A daily market update from FS Insight — what you need to know ahead of opening bell

“While armchair travelers dream of going places, traveling armchairs dream of staying put.” — Anne Tyler

Over the Weekend

House approves long-stalled $61 billion Ukraine aid package, part of a larger $95 billion allocation that also covers Israel and Taiwan (WSJ)

Israeli weapon damages Russia-supplied S-300 air defenses in Iran without being detected (NYT)

An explosion damages a military base in Iraq used by an Iran-backed armed group (NYT)

Five rockets fired from Iraq toward U.S. military base in Syria (RT)

Tesla cuts price of FSD software by a third; $2,000 cuts to U.S. prices of models Y, X, and S on Friday followed by price cuts in major markets, including China, Germany (RT)

Salesforce’s talks to buy Informatica fizzle (WSJ)

In apparent bid to boost domestic consumption, Chinese authorities now going door-to-door, forcing consumers to buy new home appliances if existing ones are expired (x.com)

Asking prices for U.K. homes close to record high (RT)

Apple ordered to remove some messaging services from China’s App Store, including some owned by Meta Platforms (Barron’s)

Erich Andersen, TikTok general counsel, who has overseen the security negotiations with the U.S. government, plans to resign from his role (TI)

Indonesia to move its capital from Java-based Jakarta, overcrowded and sinking fast, to a Borneo-based, as-yet unconstructed new city called Nusantara; influencers enlisted to get young Indonesians to move to the new capital (RoW)

A spate of arrests shows how deeply Russia has infiltrated Europe (Semafor)

Daniel Dennett, influential neuroscientist and philosopher of science, is dead at 82 (NYT)

First news

• Domestic and world factors have oil in the dol-drums
• Home starts are down, prices up, mortgage rates high, buyers up in the air
• No need to invest abroad for international exposure; the S&P may do just fine.

Chart of the Day

MARKET LEVELS

MORNING INSIGHT

Good morning!

The 6% decline in equities since early April has been painful, and there are some who believe the “top is in” for 2024, and possibly a larger “top” (for those who think the Fed may be pivoting “hawkish”). Still, in our view, the decline in equities has worked off some overbought conditions, and this has considerably improved the risk/reward for stocks in the near term:

The decline in equities has multiple drivers, but the following 5 are at the top:
– first, the relentless 28% rise since October 2023 was due for a pause
– second, earnings for ASML 1.29%  and TSMC triggered “red flags” on AI
– third, the 3 most recent inflation reports triggered fears of a “second wave”
– fourth, higher inflation compels the Fed to delay cuts, but markets are “overshooting”
– fifth, war risks generally elevating with conflict in the Middle East.

Click HERE for more.

TECHNICAL

The McClellan Oscillator has now reached levels which suggest lows should be close. This breadth oscillator has now plunged to levels which historically have been important, suggesting that market lows should be close.

While not a perfect gauge for timing lows in the market, when this oscillator reaches levels under -200, it shows a very stretched situation for market breadth that normally allows for a bounce to unfold. This gauge has undercut all the prior lows of the past year, and is the lowest since March 2023.

While we normally see breadth divergences as more important than a low level from this McClellan Oscillator alone, this most recent plunge to yearly lows is important and should signify that lows could be imminent.

Click HERE for more.

CRYPTO

• Bitcoin block 840,000, coinciding with the block reward halving on April 19th, will also see the debut of Runes, a new standard for issuing fungible tokens directly on Bitcoin, developed by Casey Rodarmor of Ordinals fame. Runes is positioned as an alternative to the BRC-20 tokens, which are dependent on off-chain indexers and the Ordinals inscribing method. Unlike BRC-20, Runes operates through embedded scripts in Bitcoin transaction outputs, called “runestones,” which utilize the blockchain’s UTXO system to store balances and facilitate transactions. This allows Runes to integrate with the Bitcoin Lightning Network for faster and cheaper transactions. Runes are one of the many reasons that investors are excited about bitcoin over the coming quarters. Transaction fees on BTC have spiked recently, likely caused by individuals speculating on BRC-20 tokens ahead of the Runes launch, or simply moving funds on chain in anticipation of a burgeoning DeFi ecosystem.
• Tether has announced plans to expand the use of its USDT and XAUT tokens on The Open Network (TON), aiming to enhance peer-to-peer transactions among Telegram’s estimated 900 million users. This initiative is designed to better integrate these tokens within the TON ecosystem, potentially increasing their utilization in decentralized finance (DeFi) applications. This strategic move is intended to boost liquidity and activity on TON, which now operates independently after separating from Telegram due to regulatory issues. The integration also merges fiat and crypto transfers efficiently. Complementing this expansion, Tether has introduced a recovery tool that allows for the migration of USDT across different blockchains.

Click HERE for more.

FIRST NEWS

Dry cleaning. It’s largely a wash for oil, as the AAA offers a zzz-worthy update: “Lackluster domestic demand for gasoline paired with decreasing oil prices led to the national average for a gallon of gas climbing just four cents to $3.67 since last week. With tensions running high over the past three weeks in the Middle East, the cost of oil reached the upper $80s per barrel. However, it has since fallen several dollars into the low $80s as the oil market watches to see if any further military actions occur.”

On The Homes Front: Four Quotes and a Census Figure. Per Freddie Mac, the average 30-year fixed-rate mortgage rose to 7.1% from 6.88% over the week before. Says Freddie Mac: “As rates trend higher, potential homebuyers are deciding whether to buy before rates rise even more or hold off in hopes of decreases later in the year. Last week, purchase applications rose modestly, but it remains unclear how many homebuyers can withstand increasing rates in the future.”

At the same time, The Census Bureau reports that new home construction has fallen, with housing starts down 14.7% in March, to an annualized rate of 1.32 million units. Building permits are off 4.3% to an annualized rate of 1.46 million units.

Unsurprisingly, the prices of non-new (previously owned) homes were up month-over-month and from year-ago levels. Says the NAR: “The median existing-home sales price rose 4.8% from March 2023 to $393,500 – the ninth consecutive month of year-over-year price gains and the highest price ever for the month of March,“ all while sales of those same non-new (previously owned) homes fell by 4.3% in March to an annualized rate of 4.19 million units. More from NAR: “Though rebounding from cyclical lows, home sales are stuck because interest rates have not made any major moves. … There are nearly six million more jobs now compared to pre-COVID highs, which suggests more aspiring home buyers exist in the market.”

And yet, the NAHB says: “April’s flat reading suggests potential for demand growth is there, but buyers are hesitating until they can better gauge where interest rates are headed. … With the markets now adjusting to rates being somewhat higher due to recent inflation readings, we still anticipate the [Fed] will announce future rate cuts later this year, and that mortgage rates will moderate in the second half of 2024.” @NAR Research

Go West Stay Home, Young Man. Did you know that your existing holdings of U.S. stocks (say, the S&P 500) may already be providing broad diversification across businesses and industries globally? Sure, there are various strategies to tweak a portfolio, such as loading up on certain stocks, shifting sector weights, or increasing exposure to overseas markets, and financial advisors often recommend allocating investments outside the U.S. to diversify portfolios and gain exposure to potentially outperforming markets.

Less discussed by advisers is the fact that, even if you only invest in U.S. stocks, you may still be exposed to overseas economies. Many multinational corporations in the S&P 500 generate a significant portion of their revenue from international markets. Per FactSet, 41% of revenue generated by S&P 500 companies comes from international markets.

^{Source: JPMorgan}

This global exposure is not unique to U.S. companies. Data from JPMorgan suggests that companies listed abroad also conduct substantial business outside their own regions, and so, investing in non-U.S. stocks can indirectly provide exposure to the U.S. economy, as many large non-U.S. companies sell goods and services to U.S. customers.

While attractive opportunities in non-U.S. stock markets may present themselves from time to time, as illustrated by UBS’s chart showing shifts in the share of value of the world’s stock markets across regions, investing in the U.S.-based stocks of the S&P 500 already provides substantial exposure to international companies.

Representing about 60% of the world stock markets’ value, the U.S. stock market has vast size and reach. It’s also been going up for a long time.

Its exceptional performance may be driven by factors such as a culture of innovation, business-friendly regulation, strong corporate governance practices, and incentives for company executives and employees. Whatever the reasons, the U.S. stock market’s ability to drive earnings higher has made investing in it a winning trade for a long time, and there is little reason to believe this won’t continue in the years to come. TKer