With trading volumes contracting rapidly, the stock market - at least as represented by the major indexes - was acting early last week like it had already checked out for summer and it’s not even May yet. It was proving to be something of a snooze-fest with a generally negative tilt as far as the headline indexes were concerned. But under the surface, things were playing out rather differently.
Earnings and guidance are generally holding up better than expected, mostly beating estimates at a good clip - notably Microsoft (MSFT), Alphabet/Google (GOOGL), Meta/Facebook (META) and Intel (INTC) last week. Indeed, 83% of non-financial companies have beaten earnings estimates so far this season (only 57% of financials).
This high beat-rate is, of course, a lot easier when the bar of these estimates has been consistently lowered by companies in considerably despondent forward guidance over the last couple of quarters banging on and on about how difficult 2023 was going to be. After all, the stock market is all about expectations versus reality.
Of some concern, however, is the fact that those firms whose earnings are failing to beat estimates seem to mainly be those that have their fingers on the pulse of the demand side of the economy, such as UPS, Caterpillar (CAT) and Packaging Corp of America (PKG) - and a number of these stocks got punished last week after announcing disappointing earnings and/or very cautious commentary/guidance.
So while macro-economic data is still broadly leaning towards a soft landing scenario (inflation to be conquered without a highly damaging recession), the micro-economic data around which types of companies are hurting more than others may be pointing in the other direction.
Early in the week, First Republic Bank (FRC) reported that customer deposits fell 40% or $72 billion in the first quarter during a ham-fisted earnings call. The already-incinerated stock got cut in half again in a matter of hours and then tumbled a further 30% the next day. On Friday, the stock price got cut in half yet again in the after-hours. While the market has now basically given up on First Republic as a viable stand-alone entity (rumors abound about a JP Morgan or PNC Bank absorption), the real damage will come if there are signs of further contagion into the likes of Zion Bank (ZION), Comerica (CMA), Bank of Hawaii (BOH) and Western Alliance (WAL).
It’s a sharp reminder that the banking sector is not yet out of the woods and indeed may well experience more pain ahead as a result of also being so entangled in the increasingly troubled world of commercial real estate that is suffering from enormously higher interest rates and vastly lower occupancy rates. A revival of banking stress simply isn’t priced into this market and its return will prove troublesome if it happens.
Stocks finished the week a touch higher after a mostly tranquil Monday, a difficult Tuesday and Wednesday but a powerful resurgence on Thursday and Friday as markets basked in the sunlight shone by earnings and guidance from some of the mega-cap tech names (FAAMG stocks, see EXPLAINER: FINANCIAL TERM OF THE WEEK BELOW). For the month of April, the S&P 500 added 1.5%, while the NASDAQ squeezed out just a small gain.
Congressional lawmakers’ continued reckless posturing around the debt ceiling appeared last week to have finally just about made it onto the radar of markets, although hardly in a meaningful way yet. For the moment at least, it still has the feel of a parent rolling their eyes after just noticing for the first time that their two toddlers are bickering over a toy. But the longer this nonsense goes on without resolution and the specter of 2011 starts emerging, the more nervous markets are going to get and the more a disastrous and completely unnecessary own goal becomes a possibility.
The Federal Reserve’s favorite inflation measure, the Core Personal Consumption Expenditures (PCE) Price index ticked down only slightly, showing 4.6% inflation year-on-year, down from 4.7% a month ago, denting the assumption that inflation is coming down hard and pretty much cementing the fact that the Fed will raise interest rates by another 0.25% this coming Wednesday (still hovering above an 80% probability, see FEDWATCH INTEREST RATE PREDICTION TOOL below).
At first glance, the second estimate (of three) of Q1 2023 US Gross Domestic Product (GDP) numbers looked grim; rising at an annualized rate of just 1.1% versus the median expectation of 1.9% and far below the 2.6% growth in Q4 2022.
The underlying details look more encouraging, however. The biggest drag by far came from a huge swing in business inventories but that category is highly volatile and subject to big quarter-to-quarter moves.
The data also confirmed that business activity is stalling out as borrowing costs rise. Spending on new buildings, equipment and more rose by just 0.7% in Q1 2023 as compared to 6.0% and 4.0% the two previous quarters.
The housing recession was the first to show itself as being affected by the Fed’s interest rate hike campaign that started exactly a year ago. But the worst may now be over, with the sector becoming less and less of a drag on growth. As recently as Q3 2022, residential investment was plunging at a 27% annualized pace. In Q1 2023, it declined at barely a 4% rate.
The interpretation of the GDP numbers actually pushed back on the idea of a hard landing and it was that which cleared the way for the strong earnings from many of the big dogs to catapult stocks meaningfully higher over the last couple of trading days, along with the market’s persistent faith in the Fed’s “hike/pause/pivot/cut” narrative, part one of which comes into play this week with the latest Fed interest rate decision announcement.
The way this narrative sees things panning out is that a 0.25% hike on Wednesday afternoon will be the last as the central bank heads into a period of pause before pivoting to rate cuts before the end of the year. Certainly very possible but, as I have been saying, this world-view is so accepted and widespread (the futures market says that the probability of rates being higher at the end of the year than they are now is quite literally only at 3%, even though the Fed is insisting that they will not cut in 2023) that there is a lot of potential for disappointment if things don’t quite go as planned and that disappointment could translate into lower prices.
OTHER NEWS ..
80%-off sale .. The Wall Street Journal reported last week that a 22-story glass-and-stone office skyscraper on California Street in San Francisco, once home to some of the world’s most valuable commercial real estate, is expected to draw bids of about $60 million, compared with an estimated value of over $300 million in 2019. The office market is being hit nationwide, but San Francisco’s blow was especially hard, for reasons including high costs, heavy reliance on a tech industry quick to embrace hybrid work, and quality-of-life issues such as crime and homelessness.
Bye, bye BBBY .. The effort to save Bed Bath & Beyond (BBBY) has finally failed and the stock is plunging into the abyss. The struggling retailer announced it had filed for Chapter 11 bankruptcy protection after being unable to raise enough funds to keep it afloat and will liquidate.
The company explained that it would continue to keep its remaining 360 stores stores open for the time being, but would begin to “effectuate the closure of its retail locations.” Bed Bath & Beyond also noted that while it has already started its liquidation process, it intends to use the Chapter 11 proceedings to “conduct a limited sale and marketing process for some or all of its assets”.
The stock had been a favorite of so-called “meme-stock” novice amateurs who kept on buying it as part of a self-styled war against institutional short-sellers. It looks like the retail day-traders are ending up on the wrong side of things yet again.
Less smoke .. We're all smoking far less but the most dramatic fall, according to a poll last week from Gallup, is among young adults ages 18 to 29, where the rate of smoking cigarettes dropped from 35% in the early 2000s to just 12% today. They went from the likeliest age group to smoke to the second-least-likely, behind only adults over 65.
Although rates of smoking cigarettes are falling fast, the decline in Americans' tobacco use has been partly reversed by the rise of vaping among young people. Still, even the combined share of young adults who smoke cigarettes and vape is still lower.
UNDER THE HOOD ..
If the October lows in the S&P 500 were to hold and markets began a new uptrend through a coming recession, it would be the first time in history that a bear market ended and the stock market bottomed out before a recession actually began. While not saying that this is in impossible feat, it would be unprecedented and that leaves market historians very cautious.
According to those who swear by the charts, a price of 4179 for the S&P 500 (which closed on Friday at 4169) is a key resistance level to beat for the bulls looking for a break beyond 4200 while 4117 is important support on the downside that, if broken, could open the door to a potentially quick drop to 4050.
A combination of both declining trading volume and declining volatility like we experienced in much of April reflects a market that is still relatively unsure of its direction. Investors are unwilling to commit large sums of capital one way or another. Last week was a great example; we saw sellers finally wake up on Tuesday and follow through again on Wednesday before being overwhelmed by buyers on Thursday and Friday. The net outcome was not a great deal of difference between Monday’s open and Friday’s close.
Masked by mega-cap price surges, this uncertain state of the broader universe of stocks with regard to its next major move is inconsistent with the early innings of a new sustainable bull market. Many short-term indicators are signaling that we might soon be moving down from a short-term high and other core indicators are frankly offering very little encouragement to buyers.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
AVERAGE 30-YEAR FIXED RATE MORTGAGE ..
6.43%
(one week ago: 6.39%, one month ago: 6.32%, one year ago: 5.10%)
Data courtesy of: FRED Economic Data, St. Louis Fed as of Thursday of last week.
US INVESTOR SENTIMENT (outlook for the upcoming 6 months) ..
↑Bullish: 24% (27% a week ago)
↔ Neutral: 37% (38% a week ago)
↓Bearish: 39% (35% a week ago)
Net Bull-Bear spread: ↓Bearish by 15 (Bearish by 8 a week ago)
Data courtesy of: American Association of Individual Investors (AAII).
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Weekly sentiment survey participants are usually polled on Tuesdays and/or Wednesdays.
US TREASURY INTEREST RATE YIELD CURVE ..
The interest rate yield curve remains “inverted” (i.e. most shorter term interest rates are higher than longer term ones) with the highest rate (5.20%) being paid currently for the 4-month duration and the lowest rate (3.44%) for the 10-year.
The closely-watched and most commonly-used comparative measure of the spread between the 2-year and the 10-year ended last week unchanged at 0.60%, indicating no change in the steepness of the curve over the last five days.
The curve has been inverted since July 2022 based on the 2-year vs. the 10-year spread. Historically, an inverted yield curve has been regarded as a leading indicator of an impending recession, with shorter term risk deemed to be unusually higher than longer term.
Data courtesy of ustreasuryyieldcurve.com as of market close on Friday.
FEDWATCH INTEREST RATE PREDICTION TOOL ..
What are the latest market expectations for what the Fed will announce re: interest rate changes (Fed Funds rate, currently 4.875%) on May 3rd after its next meeting?
↔ No change .. 16% probability
(one week ago: 11%, one month ago: 53%)
↑ 0.25% increase .. 84% probability
(one week ago: 89%, one month ago: 47%)
Data courtesy of CME FedWatch Tool. Calculated from Federal Funds futures prices as of market close on Friday.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com:
- Last week’s best performing US sector: Communication Services (two biggest holdings: Meta/Facebook, Alphabet/Google) - up 3.8% for the week
- Last week’s worst performing US sector: Utilities (two biggest holdings: NextEra Energy, Southern Co.) - down 0.9% for the week
- The proprietary Lowry's measure for US Market Buying Power is currently at 151 and fell by 9 points last week and that of US Market Selling Pressure is now at 150 and rose by 5 points over the course of the week.
- SPY, the S&P 500 ETF, remains above its 50-day and 90-day moving averages and above its long term trend line. SPY ended the week 12.9% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, remains above its 50-day and 90-day moving averages and above its long term trend line. QQQ ended the week 20.2% below its all-time high (11/19/2021).
- VIX, the commonly-accepted measure of anticipated stock market risk and volatility (often referred to as the “fear index”), implied by S&P 500 index option trading, ended the week 1.0 point lower at 15.8. It remains below its 50-day and 90-day moving averages and below its long term trend line.
ARTICLE OF THE WEEK ..
John Oliver nails it, explaining recent events in crypto world ..
EXPLAINER: FINANCIAL TERM OF THE WEEK ..
A weekly feature using information found on Investopedia to try to help explain Wall Street gobbledygook (may be edited at times for clarity).
FAAMG is an abbreviation coined by Goldman Sachs for five top-performing tech stocks in the market, namely, Meta (formerly Facebook), Amazon, Apple, Microsoft, and Alphabet’s Google. FAAMG may also go by the acronym, GAFAM.
FAAMG originated from the original acronym FANG, which was coined by CNBC’s Jim Cramer. FANG did not include Apple and Microsoft but did include Netflix. The new variation of the biggest tech companies does not include Netflix because of its relatively small market capitalization compared to the other five companies in FAAMG.
The replacement of Netflix with Microsoft in the list and the addition of Apple to now make it FAAMG made it a group of more technology-focused companies. While Amazon is also classified under the “consumer services” sector and “catalog/specialty distribution” sub-sector, it also has its cloud hosting business and Amazon Web Services (AWS), which make it a significant contributor to the technology space. So, essentially, FAAMG represents the US’ technology leaders whose products span mobile and desktop systems, hosting services, online operations, and software products.
FAAMG are termed growth stocks, mostly due to their year-over-year (YOY) steady and consistent increase in the earnings they generate, which translates into increasing stock prices. Retail and institutional investors buy into these stocks directly or indirectly through mutual funds, hedge funds, or exchange traded funds (ETFs) in a bid to make a profit when the share prices of the tech firms go up.
Although the five stocks only constitute a total of 1% of the 500 companies in the S&P 500, they make up a huge percentage of the market value weighting in the index. Since the S&P 500 index has widely been accepted as the best representation of the US economy, it follows that a collective upward (or downward) movement in the stock performance of FAAMG will most likely lead to a similar movement in the index and the market.
Among FAAMG stocks, the oldest company to list on the stock exchange is Apple which had its initial public offering (IPO) in 1980, followed by Microsoft in 1986, Amazon in 1997, Google in 2004, and Facebook in 2012.
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