Our Views
At the start of the week, I was hopeful that the combination of Fed decision day (5/3) and soft readings on labor (JOLTS, employment report) would cause markets to constructively reprice a Fed “pause” — this is what we viewed as a positive resolution to the “make or break” week:
- The Fed provided sufficient rationale for “pause” to become our base case (no hike in June) but equities fell sharply, down -3% since last Friday, while bonds and Fed futures rallied on the pause — US 2Y fell from 4.04% to 3.77% (sizable move). So bonds rallied sharply while stocks tanked.
- Part of the reason for equity softness, I believe, is the spreading regional bank crisis and the growing concerns about the U.S. debt ceiling and the “X” date approaching far sooner. During the FOMC press conference, the KBW Regional Bank Index fell -6% as Powell’s comments of a “conditional pause” and need to stay “high for some time” placed additional pressure on regional banks. And Tom Block, Fundstrat’s head of policy strategy, notes the impasse is particularly tough for the debt ceiling in 2023.
- On Thursday, the entire regional bank complex came under selling pressure again, but two stocks went into a downward spiral—PacWest -51% (PACW) and Western Alliance Bank -39% (WAL), and both saw their short-term bonds fall 50% to $30-$40, very distressed prices. The assurances of regulators is not what investors want to hear, as the mounting concerns of deposit flight, funding costs, CRE exposure and the fact FRC and SIVB equity holders were zero’d out means regional banks are “no touch.”
Bottom line: Stocks are entering a gauntlet of key data and a reversal of regional banks matters most.
- Friday’s US Equity market reversal looks important and positive for gains back above SPX 4200.
- Technology has been one of four Overweights for 2023. However, it has some “work to do” in order to reclaim recent technical damage, and some consolidation in this sector looks likely between May-July.
- Until/unless AAPL 1.74% can exceed $176 on consecutive weekly closes, it looks more likely that the stock will stall out following its big run-up from late December 2022 lows when it traded below $125.
- KRE -0.26% reversal should signal a temporary bottom in Regional banks.
- The S&P 500 appeared set to end the week in the red following a disappointing outcome for the doves at the Fed and the reappearance of banking system problems. However, a combination of better-than-expected earnings from AAPL 1.74% , a positive reaction to this morning’s NonFarm Payrolls data release, and the “disappearance” of yesterday’s banking system issues caused the index to surge nearly 2%, almost returning to even.
- Despite the daily macro headlines and intra-week price volatility, my analysis suggests that not much has actually changed. There will be much debate following nearly every economic release related to inflation and employment on how it impacts the next monetary policy decision by Chair Powell and the Fed. From my perspective, the odds have increased that the last hike may have occurred this week, but also that the Fed Funds rate may be held at current levels at least through year-end.
- Forward earnings expectations continue to appear too high, in my view. While the 1Q23 earnings season was better than expected and the U.S. economy has remained resilient, my research suggests that the weakest quarters for domestic growth are still ahead of us and are not yet properly discounted.
- Thus, if my analysis is accurate and there is no Fed easing on the way and profit forecasts need to be lowered, then the S&P 500, still above 4100, does not appear attractive to me. I continue to advise caution as risk remains at elevated levels, and investors should maintain a barbell positioning of Defense and Larger Cap, Higher Quality, Offensive secular growth while avoiding SMID, lower quality, and cyclicality.
- The Federal Reserve has increased the federal funds rate by 0.25 percentage points to a target range of 5%-5.25%, marking its 10th interest rate increase in just over a year. Barring unforeseen inflationary data, the Fed is likely to pause in June, and asset prices generally respond positively when the cost of money stops increasing at a rapid clip, as long as prices remain stable/disinflationary.
- Based on the information provided, it’s reasonable to anticipate a short-term government debt extension in June, which could potentially reduce market liquidity. However, investors should stay vigilant and agile. In the unlikely event of a technical default (which anecdotally seems to have a higher probability than many believe), given Bitcoin’s performance during bank insolvencies, we could expect BTC to experience a parabolic surge.
- The ongoing surge in transaction fee revenue, driven by the BRC-20 Ordinals phenomenon, is bolstering the Bitcoin network’s health. Increased fees strengthen miners’ financials and address concerns about network security. This development is challenging the negative narrative around Bitcoin’s sustainability and reigniting interest among former participants. If this trend persists, we may see publicly traded miners outperforming market expectations in the upcoming quarter.
- In our assessment, Rocket Pool presents a compelling long-term risk/reward opportunity, driven by its value proposition for node operators and the value-accruing nature of the RPL token. The performance of the RPL token is closely tied to the growth of rETH supply and the appreciation of ETH’s price. The recent atlas upgrade serves as a significant boost to the network’s prospects, further enhancing its potential for success,in my view.
- Core Strategy – Despite our recommendation in late April to raise cash in anticipation of a near-term resolution to the debt ceiling (higher TGA balance = reduced market liquidity), our overall outlook for the year remains positive. Should they follow through, a pause from the Federal Reserve is a positive development for liquidity-sensitive assets. Additionally, there has been an unexpected resurgence in the regional banking crisis, which may provide further support for bitcoin in the near term.
- Treasury Secretary Janet Yellen warns that Congress might only have three weeks to reach a deal to raise the debt ceiling.
- Senate GOP leader Mitch McConnell will follow House Speaker Kevin McCarthy’s lead on debt-ceiling negotiations scheduled for May 9 at the White House.
- Fed Chair Jerome Powell’s press-conference language suggests that a course correction on rates is approaching.
Wall Street Debrief — Weekly Roundup
Key Takeaways
- The S&P 500 kicked off the month of May with a 0.8% weekly decline, closing Friday at 4,136.25. The Nasdaq was largely flat for the week, up 0.07% to 12,235.41, and bitcoin traded sideways.
- The Federal Reserve raised interest rates above 5% for the first time since August 2007.
- Amid the banking crisis, Apple continues to shine as a pillar of strength after posting an earnings beat Thursday afternoon.
“The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed.”
~ Peter Lynch
Good evening:
Despite the prevailingly negative sentiment about the market, we entered May with the S&P 500 almost exactly where it was one year ago: it closed April 2023 at 4,169, slightly higher from its close on April 30, 2022–4,132. You wouldn’t have known it by looking at trading activity in the first half of the week, which saw markets down on recession fears and the FOMC meeting on Wednesday.
The FOMC decision–a unanimous vote to hike rates by 25 bps–was never really in question. The Fed’s press statement and Fed Chair Jerome Powell’s press conference were the focus of attention, and based on those, Head of Research Tom Lee described the Fed action as a dovish hike. “We think the further chance of rate increases is low,” he said in our weekly research huddle. “Inflation is going to continue to fall, and the labor market is softening,” he asserted. To illustrate, he pointed out, “Tuesday’s JOLTS report (job openings) showed a steeper than expected decline for March and is only starting to reflect what we are seeing in jobless claims and in company announcements. The steepness of the three-month decline in openings is surpassed only by what we saw during the 2020 pandemic.”
Mark Newton, our Head of Technical Strategy, agreed with Lee on the low likelihood of future rate hikes, using trading in Fed Funds Futures (which shortly after the FOMC meeting estimated the chances of a June rate increase at 2%) as his barometer. “This tends to be far more accurate as to what the Fed will do than listening to economists,” he said. “So as of now, the chance of a future hike looks very slim.”
Washington Policy Strategist Tom Block, who got to know Powell in the 1990s in his previous life helping banks with their government relations, agreed. “From Powell’s press conference, I thought it was pretty clear that cuts are not on the horizon for the immediate future.”
During our huddle, Block also brought up the U.S. debt ceiling, an issue that became more pressing this week after Treasury Secretary Janet Yellen formally notified House Speaker Kevin McCarthy that the “X date”--the date when the federal government will cease being able to meet its existing financial obligations–could arrive as soon as June 1. Lee acknowledged that the issue seems to have become more concerning to some of the institutional clients he’s meeting with, perhaps more so than the debt-ceiling crises of 2011 and 2013 were.
The debt ceiling poses a particular challenge for House Speaker Kevin McCarthy. The deal that McCarthy wrangled through his own party in the House last week was a placeholder to get President Biden to come to the table–which he has. However, House Republicans include conservatives who have warned that “if any of the cuts are rolled back they are off the bill.” Meanwhile, Republican moderates who voted for McCarthy’s debt-ceiling proposal did so “with the understanding that when a compromise comes back the most draconian cuts will be restored.”
“I am growing more concerned that markets are going to have to deal with some ugly headlines in the coming weeks as DC tries to deal with the debt ceiling,” Block warned. He also reminded us that to win the Speaker position, McCarthy in December agreed to a rule change that makes his position precarious during any contentious situation: any House member can call a snap vote (simple majority) to remove him from power.
There is a possible opportunity to this crisis, however. Head of Crypto Strategy Sean Farrell observed: “If you’re trading around the X date and there's a plausible scenario in which the US goes into technical default, I have to think Bitcoin just launches into orbit.”
In earnings, all eyes were on tech giant Apple (AAPL), the most valuable company in the world. The longtime Tom Lee Granny Shot (+368% since addition) has proven to be a pillar of strength amid the Federal Reserve’s interest rate campaign, banking woes, and recessionary fears. Through it all, Apple has chugged along to gain nearly 40% this year as it sits close to its all-time high around $180. Strong iPhone sales highlighted the Q1 earnings report, and growing sales in India offset waning demand for Macs and iPads.
Apple, which accounts for more than 7% of the S&P 500, also increased their dividend for the 11th consecutive year and announced an additional $90 billion stock buyback plan. “The iPhone is truly a global product and we’re doing well in emerging markets right now,” CFO Luca Maestri said. “That has helped us offset some macroeconomic challenges.”
iPhone sales are growing in Indonesia, the Middle East, and India. On the call with analysts, Apple CEO Tim Cook said: “What I do see in India is a lot of people entering the middle class, and I’m hopeful that we can convince some number of them to buy an iPhone.”
Leisure thrives in 2023
Amid recession alarms, leisure spend and hospitality continues to suggest the consumer is relatively healthy. Early this week, Marriott International reported a 34% annual increase in revenue to $5.6 billion. With about 30 hotel brands, Marriott controls over 5,800 properties with more than 1.5 million rooms. This summer, U.S. travel demand is expected to be strong, defying recession fears.
Elsewhere
Arm, the British semiconductor design firm, has filed to go public on the Nasdaq sometime this year after being taken private by owner Softbank in 2016. The company’s chip-design technology is frequently licensed by other semiconductor companies for their System on a Chip (SoC) products. The British government tried hard to convince the company to list domestically, but Arm co-founder Hermann Hauser said, “The fact is that New York of course is a much deeper market than London, [and] partially because of the Brexit idiocy the image of London has suffered a lot in the international community.”
Tech CEOs visited the White House on Thursday to discuss the future of AI. In addition to Microsoft’s Satya Nadella and Alphabet’s Sundar Pichai, Open AI CEO Sam Altman and Anthropic CEO Dario Amodei also joined in a discussion with Vice President Kamala Harris, Commerce Secretary Gina Raimondo, and other senior White House officials. In the early days of social media, “there was this mantra of ‘move fast and break things’” Raimondo noted. “We cannot allow that to happen [with AI.]”
Residual resentment: The Writers Guild of America went on strike after failing to reach an agreement with the Alliance of Motion Picture and Television Producers, the first strike in 15 years. The labor dispute arises from the increasing prominence of content streaming, and disagreement about how to structure residuals (the fee a writer or creative professional is paid each time an episode or film is rebroadcast). The last writers’ strike cost an estimated $2.1 billion to the California economy. Directors’ and actors’ unions are also sure to be watching how the residuals issue resolves.
Icahn Enterprises found itself in the unusual position of taking criticism from an activist investor rather than dishing it out, as short-selling firm Hindenburg Research charged that Icahn Enterprises had a “Ponzi-like economic structure” in which cash from new investors was used to fund the conglomerate’s dividend payouts. “We obviously disagree with the inflammatory assertions in the Hindenburg report and intend to respond at length,” the firm’s founder, Carl Icahn said in response.
And finally: China’s Ding Liren has become the world chess champion. He won the title after Magnus Carlsen retired rather than defend his title for a sixth time. Ding, who had previously been ranked No. 3, is the first Chinese and only the sixth non-Russian to hold the world title in the championship’s 75-year history.
By the way, we’d like your feedback. How are you enjoying this weekly roundup? We read everything our members send and make every effort to write back. Please email thoughts and suggestions to inquiry@fsinsight.com
Important Events
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The Consumer Price Index is a measure of how much Americans paid for a basket of goods and services.
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A measure of wholesale inflation as indicated by prices received by producers for their output.
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A survey-based index of consumer expectations for inflation in the next year.
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Stock List Performance
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Brian’s Dunks
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Performance available here.
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