The View from 5th Avenue

Not a bad way to start the half, granted we’ve got a loooong way to go. Also nice to see that “statistics” once again were a good predictor. Historically July 1st is one of the most bullish days of the year, being an up day 87.5% of the time over the past 21 years. Markets were ready to achieve this by whatever means necessary, shrugging off a higher than expected Manufacturing PMI, declining construction spending, and an expectation revision for US GDP from JP Morgan that looks suspiciously like it’s predicting a recession. The optimism wasn’t always a constant – as has been recent fashion, the markets were volatile intraday (volumes also muted: SPX -13.71% vs. the 20 day moving average), with multiple intraday moves greater than 1.5%. Value outperformed growth (SPYV +1.25% vs SPYG +0.71%), although with only one sector in the red, today felt more about the tide than anything else.

And that thankfully is a wrap on H1, the S&P’s worst since 1970. The NASDAQ,  not to be outdone, had its worst H1 ever. The 3 times before this it was down more than 15% in H1, it continued to fall…it’s only been around since ’71 though, so maybe the data isn’t perfect? Early on today investors were heavily focused on the PCE Deflator, which came in below expectations. For those looking to grasp onto any glimmer of hope, improvement in the Fed’s preferred inflation measure could have been it. But the Inflation Adj. Personal Spending number overshadowed it, after falling for the first time this year. A weak consumer is something we have seen plenty evidence of lately, the most recent example of which is Restoration Hardware, who had to lower guidance last night. It’s one thing to have to lower guidance, and another to have to do so twice in the span of a few weeks. The worrying implication is that estimates for this pending earnings season remain far too high.

Investors have had to contend with some interesting markets recently. Last week, it was the case of futures/ indexes being bid up early, and then watching everything trade sideways for the rest of the day (happened last Tuesday, Wednesday and Friday). But today the intraday chart for the broader indexes, and pretty much every non-energy stock, was diagonally lower. While the move started just before the Consumer Confidence data was released, it is hard to say if an inline result would have made any difference… remember, the calendar is at quarter end, and accounts are repositioning. Investors are watching the economic data intently, not only for recessionary signs, but also for clues to how long the Fed will keep raising rates. And today’s Consumer Confidence showed a drop to 98.7 (versus estimates of 100). While the Present Situation dropped to 147.1 from a revised lower 147.4, the Expectations Index fell to 66.4 from last month’s 73.7, its lowest level since 2013. Investors will not need to wait long for the next series of data for added insight, as Personal Spending/ Income and PCE come Thursday.

Similar to Europe, the US endured a woefully dull session that meandered lower throughout on meagre volumes as the market digested last week’s squeeze. June is still down a gentle -5.6% with H1 -18%, but some recent green shoots have provided a little hope (though see below meme for caveat). Last week, the S&P got back above 3810/15, the mid-May breakdown point.

We seem to be wrapping up the week on a long awaited bullish tone, but the optimism should be taken with a grain of salt – some might even call it misplaced. We still have plenty of rate hikes to contend with, and despite some chatter that rate cuts might come H2 of 2023, for those who buy it, that’s still plenty away. We have to get through quarter end/this round of earnings first, and we all know how tough the environment that will be reported on was.

Last night I went to see the Broadway play Wicked, and it’s well worth a visit if you haven’t seen it yet. Great songs and of course the added nostalgic benefit of the beloved Wizard of Oz were sprinkled about. Most interesting was it’s completely different perspective on the story we thought we knew. Wall Street could use a bit of different perspective right now, with the last few investment banks piling on to an already pessimistic market this morning. (Talking their own book perhaps?) The AAII Bull Bear survey had the 2nd highest % of bears in 10 years and talk of a recession has a tone of when not if. And the PMI numbers we got earlier today, missing estimates and creeping ever closer to contraction territory, did little to dissuade from that notion. But such one-sidedness can lend itself towards outsized moves in the other direction and while this week has barely dented what’s happened year to date, it could at least be viewed as encouraging. Are we building a bit of a base, or being lulled into a false sense of security though? We have seen a bit of sideways pricing action the last week-plus and the S&P 1500 having a 50/50 split on the gainers vs losers further highlights investors indecision/hesitance. We are watching 3810/15 on the S&P, above that could trigger a rally to 4087 but trends remain down and while the benchmark did peek above 3800 today, it fell short of closing there.

Yesterday saw across the board green as markets bounced off a horrible prior week. But investors have been taught to sell those green days with the complicated macro headwinds, and overnight recession concerns pushed futures lower. We are getting close to quarter end however, and the indexes are nursing some double digit losses (SPX down 17%, Nasdaq down 22%), giving hope that some month/ quarter end rebalancing may give some respite. And therefore when you look at the intraday chart of the S&P 500 today, and compare it to yesterday, they basically look very similar. Rally early off the lows, and then trade relatively sideways into the close. Only difference is that today had slight losses. While every sector yesterday enjoyed the bid, only a handful today closed in the green. Homebuilders (ITB +1.23%) and Biotech (IBB +1.23%) led, as Energy (XLE -4%) and Metals (XME -3.8%) lost. While stocks enjoyed another sideways day, Treasuries and Commodities did not. 10yr yields fell to 3.15% from 3.3% yesterday; Crude fell 4.8% to 104.20, and Copper 2.57%. These assets are monitoring the potential economic slowdown as direct correlations, and the weakness led to losses for their corresponding equity sectors (only ones with ytd gains as well).

If appears investors weren’t the only ones depleted by last week’s crusher. The sell-off itself seems to have run out of steam, which led to a minor rebound on Friday and somewhat of a “sympathy bounce” today. It was as if the optimism was pre-determined this am— it was evident from the start with all sectors opening (and also closing) in the green, led by energy, autos and tech. There seemed to be no obvious trigger for the move higher beyond an offhand comment from Pres Biden saying recession isn’t “inevitable” as well as some media outlets noting that inflation may be peaking. Bloomberg spoke to global food concerns beginning to ease thanks to better planting conditions (weather related) and also as Beijing and Shanghai curb Covid outbreaks. Further, existing home sales were right in line –the first print that wasn’t below expectations in four months. But more interestingly was an uptick in housing supply to 1.16m units from April’s 1.03m (though still lower than a year ago). However, those few headlines didn’t seem impactful enough to support the +2.5% moves by the S&P and Nasdaq. It begged the question — was last week’s selloff (to the tune of $2 trillion off the S&P) a form of capitulation? Possibly, but the trend currently remains negative, especially until we see the RTY through 1712 and the S&P above 3810. The fact of the matter is housing data may have shown better supply, but prices have continued to climb. Homebuilder Lennar (+1.6%), which reported better-than-expected results, flagged a pause in buying by homeowners due to rates and prices. However, it didn’t stop their revenues from climbing as home deliveries rose and its sales prices jumped 17%. And the firm expects prices will be higher still next quarter. And lest we forget last week’s retail sales and CPI data. Still, today’s market was determined to be “chipper” as Nvidia (+4.3%) led the semis AMD (+2.7%), Qualcomm (+2.8%), and Analog Devices (+2.6%) higher (yeah I did). Prudent to note that despite today’s broader rally, the current market environment remains one of the most difficult ones investors have seen in recent years. Thus, no sudden move may be the best move at this juncture.

There’s really no nice way to say it – it was a week to forget but one we’ll likely long remember. Don’t let today’s quixotic move higher fool you; it was meager compared to the losses we saw the previous 4 days and volumes did little to suggest there was any genuine meaning behind it. The strings pulled by central banks have forever been calculated and deliberate ones so the actions seen this week rightly left markets shaken. The US benchmark saw the most modest of lifts while tech/growth far outpaced the field but a bit of covering into the long weekend after the last week plus’s drubbing likely the cause. There wasn’t much in the way of optimism from economic data (factory demand cooled, ind production missed) we saw this morning, with the conference board survey revealing more than 60% of CEOs believe a recession is on the way in 12-18 months’ time. Yields across the curve rose after Powell added to the Fed-speak lexicon with an “acute focus” on reigning in inflation; we’ll get more from him next week.

Well, Powell did warn investors back in May that it would be painful. And as the Fed continues to ween more than a decade worth of stimulus/ low rates out of the system, it has been exactly that. T+1 from the FOMC’s 75bp hike, traders reacted to the news by accelerating their de-positioning as expectations of a pending recession grows. The surprise hike by the SNB today, along with the expected BOE, left participants on edge, and the final tally across the board was deeply red, with the best performing sector, Staples, closing down 76bps. The S&P finished down 3.25% and now is back to the December 2020 level. And for Nasdaq, down 4.08% today, back to September 2020. Everyone is either now bearish, or very bearish, and the CNN Fear and Greed Index is now at 14 (yes, it has gone to zero). Excluding Staples, the average sector move was down 3.3%  Homebuilders fell 7% as the 30yr mortgage rate rose to 5.78%, and Housing Starts data fell 14.4% m/m. Semis dropped 6.2%, Energy 5.6%, Retail -5.1%… you get the point. Treasuries rose today, with the 10yr yield closing at 3.18% (versus 3.29% yesterday). High Yield on the other hand, is near their March pandemic lows, as the Fed is no longer supporting the space, and investors are concerned about potential bankruptcies during a recession. Stress is definitely building. What will mend the current sentiment is still unknown, but tomorrow happens to be a Triple Witch expiry with over $3trln expiring. Perhaps the most important part for those staring at the end of day volatility is that some gamma will also be expiring, alleviating some of the dealer hedging that is also moving indexes recently. Unfortunately, any respite from the option market feels like it will be short-lived, but maybe, just maybe end of month/ quarter will provide some support. But that is still 1.5 weeks away, a lifetime in this current environment.