![Two key data points past few days. Blackbook Used cars + Debt ceiling = positive. FYI, markets don't blare trumpets at the low (Oct 2022 low).](https://cdn2.fsinsight.com/wp-content/uploads/2023/05/image-569.png)
![Two key data points past few days. Blackbook Used cars + Debt ceiling = positive. FYI, markets don't blare trumpets at the low (Oct 2022 low).](https://cdn2.fsinsight.com/wp-content/uploads/2023/05/image-570.png)
NEW: Section (above) added identifying Key Recommendations and Super Grannies
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In case you missed our webinar “Super Granny” Shots last week
- we discussed “Super Granny” shots that are expected to tactically gain near-term
- and “Sleeping grannies” which we expect to tactically underperform
![Two key data points past few days. Blackbook Used cars + Debt ceiling = positive. FYI, markets don't blare trumpets at the low (Oct 2022 low).](https://cdn2.fsinsight.com/wp-content/uploads/2023/05/20230523_TL_grannies_PubBanner_FSI-1-1024x256.png)
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In the past week, there has been a notable incrementally positive shift in investor sentiment towards equities. Previously, many pundits claimed stocks were ignoring enormous risks like debt ceiling, war, inflation, and Fed resolve and fundamentals could never justify the “unsustainable valuation expansion.” But it seems bears are now swayed by strong 1Q23 earnings (+700bp beat), along with a dose of NVIDIA NVDA 1.39% cementing the AI theme (Fundstrat clients know this has been a central theme of ours for many years).
- Recall, one cannot be a “bear” and then be buying FAANG stocks. Anyone rationalizing FAANG as a Defensive trade has forgotten the 2022 bludgeoning of FAANG was due to higher interest rates. FAANG is a pro-growth, thematic trade. And as our clients know, was our top sector pick for 2023, as we expected FAANG to gain >50% on the heels of AI (see our 2023 Outlook from mid-Dec 2022).
- Over the past few days (including Memorial Day weekend), there are two incremental data points worth flagging:
– first, Congress has a tentative deal to raise the debt ceiling, on balance positive
– second, Blackbook Wholesale (@blackbookauto) shows May used car prices absolutely tanking - The debt ceiling resolution is on balance positive, but there are some give backs. Foremost, in justifying the May “pause,” the Fed cited some financial instability risk (alluding to the debt default/ceiling) and with this behind us, that takes away an argument for a pause. Thus, the odds of a June hike are now 59% from 0% post-May FOMC. There is a secondary headwind which is the Treasury may now issue debt, which would drain market liquidity.
- But the positive of the debt ceiling is that this did remove a binary event risk. Thus, fundamental investors can move off the sidelines — not all would be constructive, however.
- On used car prices, in April’s CPI report, Used Cars was the second largest contributor to inflation, surging 4.4% in the month (-6.6% pre-seasonal adjustment). This surge along with Shelter (+0.4%) accounted for 78% of all the inflation in the US economy in April. Yup, used cars literally drove the April inflation report. Now it is tanking again, so this suggests May CPI could have downside, fueled this odd reversal of used car prices. Why would used car prices be exploding at a 48% annualized rate?
- This used car data point is arguably a key offset for the Fed and the risk of a June hike. We get the May CPI report in mid-June (6/13). Used cars and housing drove the April CPI report. If there is a softish reading, this would push odds back towards a Fed pause. Hence, this matters.
- But the broader question: does a +25bp this kill equities? It seems to me many investors argue the stock market will plunge if the Fed hikes again, and especially if there are hikes in June and July.
- To me, that bearish view is investors “over-fitting” data. The absolute level of the Fed funds rate does not correlate to a P/E level or to a S&P 500 EPS level, thus, has ZERO to do with price level of the equity market. It is the 10-yr yield that matters most and that is impacted by the path of rates and by the path of inflation.
- Our view is that inflation will fall faster than the backwards looking CPI suggests. The above used car data point is an example. And as such, we think the Fed has less work to do, but only when the Fed begins to look forward.
BOTTOM LINE: Markets don’t blare trumpets at the low
We remain constructive on equities. In the past week, the most notable thing has been the shift in investor sentiment. At the start of this year, recall how many pundits called for S&P 500 making new lows or testing 3,500. And many even said this would be worse than 2008 GFC or 1999 dot-com bust.
- But markets don’t blare the trumpets at the low (nor ring the bell at the top). In our 2023 Outlook (mid-Dec), we outlined 8 reasons why we expected stocks to surge in 2023, led by FAANG. We won’t plaster you with those arguments now (please see report).
- Incrementally this week, arguably the most consequential event is the downturn in used car prices (Blackbook data) and if true, sets stage for CPI to fall further.
- As for equities, we agree an expansion of breadth is helpful. We think there are tentative signs and will explain these on our Thursday report (Fri am). For now, our top sector OW is Technology/FAANG.
- We also like Regional banks (KRE 0.54% ) given the temporary Fed put. But this could have an expiration date if the Fed feels emboldened.
- And the May ISM coming this 6/1 should give us better conviction on whether PMIs have bottomed. But if they have, this supports the OW in XLI 0.98% .
![Two key data points past few days. Blackbook Used cars + Debt ceiling = positive. FYI, markets don't blare trumpets at the low (Oct 2022 low).](https://cdn2.fsinsight.com/wp-content/uploads/2023/05/image-576.png)
USED CAR PRICES: falling, yet the CPI data shows used car prices again rising…what gives?
Is this the most important data point this week?
Blackbook Auto Wholesale (link) released its May 2023 data and it shows a resumption of declines in used car prices. This is quite significant.
![Two key data points past few days. Blackbook Used cars + Debt ceiling = positive. FYI, markets don't blare trumpets at the low (Oct 2022 low).](https://cdn2.fsinsight.com/wp-content/uploads/2023/05/image-577.png)
Recall, the April 2023 CPI report showed a staggering surge in used car prices.
- used car prices rose 4.4% (48% annualized) and the highest rise of any category
- oddly, the non-seasonally adjusted figure was -6.6%, so the seasonal adjustment was massive
![Two key data points past few days. Blackbook Used cars + Debt ceiling = positive. FYI, markets don't blare trumpets at the low (Oct 2022 low).](https://cdn2.fsinsight.com/wp-content/uploads/2023/05/image-578.png)
In fact, April used car prices contributed:
- +0.11% to April CPI of the 0.37% change
- Shelter was the largest at +0.18%
- combined, shelter and used cars was 0.29% of the 0.37%, or 78% of the rise
- without this, CPI was a mere 0.08%, or 1% annualized
- yup
![Two key data points past few days. Blackbook Used cars + Debt ceiling = positive. FYI, markets don't blare trumpets at the low (Oct 2022 low).](https://cdn2.fsinsight.com/wp-content/uploads/2023/05/image-580.png)
DEBT CEILING: Progress and incrementally moving forward… but raises risk of a hike too
Tom Block, Head of Policy Strategy at FS Insight, notes that progress is likely made on the debt ceiling package:
- he notes that Thomas Massie, Republican, announced his support for the “rule”
- Massie is considered one of the most conservative, thus, increasing chances of a deal
![Two key data points past few days. Blackbook Used cars + Debt ceiling = positive. FYI, markets don't blare trumpets at the low (Oct 2022 low).](https://cdn2.fsinsight.com/wp-content/uploads/2023/05/image-574.png)
And recall, just a few weeks earlier, many pundits and the media were suggesting that a violent sell-off faced equity and debt markets in the event of a default. This was a binary event:
- binary meaning this would have a definite end result and a definitive end date
- but even if one expected this to be resolved, this kept money on the sidelines
![Two key data points past few days. Blackbook Used cars + Debt ceiling = positive. FYI, markets don't blare trumpets at the low (Oct 2022 low).](https://cdn2.fsinsight.com/wp-content/uploads/2023/05/image-575.png)
But as much as the “binary risk” is behind us, the bond market is similarly assessing that a potential risk contributing to a Fed pause has lifted:
- After the May Fed meeting, the odds of a June hike were essentially 0%, inline with Fed guidance
- Among the multiple factors, one was the risk of financial instability from the debt ceiling/default risk and the other risk was the widening regional bank crisis.
- Thus, on the margin, the debt ceiling resolution does raises the incremental probabilities of future hikes
This is what is playing out in markets. As shown below, the odds of a June, and even July, hike increased:
- odds of a June hike is now 59% from zero
- odds of a July hike is now 41% from zero
- so the market is now pricing in additional hikes
![Two key data points past few days. Blackbook Used cars + Debt ceiling = positive. FYI, markets don't blare trumpets at the low (Oct 2022 low).](https://cdn2.fsinsight.com/wp-content/uploads/2023/05/image-573.png)
And it is something that several economists are also properly flagging. The odds of a hike in June and July are higher.
![Two key data points past few days. Blackbook Used cars + Debt ceiling = positive. FYI, markets don't blare trumpets at the low (Oct 2022 low).](https://cdn2.fsinsight.com/wp-content/uploads/2023/05/image-579.png)
ECO: Important week ahead, JOLTS and May Employment Report…
Many economic reports this week, but few will likely be as market moving as inflationary reports. As shown below, the highlights are:
- 5/31 (Today) 10am ET April JOLTS –> key is this figure below the March figure of 9.59 million
- 6/1 10am ET May ISM Manufacturing –> key is this figure above the 47.1 last month, affirming low in place
- 6/2 8:30am ET May employment report –> avg hourly earnings <4.4% YoY would be good
![Two key data points past few days. Blackbook Used cars + Debt ceiling = positive. FYI, markets don't blare trumpets at the low (Oct 2022 low).](https://cdn2.fsinsight.com/wp-content/uploads/2023/05/image-571-1024x684.png)
ECONOMIC CALENDAR: Key May data is inflation and ISM, and April was overall “tame”
Key incoming data May
5/1 10am ET April ISM Manufacturing (PMIs turn up)Positive inflection5/2 10am ET Mar JOLTSSofter than consensus5/3 10am ET April ISM ServicesTame5/3 2pm Fed May FOMC rates decisionDovish5/5 8:30am ET April Jobs reportTame5/5 Manheim Used Vehicle Value Index AprilTame5/8 2pm ET April 2023 Senior Loan Officer Opinion SurveyBetter than feared5/10 8:30am ET April CPITame5/11 8:30am ET April PPITame5/12 10am ET U. Mich. April prelim 1-yr inflationTame5/12 Atlanta Fed Wage Tracker AprilTame5/24 2pm ET May FOMC minutesDovish5/26 8:30am ET PCE AprilTame5/26 10am ET U. Mich. April final 1-yr inflationTame- 5/31 10am ET JOLTS April job openings
- 6/2 8:30am ET May Non-farm payrolls
Key data April
4/3 10am ISM Manufacturing Employment/Prices Paid MarchTame4/4 10am ET JOLTS Job Openings (Feb)Tame4/7 8:30am ET March employment reportTame4/12 8:30am ET CPI MarchTame4/12 2pm ET March FOMC MinutesTame4/13 8:30am ET PPI March Tame- 4/14 7am ET 1Q 2023 Earnings Season Begins Better than feared
4/14 Atlanta Fed Wage Tracker MarchSemi-strong4/14 10am ET U. Mich. March prelim 1-yr inflationHawkish4/19 2:30pm ET Fed releases Beige BookTame4/28 8:30am 1Q23 Employment Cost IndexSemi-strong4/28 8:30am ET PCE MarchTame4/28 10am ET UMich April final 1-yr inflationHawkish
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34 Granny Shot Ideas: We performed our quarterly rebalance on 4/26. Full stock list here –> Click here
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