After 13 months of working from home, I made my triumphant return to the office. Things have changed obviously; fewer people in the office still, fewer people on 5th Ave, fewer cars, and unfortunately, fewer stores still in business. But I am happy to be back, and trying to get some resemblance of working normalcy. Markets have been toying with their own return to balance (new highs forever/ low rates forever??), but this will take far longer.
We’re switching the View up a bit today, moving it back to post the US close (we hope you’ve at least noticed THAT change by now) and a format more similar to the original version. Is it cool my co-authors have made me initiate the new/old View on my birthday? I have my thoughts on the matter but will leave the ultimate judgment to you. Enough of that – after a torrid week of earnings, the seasonally weak month of May now upon us. If you base your portfolio decisions solely on rhymes, it’s clear what to do next. But even that time worn adage doesn’t necessarily hold true anymore (see below). Warren Buffett and Charlie Munger gave us some delicious soundbites while reenacting Grumpy Old Men (can sympathize). There’s still plenty of fire from these two, nobody was spared. Crypto, SPACS, Robinhood – each of them caught a fresh one from the Street legends. Buffett also touched on the “buying frenzy” taking place in the market and naturally pointed to creeping inflation. It’s impossible to argue that point; you could look in any direction and find an ‘asset’ that’s ripping.
April Showers Bring?… Month-end risk off mentality has introduced some sogginess into the market today, but with stocks arguably in full bloom already near ATHs, it’s hard to say what lies ahead. Yes it’s been a packed earnings / Fed week so there’s a lot to digest, but it feels like all the action has only really served to confirm earlier suspicions and left unanswered the question “what next?” Earnings overall have been pretty good and companies are reflecting optimism about the recovery. Check. Many of those companies are also experiencing input price pressures and supply chain disruption. Check. Big Tech giants are still basically printing money and leaving cons estimate in the dust. Check. And, most important (and predictable), the Fed is sticking to its script on patient policy and transitory inflation. Double check. We’re seeing the market struggle with whether or not “good” corporate updates are “good enough” to extend the already stretched valuations that have been born out of high expectations. The big question mark was and still is the Fed’s stare down with oncoming inflation. Just when they blink is a matter of time given the pace of recovery, but until then stocks may be left struggling for answers…
Great Expectations – It’s always tough when markets start the day with healthy gains, especially at new ATHs. Either they can continue higher based on the pre-open reasons for the gains, or expectations catch up to reality, and that opening level fades. Today’s action has been that second point. Earnings from Apple (u/c) and Facebook (+6.2%) were fantastic, and the latest Q1 GDP reading of 6.4% (driven by 10.7% personal consumption annualized) was also strong. But stocks look to the future, and the debate of whether this level of earnings/ GDP strength can be maintained is triggering some profit taking (although the S&P is still +30bps currently). Looking ahead, traders will get a healthy does of eco data tomorrow; Personal Income and Spending are expected to show monthly gains, while the Fed’s preferred inflation PCE data will be announced. Some other notables:
Straight Face… Of course the impending FOMC decision had plenty to do with the lack of real action this morning (MVOLUSE -42%). No surprises were expected, but with such an intense focus on “parsing” Powell’s words for ANY change in tapering tone, yields pushed higher just in case. Turns out, there was no need. Drumroll please…CRICKETS. Fed headlines revealed ABSOLUTELY NOTHING new. Powell’s words did mention a “strengthening economy” which was sliggghtly more aggressive in tone than his last “turned up.” Semantics really, but maybe a set up for September? Either way, treasuries were hit and stocks basically remained as they were – flat. In the meantime, plenty of action in the earnings space, though a distinct lack of enthusiasm (see more below). Looking at the S&P sectors, ENERGY is outperforming as the “forgotten rotation” plays catch up. The XLE is up 3.2% led by Hess (+7.4%) whose adjusted EPS beat estimates and Devon (+9%) after a broker upgrade, but also because oil has lagged the commodities move for too long. Speaking of lagging performers, TECH is at the bottom of the sector barrel after the first round of megacap results, despite Alphabet’s (+4.6%) surge in ad sales. It is Microsoft’s (-3%) numbers that just weren’t enough to keep profit takers from stepping in. Elsewhere, Boeing (-2.7%) dropped after burning more cash on the 787 delivery halt and Texas Instruments’ (-4%) sales forecast was less than analysts hoped. With stock valuations about 25% above their 5-year average, good is not good enough. From here, things get a bit more interesting potentially. Another big options bet placed over the last week sees the market’s view of rate hikes shifts drastically before Sept (aka something to come from the Jackson Hole symposium in August). With the US recovery on such a blistering pace, the Fed can’t keep calling for “substantial further progress” with a straight face for too much longer.
All Downhill from Here… Take a deep breath: we’re only 30% of the way through earnings but it doesn’t get any busier than this in terms of the combined market cap reporting today (chart below). That breath isn’t because things feel “hectic” at the moment (a lot of that market cap weight comes after the bell from MSFT / GOOGL), rather it’s to ease the frustration arising from the fact that at least so far, earnings season isn’t delivering the answers many had hoped for. Yes it’s hard to complain when we hit all-time highs as frequently as we are, and it’s not as if earnings have been a big disappointment (3/4 S&P co’s have beat EPS ests thus far), but they still haven’t produced a definitive sign as to what “comes next.” This morning’s slate of cyclical / reopening barometers is a good example: GE, MMM, and SHW delivered quarterly beats, but not without warts and none coming with upgraded FY guidance. Net result today: all three in the red, the results “good but not good enough” to justify the next leg higher with GE +26%, MMM +14%, SHW +10% (ATH though) already ytd. For now, the Reflation trade remains stuck…
Business as Usual – After encountering some resistance at the end of the day Friday following their standard ramp-up into the bell, equities are back to doing what they do ie going higher, albeit in tempered fashion to start what promises to be a busy week. It being a Monday with plenty set to come in the days to come have kept moves and volumes largely in check but banks and semis are the strongest of the lot. Reopening sentiment was bolstered over the weekend after a report that Europe would allow vaccinated Americans to visit (be careful what you wish for!) Cap goods company OTIS (+6.2%) had the stage largely to itself this morning and delivered but that aside, today has been more of the same. Even with concern increasing over an increase in COVID cases in developing markets, optimism over economic growth is winning the day. After bouncing off its 50dma, 10-year yields were in the process of making a move through 1.60 but have since relented after some soft economic data – isn’t that how its usually supposed to work? Even so, banks remain in favor while semis try to recapture their mojos ahead of some high-profile earnings this week, broker upgrades providing a tailwind today. That said, chip shortages remain a concern, with Volkswagen highlighting that point over the weekend. Speaking of earnings, we get Tesla after the close today. Elon revealed he’d soon be hosting Saturday Night Live and given his past public appearances, it’s got to make some investors a bit jittery.
Two Steps Forward, One Step Back – Maybe taxes aren’t so bad after all? Well, of course they are, nobody WANTS to pay more. But if you didn’t know hikes were coming post November 3rd AND after printing trillions to stimulate the economy, then you haven’t paying attention. Sentiment still feels optimistic, bordering on complacent, and with valuations so stretched, it can leave the market vulnerable and fragile, hence those little shakeouts. But yesterday’s news feels a lot older than that and the main indices are on precipice of making new ATHs. And why? Because earnings have on balance been great, economic data remains red hot and those tax rates that flashed on the TV yesterday simply aren’t going to happen. The lone sector in the red is Household Goods and you can point your finger squarely at Kimberly-Clark as the hoarding of toilet paper dissipates. Bank/autos names are at the top of the gainers but growth doing better broadly speaking. Semis would be doing even better were it not for Intel (shame on you), where increased costs and some weakness in their data centers. And whereas bonds didn’t gain yesterday during equities sell-off yesterday, they are in fact lower on stocks resurgence today. Breadth remains good for the S&P but there has been some leakage from the Nasdaq and Russell 2k – you must keep your eye on this.
Lock In Those Gains… So far this week we endured the shock and horror of 2 consecutive red days, then yesterday the S&P rallied back near ATHs to answer the call of the sentiment gut check. Yet even with a barrage of earnings to digest and jobless claims data, today’s action felt very indecisive, with indices’ drifty behavior offering little clue as to what lies ahead for the Reflation trade. The action has picked up however, as reports that President Biden is mulling a top-tier capital gains tax of 43.4% seemingly caught the market off guard. Indices immediately tumbled into the red before trying to regain their footing, but are currently pushing towards new lows once again. It’s hard to pick out many spaces getting especially hard but Semis, FANG, Tech are noticeable decliners (aka those with the most capital gains to be taken). The lone S&P sectors clinging to green are Commercial Services thanks to a beat and raise from Equifax (EFX +15%), and the concentrated Telcos as AT&T (T +3.8%) dialed up the subscriber gains that Verizon’s slippage had hinted at. The rest of the board is red, but notable earnings underperformers include Dow Inc (DOW -5.6%) dragging on Materials and Biogen (BIIB -3.3%) weighing on Pharma. Yields have remained fairly steady, and the Russell has now joined the major indices in the red (IWM -0.5%). Reading through analysis of the tax plan, it seems the number isn’t much different from what’s already been whispered, and of course any ideas have a long road to go before they become law, but clearly this is a case of an indecisive market getting a hard shove to the downside. The market has shown an incredible ability to shrug off anything / everything negative, but this could also mark the arrival of a real headwind that the market has been dreading ever since it began riding the post-election Blue Wave higher…
Alka Seltzer to the Rescue….Though the major averages quickly moved from red to green this morning, two days of losses earlier this week seemed to have left a mark as the move packed a punch for the “stonks only go up crowd” (BUZZ -2.2% yesterday). That was expected to continue today after NFLX’s (-6.5%) big miss last night and what it meant for the stay-at-home play. Indeed the reopening and reflation trade sectors are outperforming. That said, BUZZ is back +1.4% and markets are back to doing what they do best – going up once again as if nothing ever happened. Healthcare, Materials and Transport are leading the way for the S&P, while The Dow is being helped by Visa (+1.7%) and Home Depot (+1.1%) specifically. The Nasdaq has Microsoft (+0.5%) to assist, though NYFANG+ is -0.5% thanks to the aforementioned Netflix soil. And while small and microcaps underperformed yesterday, they are outperforming again today (RTY +1.2% and RMICRO +2% vs. MS Size -1.1%), which only goes to prove that this market wants badly to keep going up (though if Vix is any indication at 17.36, no one wants to do much of anything currently). Though there are some concerns with tax-related selling in front of next month’s IRS filing deadline, earnings will remain the name of the game. The risk is, when you are priced to perfection (and equity valuations are close to record highs), you better deliver on earnings and guidance.