tailwind for stocks. Case in point: Meta and Alphabet authorized their first-ever dividend this quarter, and additional stock repurchases. Apple announced a 110 billion dollar buyback-the biggest in the company’s (and the market’s) history. There is plenty of evidence to suggest that this trend will continue. 4.) Consumers Are Becoming MORE Discerning Despite ongoing concerns of consumer fatigue, a big takeaway this earnings season is that consumers, in aggregate, remain healthy and resilient. This was highlighted by some bank and credit card companies, which reported that loan loss reserves (the amount set aside to cover uncollectible debts) remained stable and even decelerated last quarter. Delinquency rates remained well below historical averages. Yes, there are signs that consumers are starting to prioritize their spending (i.e., travel remains favored over goods-related areas), and lower-income consumers are feeling the pinch from higher prices (e.g., restaurant, beverage companies), but this is forcing companies to compete on delivering value to capture the discretionary spend. Those who execute well are being rewarded. 5.) Earnings Growth Is On A Solid Uptrend Earnings growth has remained positive for three consecutive quarters, with 1Q24 on pace for a 6+% YoY gain. The healthy macro backdrop and optimistic comments about the resilient consumer and business spending suggest forward-looking earnings should remain on an uptrend in the coming quarters. Consensus estimates reflect double-digit EPS gains in two of the next three quarters, with 2025 earnings estimates around ~$275/share-a 13+% gain YoY. More importantly, earnings growth is expected to broaden, with the other 494 stocks in the S&P 500 catching up and even outpacing MAGMAN’s earnings later this year. These solid earnings trends, plus optimistic management commentary, give more confidence to the $240-$245 year-end S&P 500 EPS target. ENERGY- The MACRO view Recent oil price movements are a textbook example of how the geopolitical risk premium in the oil market can ebb and flow solely based on day-to-day headlines. Back in April, it briefly looked like Israel and Iran were on the cusp of all-out war, but both sides decided to take an off-ramp. Fundamentally, nothing has changed with oil supply and demand, but the lessened risk premium translates into lower prices. Oddly enough, Russia’s war in Ukraine is more directly relevant to oil prices than Iran/Israel. Ukraine has become skilled at using drones to attack Russian oil refineries, which is having an impact on Russia’s ability to produce and export fuels. The next OPEC meeting is June 1, and production cuts are expected to be extended on that day. If that does not happen, it would be surprising and more than likely push down prices. The problem with the latter issue is that OPEC is back in control of pricing due to US energy policy. SUMMARY The problem for the average investor remains the same. What data set should they be looking at to measure this economic backdrop? Is it the optimistic GDP projections? OR is it the Manufacturing data that has been in recession since 2022, the flat retail sales data, Leading economic indicators that have been down 26 of the last 28 months, and the consumer/ small business sentiment results? What about the yield curve? The answer is none of the above. Trying to form a MACRO view of the US economy that has any conviction behind it is impossible today. I have NEVER seen a dichotomy in the MACRO view (lasting this long) like this in my entire career. The answer is to do our best to separate the MACRO view from the daily short-term swings. The former is reality, the latter is emotion-based, and they rarely align. So, in the short term– it’s always price action. The Week On Wall Street Monday’s session followed a week where the S&P 500 was up +1.3%, essentially at all-time highs, while small and mid-cap indexes were down ~2%. Early price action was mixed until a late-day rally pushed the S&P 500 and Nasdaq to finish at new record highs with gains of 0.26% and 0.35%, respectively. Breadth was strong, with 8 of 11 sectors being higher. Utilities were the best performers with a 1.28% gain, while Materials, Consumer Staples, and Financials all finished in red. Crude oil, gold, silver, uranium, and copper were higher. After new highs on Monday, Tuesday’s start to trading had all the earmarks of a big turnaround until the dip buyers pared the early 32-point loss on the S&P 500 and turned it into a modest gain and another new all-time high. The day’s story was Apple (APPL); its 7% gain lifted the S&P and NASDAQ (0.84%/new highs). However, it wasn’t enough to offset the losses in the other DJIA components, leaving the Dow 30 and the Russell 2000 finishing with modest losses. Overall, it was a mixed session with the same bifurcated results we’ve seen before. Breadth was terrible, with only two sectors finishing in the green: Technology (XLK) and Communications Services (XLC). On Wednesday, the upbeat tone was set before the market opened with better-than-expected inflation data. Tuesday’s momentum trade continued, sending the S&P 500 to another new high. The NASDAQ also reached a new high with a 1.5% gain. The divergences remain, as the DJIA posted a modest loss. The 10-year Treasury yield fell to 4.29%, sparking a rally in the 20-year treasury trade (TLT) (+70%) and the small caps (IWM) (+1.6%). Today, there was slightly better breadth (but not overwhelming), with six of the eleven sectors higher. It was another solid start to the trading day on Thursday after the positive PPI data crossed the tape. A late-day rally moved the S&P 500 to a 0.23% gain, recording its fourth straight day of record closes. Breadth continues to be weak. Tech outperformed, rallying 1.36%, while seven of eleven other sectors were lower on the day. The NASDAQ lept up with the S&P rally by recording its fourth straight day with a new high. The trading week ended with a mixed session. The S&P’s four-day new high winning streak ended with a two-point loss. It was a different scene at the NASDAQ, where a modest 0.12% gain extended that index’s new high streak to five. Meanwhile, the bifurcated scene was very prevalent. The DJIA finished the week on a four-day losing streak, and the index has posted losses in three of the last four weeks. The Russell 2000 (IWM) hasn’t joined the market’s party, extending its losing streak to two. ECONOMIC REPORTS The headline CPI was unchanged in May, and the core increased by 0.2%, which was cooler than expected. Those follow gains of 0.3% for both in April and 0.4% on both in March. It is the lightest headline print since the unchanged reading in July 2022 and the lowest since the -0.1% from May 2020. The core rate ties several months as the slowest since August 2021. On a 12-month basis, the headline index slowed to 3.3% y/y from 3.4% y/y. The core rate decelerated to a 3.4% y/y clip from April’s 3.6% y/y. Headline PPI fell 0.2% in May, with the core unchanged. Those follow gains of 0.5% for the headline and 0.5% for the core in April. For the headline it is the weakest since October. These left the headline y/y rate at 2.2% from April’s 2.3%. The core rate slipped to 2.3% y/y from 2.5%. Michigan consumer sentiment continues to show distaste for the current economic backdrop. The June reading was 65.6, down from 69.1 in May. Most of the weakness was in the current conditions index, which fell to 62.5 from 69.6. Consumer Sentiment (ww.sca.isr.umich.edu/) While we have seen an up-and-down trend since 2022, the crash in sentiment in 2021, which took the data far below pre-pandemic levels, is still in place. The Global Scene UK Construction: Monthly activity data in April was mixed for the UK as a huge drop in industrial and factory activity was offset by stronger-than-expected services activity. As shown in the chart below, construction activity volumes are declining steadily. Over time, construction volumes are pretty steady, so a consistent drop is notable. UK construction (www.bespoke premium.com) High rates are starting to impact the UK’s building sector as the BoE considers a rate cut. MACROECONOMY This section presents a series of issues that may not necessarily impact the market today but can pose problems for the MACRO scene. ANTI-BUSINESS policies will ALWAYS take their toll. Well, that didn’t take long. The FTC (Federal Trade Commission) and DOJ (Department of Justice) are finalizing plans to file antitrust action against the big ‘players’ in AI. Microsoft, OpenAI, and Nvidia will now see increased antitrust scrutiny of their roles in the artificial intelligence industry. The justice department will lead in investigating whether Nvidia, the leading maker of chips that train and operate AI systems, has broken antitrust laws that oversee fair competition in business. For the last three years, when any corporate entity successfully develops transformational technology, the most anti-business administration in US history gets involved to ensure growth is stifled. Governments around the globe live to extort large corporations and get their piece of the pie, and the U.S. FTC and DOJ’s combined efforts are this wolfpack’s leaders. It’s common sense, a natural phenomenon, and sheer reality that the most prominent companies have the wherewithal to bring AI to the economic scene. In doing so, they will be spending hundreds of billions. It’s implausible to expect any small entity to get involved with such a high cost of entry. Smaller tech companies will have their day in the sun. They will ride the coattails of the giants, and if AI is as profitable as expected, they will surely share in the rewards without the HUGE expense. Again, what was Nvidia supposed to do? Give up their formula for success and wait for everyone else to catch up. According to the FTC and DOJ, that is exactly what they suggest. Nvidia invented a breakthrough technology and should be able to reap ALL of the benefits, not wind up under the anti-growth regulatory microscope. That is, if we were operating with a capitalist backdrop. There is no other way to view another attack on corporate America, no way to mince words. What we are seeing is socialism being introduced in an absurd, unrealistic way to attempt to make everyone and everything “equal.” These corporations will now spend hundreds of millions to defend their practices instead of using those funds to add employees and grow to enhance this technology further. Lina Khan (FTC) and Jonathan Kanter (DOJ) have once again fleeced the American taxpayer to pay for another folly in the name of promoting a socialist agenda that stifles capitalism and growth. However, it doesn’t end there. The FTC/DOJ vs. BIG Oil The anti-business sentiment continues, and now it’s targeting oil and gas company executives. The administration’s Justice Department accuses U.S. oil producers of colluding to keep prices high and inflate their profits. As in almost every proposed “action” taken against corporate America lately, the evidence is ‘flimsy’ at best. The Senate, led by Chuck Schumer, sent a letter to the FTC citing that former Pioneer Natural Resources CEO Scott Sheffield attempted to collude with the Organization of the Petroleum Exporting Countries to restrain production. This is another example of spinning a story in an effort to blame everyone else for high oil prices. It’s another salvo in the ongoing war on fossil fuels. Let’s be clear: OPEC and OPEC alone control the price of oil, and that is due to present US energy policies. It’s unfathomable to believe they’re sitting around waiting for than listening to any US oil executive for advice on setting “price.” Mr. Sheffield has already been punished for his success in producing one of the gems of the oil industry. His prize company, Pioneer Natural Resources, was recently bought by Exxon, and as a condition of that deal, Mr. Sheffield was not allowed to be part of the new combined entity. There has NEVER been such a demand in any government merger review, showing that the FTC and DOJ under this administration have overstepped their bounds to stifle anything representing growth in corporate America. There is little doubt that the government’s anti-business sentiment has been ratcheted up a notch. Since this declaration now targets corporate individuals, I doubt any corporate oil and gas executive would consider discussing details of energy policy with this administration. The EV Boondoggle continues. Anti-business actions have ramifications; in this case, “mandating” policy carries huge costs. We’ve turned the page and have moved on to 2024, but the insanity that is called EV production in the U.S. continues. According to a May 2024 Bloomberg report, Ford Motor Co. lost over $100,000 for every electric vehicle (EV) it sold in the first quarter of 2024. This forced the company to cut orders from battery suppliers for future models and rethink its EV targets. The money that has been tossed away on this agenda borders on criminality in our opinion. Money that could easily be used to generate profitability elsewhere and add Growth instead of Losses. This results from “mandating” instead of letting market forces control the situation. It’s anti-capitalism at its worst. ILLEGAL Migration. Election pressure has become too overwhelming, so the administration believes it has appeased some critics. An executive order was announced to deal with the illegal immigration issue, which has allowed anywhere from 8 to 10 million illegal crossings into the country in the last 2+ years. The headline reads, “Biden signs executive order dramatically tightening border.” However, it does nothing to solve this self-inflicted crisis. Under this executive order, US ports of entry will be shut down once a threshold of 2500 illegal crossings is reached in a single day. Currently, ~3100 illegals enter the country daily. The border will reopen when the number of unlawful crossings drops below 1500. Unaccompanied minors and the illegals that are being flown into the US by the administration daily are not counted. Instead of a flood, the US will continue to see a strong and steady stream of illegal migrants entering the country. No details are offered on how this will be effectively managed, but if you analyze this, it doesn’t matter. In essence, the government will continue sanctioning a large number of illegal crossings daily. Programmed legal migration adds to growth; excessive Illegal migration reduces growth by adding unnecessary costs-costs that burden citizens and will lead to higher taxes in overburdened US cities. I wonder what the reaction would be if the American people were told the US will absorb the entire population of Hungary. Since the US has allowed 9-10million migrants to enter the country illegally since 2021, that is exactly what has happened. The economic disruption associated with this exercise will produce negative impacts for years. Each issue presents a problem individually, but combined, they stifle growth at a very high cost. The Daily chart of the S&P 500 (SPY) It was an eventful week. The S&P 500 recorded four straight days of record highs before ending the Friday session with a modest two-point loss. S&P 500 (www.freestocksharts.com) Strength begets strength, and in the case of the S&P, that made it 30 new all-time highs this year. The index is overextended in the short term, and we can see a pullback anytime. However, multiple support layers should keep any retreat from these levels in check. INVESTMENT BACKDROP Summer trading has a reputation for inactivity and tight intraday ranges. It is supposed to be boring, allowing for Wall Street to hit the Hamptons or wherever non-Floridians go when they don’t have beaches thirty minutes away. Since Memorial Day, however, has been anything but boring. Stocks have stayed rangebound but have swung around widely to create that range. That was until this week’s parade of new highs for the S&P and NASDAQ. It has made life difficult for both the bulls and the bears. The broad market (ex NVDA, MSFT, AAPL, etc.) has been unable to sustain much momentum on either the upside or downside since the middle of May, and the day-to-day rotations have meant that very little is “working” in either direction for very long before it reverses. It has been frustrating. There are times when watching the intraday action as closely as I do provides insights that may be missed by looking at just daily charts. There are other times, though, when the more granular view muddies the water. This is one of those latter times. The short-term action continues to be a mess. The divergences in the major averages aren’t making it any easier. The small caps look as if they are ready to break down, yet the large caps led by NVDA can’t seem to get any downside traction. Some days, breadth is terrible, but a few megacaps prop up the large-cap averages and prevent too much damage. On other days, these megacaps fall while stocks bounce farther down the cap spectrum, but the bounces are usually short-lived. Accordingly, I’m searching for more conviction about the near term, but with the leadership so narrow so far, I’ve come up empty. However, that doesn’t mean anyone should try to fight the tape and start making bets against the strength of the market. This means that investors should understand what is happening and proceed accordingly, given their situation. I’ve started to track the equal-weight Technology ETF (RSPT) as a comparison to the Nasdaq 100 (NDX). In Q2, the NDX outperformed the RSPT by 7.7% to 3.6%. So, anyone deciding to toss darts at anything tech as a strategy has been disappointed. A broadening out of the market will require a reversion to the mean where these results are flipped. That would make the probability of the market maintaining its strength – VERY HIGH. Short-term overbought conditions returned this week, and intraday upside momentum has faded, as noted by the divergence between the S&P, NASDAQ, and everything else. Looking over the many individual stock charts, I’ve concluded it’s time for portfolio reviews. After the big rallies in the momentum names, we are now at a moment when we all have to review stocks that have weakened in the short term. Then, decide to either cull now or HOLD for a more extended period. I expect most names in this category will enter sideways trading patterns (HIGH probability) rather than embark on a quick “V” rebound (LOW likelihood) FINAL THOUGHTS It was another strange week, with the indices looking strong but many sectors showing weakness. We’re seeing some moves in a few days that typically occur over months. AAPL rallied 14% in three days this week before pulling back. ARM rallied 13%, NVDA added another 8% this week after the split, and MSFT added 5%. Well, you get the idea. On Friday, the S&P and NASDAQ were basically flat, as the poor breadth bifurcated market keeps trucking- – Energy, Materials, Industrials, and Consumer Discretionary were all down 1% or more. At the same time, a very select set of tech stocks posted gains. THANKS to all the readers who contribute to this forum to make these articles a better experience. These FREE articles help support the SA platform. They provide information that speaks to Both the MACRO and the short-term situation. With a diverse audience, there is no way for any author to get specific unless they’re simply highlighting ONE stock, ETF, etc. Therefore, detailed analysis, advice, and recommendations are reserved for members of my service offering on the platform. The information provided here is verified by SA; in most cases, links are provided as supporting documentation. If anyone can point out a comment in any article I put forth and demonstrate that it is factually INCORRECT – I will REMOVE it. Best of Luck to Everyone!
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