“Invest for the long haul. Don't get too greedy and don't get too scared.” ~ Shelby M.C. Davis.

Good evening:

Equity markets snapped their winning streak on this shortened post-holiday trading week as investors reacted nervously to Jerome Powell’s comments during the Fed Chair’s semi-annual appearance before Congress, as well as to a higher-than-expected rate hike across the pond by the Bank of England. 

Our Head of Research, Tom Lee, did not share their worries. His long-term outlook for the year remained unchanged, as he viewed Powell’s remarks in a positive light. At our weekly huddle, Lee observed that Powell’s remarks, if delivered one month forward after July CPI numbers had been released, “would sound a lot like a victory lap.”

Lee explained his reasoning: “Powell said that while there's been some progress for inflation, he cited the numbers at 4% headline, far from our 2% target.” But as he has previously noted, the 41-year-high CPI reading from back in June 2022 (+1.2% MoM) is likely to result in a significant drop in June 2023 CPI YoY next month, which could fall to as low as 3.0% vs. May 2023 4.1% YoY.

“So if he had been giving this testimony one month later, Powell could say, ‘Headline CPI is at 3, we're almost at our goal of two, and consumers have anchored themselves.’ That's why I think the Fed is going to be whipping much less hawkish once the real numbers come in, because then they can actually start to really point to something hard that takes the pressure off them from Washington.”

Crypto Surging

Though equity markets slipped this week, Lee noted that the overall markets “expanded through bitcoin … Part of it is a series of legitimizing headlines. But also, a lot of the crypto hedge funds that I'm speaking with suddenly flipped very positive on what they think could happen. I think there has been an expansion in crypto equities too.”

Viewed through his lens of expertise, Head of Technical Strategy Mark Newton confirmed a meaningful change as well. “I think the move in crypto is certainly for real. I think bitcoin kicked things off, ethereum followed yesterday, and we're starting to see some good strength in some of the alts. In recent months, crypto in general held up in a resilient fashion in response to a lot of what I thought were things that could have damaged it, such as all these lawsuits and the SEC movement. Now you've seen pretty good breakouts on many of these. I'm not ready to say we're going to double from here, but I do think it rallies up into July along with risk assets.”

Newton and Lee both asked Fundstrat’s Head of Digital Assets, Sean Farrell, for his thoughts on the matter. In Farrell’s view: “The game changed this week. I don't want to call ‘Operation Chokepoint’ officially over, but Blackrock filed for a spot Bitcoin ETF this week. And BlackRock does not just throw stuff at the wall to see what sticks. They're very tactical about things like this.” 

“I think there are two ways to look at this one,” he told us. “The uber-bull case is [BlackRock CEO] Larry Fink and the boys know something and approval is imminent. The catalyst could be a positive ruling in the Grayscale case, which could open the door for BlackRock to get approved, even before Grayscale. As we've consistently said, we trust the courts, more than perhaps the casual observer does, when it comes to battling the SEC.”

“But even in the worst case scenario – which is that this is just a shot across the SEC bow and it's a political gesture, it means that – in my opinion – the worst of the regulatory risks are behind us.” 

Farrell’s optimism didn’t just come from his assessment of future regulatory risk.

“We're starting to see capital come out of money market funds. And, as Tom has said, a lot of people have been sidelined and missed the trade in AI and tech. I think those people are going to want to make it back in one trade – and what's the natural shiny thing, assuming that regulatory risk is a beta? I would say that's Bitcoin and so I think over the next month, we could see a bit of a catch-up. That is well within the realm of possibility.” 

Lee remains long-term constructive on the market. “I think a lot of stocks are kind of spiking right now. Take Meta (META 0.66% ) for example,” he explained. “From 2015  it took seven years to get from 80 to 280. And, in fact, when Meta started to break down, many people said, ‘Well, it took seven years to go to 80. It's gonna take seven years to get back to 80.’ And it took like seven months.”

“I think this shows that there was a lot of ‘rage selling’ back in October, where some people even rage sold their entire brokerage accounts. But that’s why I think we’re going to see a very vertical recovery now, one that looks a lot like 1982: Back then the stock market took 27 months to decline. It took four months to recover.” 

Turning to Newton, Lee asked: “So this is where I have a question for Mark – do you think we made a local [short-term] top? Because we're in a data vacuum where there won’t be any significant Fed speak for a while, we won’t get the next CPI reading until July, and also no earnings until July.”

Newton’s response: “It’s true that we did get up to levels near the highs of this channel so we’re sort of seeing a little bit of consolidation, and we might have another day or two of this. But a few days of consolidation do not make a top. Honestly, I'm expecting the market to go right back to new weekly highs into the beginning of July.” 

Further explaining his views, Newton added, “You're not going to get a serious pullback if the defensive sectors are all falling relative to the S&P and on absolute terms too. It just doesn't happen and that has not happened now.” Furthermore, “during rapid bull runs, you see people buying call options hand over fist and making a ton of speculative bets, and you just don't see that right now.” So as someone prefers to stay ahead of consensus, “I tend to be still very optimistic,” he concluded. “I’m a buyer of dips, long and strong.”

Lee, Newton, and Head of Global Portfolio Strategy and Asset Allocation Brian Rauscher agreed that any suggestion that market sentiment had turned bullish was premature at best. “In my client conversations, nobody’s bullish. Nobody’s bearish, but nobody's bullish.”

Looking further out, our Washington Policy Strategy Tom Block saw potential clouds on the horizon, though it was not clear how much – if any – effect they would impact the markets. “In the coming months, we're gonna have just bad headline after bad headline in the coming months about the inability of Congress to come up with a budget. I think the chances are very high that there'll be a government shutdown, starting October 1, and I just don't see how they avoid it.”

Other market observations from Lee this week:

On a more patient Fed: I think there’s a growing realization at the Fed that inflation could be taking care of itself. It’s the Fed that’s turning more patient. Too many are thinking the Fed is trying to make a hard landing. 

All-time highs could be in store: Our view is that we approach all-time highs this year. It sounded preposterous when we said that in December, but the roadmap we see in the second half is that FAANG’s done a lot of the heavy lifting. Believe it or not, compared to a year ago, FAANG’s up almost 60%. To get to all-time highs, you just need the other 493 stocks to show some semblance of multiple expansion. That group is trading at 15 times. So we think there’s going to be a pretty dramatic expansion in market breadth in the second half of this year, and that’s going to help get us another 400 points in the S&P to get us to 4800. 

On this week’s market decline: I think this is going to be quickly erased. Since March, we’ve been in a buy-the-dip regime, meaning these 2% pullbacks over five days get pretty quickly recovered. We’re in an environment where there’s more IPOs: That’s actually positive for risk. Earnings are bottoming, that’s again positive for risk. There’s a lot of cash on the sidelines available to buy the dip, and we know inflationary pressures are cooling. 

Earnings are bottoming: Ex-energy, it looks like (earnings) are going to be positive. If you have positive earnings growth, you kinda want to be risk-on.

The return of IPOs: The IPO market is coming back to life. There have been several high profile IPOs this past week, including CAVA 3.63% . IPOs are a way for institutional investors to gain risk-on exposure, as they allocate and participate in new issuance. For June MTD (2 weeks), IPO issuance has already totaled $30 billion, exceeding the $19 billion issued in all of June 2022. A return to the calendar is positive. In 2021, IPOs totaled $1.4T and were a mere $740 billion last year. This is illustrated by our Chart of the Week:

On high cash levels: Even as the markets rallied, cash balances have risen. Compared with 2019, there’s been a staggering increase in cash not involved in the market. 

Overall, most clients remain bearish: This is something we see in almost all of our conversations. Short interest topped $1 trillion, the highest since April 2022 when the market was about to tumble 1,000 points. Now, we’ve been anticipating things to get better.

Elsewhere

President Biden welcomed Indian Prime Minister Narendra Modi this week, discussing areas of cooperation in the fields of technology, energy, space exploration, and military-hardware manufacturing. Modi also addressed a joint session of Congress before attending a state dinner hosted by Biden at the White House, only Biden’s third as President (the others welcomed the leaders of France and South Korea.) Other major issues on the agenda included supply chains and India’s stance on the Ukraine war.

Germany took steps to address its drastic labor shortage with reforms to its immigration system that loosens requirements for prospective immigrants based on their professional qualifications, age, and language skills. In some cases, the reform will let foreigners move to Germany without first securing a job, allowing them to live there for up to one year while seeking employment.

The Bank of England raised rates to their highest level since 2008, boosting them by a higher-than-expected 50bp to 5.00%. Bank governor Andrew Bailey said that the rate hike was a response to a rate of wage increases that “cannot continue” if the UK’s 8.7% inflation is to be curbed. 

South Korea exported more to the U.S. than China last year, the first time this has happened since 2004. South Korean exports to China declined by 10% to $122 billion, while exports to the U.S. rose in 2022 to $139 billion, up 22%. The change came as China sought to become less reliant on imports while the U.S. sought to become less reliant on Chinese manufacturing. 

Turkiye raised its interest rates by 650 bp to 15%, reversing President Recep Erdogan’s previous unorthodox strategy of combating inflation by lowering rates. The hike was nevertheless lower than analysts expected, sending the lira sinking against other currencies. 

Warren Buffett has donated another $4.64 billion of Berkshire Hathaway stock to five charities, boosting his total giving since 2006 to more than $51 billion. That sum is greater than his entire 2006 net worth.

The USDA has, for the first time, approved the sale of cell-cultured “meat” to the public, paving the way for Good Meat and Upside Foods to sell a product consisting of protein produced by taking stem cells from muscle and fatty tissue of a chicken and culturing it in a growth medium. The FDA has also approved the sale of these products. 

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