“Intuition will tell the thinking mind where to look next.” ~ Jonas Salk

Good evening,

The S&P 500 has closed out its third consecutive down week, and there is no denying that investors had much to worry about this week. Stocks had already come under pressure last week with shrinking expectations for rate cuts from the Fed and a recent CPI print that came in hot. Escalating tensions between Iran and Israel last week also weighed on investors’ minds, and those worries ramped up significantly on Sunday (April 14) when Iran launched an attack of unprecedented scale against Israel, launching 300 drones and missiles – although nearly all were successfully intercepted.

As the week began, the S&P 500 was already below its 20-day moving average (20 dma), and right around its 50 dma. Fundstrat Head of Research Tom Lee described the instinct for investors to de-risk after Iran’s attack as both “knee-jerk” and “reasonable,” and he expressed hopes that equities would ultimately bounce from the dip. He pointed out that as long as the immediate risk of escalation evaporates, markets will eventually get comfortable with the idea of a simmering conflict. “That’s an unpleasant and uncomfortable thing to say,” he acknowledged, “but it is reality. This is what happened with the Russia-Ukraine war.”

However, although the pullback in markets have created an attractive opportunity in his view, the surge in the VIX makes Lee markedly cautious. “The VIX is telling us that we need to take this extra slowly, that there’s still more derisking ahead,” he said, repeating the word “slowly” for added emphasis. Ultimately, and looking tentatively at a time frame of two weeks to a month from now, Lee would like to see VIX make a sustainable move back below 18, with oil prices remaining subdued. And of course, for many reasons, “we want to see further escalation avoided,” he said. 

From a strictly technical perspective, Head of Technical Strategy Mark Newton is not particularly worried about recent market movements. “Three things to me suggest that this is going to be a minor pullback and we are near the end of it,” he said during a live webinar with Lee on Wednesday. They were:

• Technology needs to hold. Newton believes that it has – a look at equal-weighted Tech tech versus equal-weighted S&P 500 shows no evidence of material breakdown, in his view.
• No defensive outperformance. Looking at Consumer Staples, REITS, and Utilities, Newton has not seen the return of defensive outperformance, at least not enough to suggest that a larger selloff is approaching. 
• Breadth remains healthy. Newton told us that breadth has held up quite on an intermediate term basis while getting to levels that mark prior lows on a near-term basis. 

Newton asserted that for him, “the most important catalyst from a technical perspective to watch for in the weeks ahead concerns a turn back lower in the US Dollar and Treasury yields.  It’s thought that when cycles start to project lower for yields between late April and August, that indices should respond positively.

Head of Digital Asset Strategy Sean Farrell is in agreement on yields pulling back some time after May, albeit for different reasons. It might not seem like it given this eventful week, but April 15, Tax Day, was just a few days ago, and some projections suggest that federal tax receipts could approach record highs this year. If so, Farrell believes that could have implications not just for liquidity and risk assets, but also for the next federal quarterly refunding announcement (on May 1, 2024, the same day as the next FOMC meeting). 

At our weekly research huddle, Farrell suggested, “We could see [Treasury Secretary Janet] Yellen come out and overweight issuance for the rest of this quarter and next quarter towards bills [shorter-term debt] so that she can reduce the coupon issuance [longer-term debt].” With less longer-term debt being issued than perhaps the market is currently pricing in, this could “bring yields down and smooth out volatility, a good setup for crypto and equities.”

Regarding the Fed

Head of Data Science Ken Xuan observed that many seem to be viewing the question of Fed cuts too rigidly. “It’s not that black-and-white, and it’s not as if, for example, three cuts is good for stocks but two cuts is suddenly bad.” Xuan argued that even with no cuts, if the rationale for that decision is that the economy is already strong despite the current rate environment, “I think that would still be very bullish.  A robust economy is good news.”

That is Lee’s view as well. However, Lee also believes that the Fed will turn out to be more dovish than consensus expects. Despite a hotter-than-expected headline CPI number, the internals of the latest CPI release confirm inflation continuing to fall. The median inflation rate for all of the various components that make up CPI continues to fall and is at 1.76%. The gap between the median component and the headline number has widened over the past year and is further evidence that only two components – housing and auto insurance – are keeping the overall CPI elevated while the rest of inflation declines. We can see this in our Chart of the Week:

Elsewhere 

The International Monetary Fund (IMF) has warned that a small number of hedge funds have become “too big to fail,” due to their highly leveraged short positions in Treasury futures. The IMF said if the hedge funds should encounter liquidity problems, the financial stability of the U.S. and the rest of the world could be put at risk. The hedge funds’ bets appear to be predicated on the high likelihood that the U.S. Treasury will need to issue a significant volume of new bonds to refinance existing debt while also covering the surging deficit.

The European Parliament passed migration reforms that have been debated since 2015. The new regulations would speed up both asylum requests and deportation of migrants whose requests are denied. The deal attracted immediate criticism from both extremes of the political spectrum. 

RealPage, a property software company, is facing a new front in its legal battle against allegations of price fixing, with various state and district attorneys general initiating action. The company is alleged to have helped landlords across the country illegally fix apartment-rental prices through its software, which uses the real-estate market data to provide landlords with rent recommendations for new and renewed leases. RealPage customers aggregately control an estimated 4.5 million units across the U.S. Several RealPage clients have already settled class-action price-fixing lawsuits brought by renters.

The CEO of Moderna predicted that AI will enable scientists to “understand most diseases” as early as 2027. Stéphane Bancel gave a three- to five-year timeframe for his prediction, noting that Moderna’s scientists had already used AI tools to discover new insights.

Private equity funds are preparing for new rules that would allow them to invest in NFL teams. Though previously barred by the league, a committee of NFL owners is considering rules that would allow institutional investors to acquire stakes in teams, possibly through funds that are NFL-specific and prohibited from any other holdings. Other U.S. pro sports leagues, including Major League Baseball (MLB), the National Basketball Association (NBA), and the National Hockey League (NHL), already allow institutional ownership.

Meta has integrated its Meta AI assistant across its Facebook, Instagram, WhatsApp, and Messenger platforms, as well as on a standalone website. Meta hopes the assistant, based on its Llama 3 AI model, will become a viable competitor to the likes of ChatGPT and Gemini. It integrates real-time search results from Google and Bing.

India is set to once again hold the largest democratic election in the world, with voters headed to the polls beginning on Friday (April 19) to select a new Parliament that could see Prime Minister Narendra Modi winning his record-tying third term leading the country. (The only other three-term Prime Minister in modern Indian history was Jawaharlal Nehru.) India reports that 968,821,926 citizens are eligible to vote in this election, almost triple the entire U.S. population.

U.S. retail sales beat estimates in March, coming in at 0.7% MoM versus expectations of 0.3% and outpacing inflation. The consumer data reading, largely due to a surge in online purchases, boosted estimates of U.S. economic strength but dampened expectations for Fed rate cuts, thus weighing on stocks. 

And finally: The countdown to the Games of the XXXIII Olympiad in Paris has begun, with the Olympic flame having been lit in the ruins of a temple to Hera in ancient Olympia. The torch relay will involve more than 10,000 torchbearers traveling to Athens, then across the Mediterranean on a 120-year-old ship to Marseille. From there, it will wind its way to the opening ceremonies in Paris on July 26.