What Our Clients Are Talking About Behind The Scenes

FLASH COMMENTS

My work still strongly supports the FLASH points that I have included the past two weeks. 

The “shift” towards a hawkish Fed appears to be losing steam as it is slowly becoming clearer that the FOMC is going to need to see more progress on the full employment policy target before beginning a substantive discussion on the taper. 

In my view, there is a high likelihood that we have seen the low in long yields for now and the peak in the U.S. dollar, which drives the S&P 500 higher and provides tailwinds for my ongoing preferred positioning themes as stated below: 

• My work remains medium-term bullish.
• Buy tactical dips in Financials and Cyclical/Recovery/Reflation trades.
• Sell relative strength in defensive areas — Utilities, Staples, and Health Care (except in HC equip and select single stock names).
• Growth/FAANG remains as tilt above benchmark — have less exposure than pre-4Q20 but note they were never suggested to be abandoned — do not chase any tactical outperformance.

MAIN CLIENT ISSUES

• What happened last week with the Fed and market reaction?  Many are still perplexed. 
• Inflation — although was a near even split between inflationists and deflationists.
• Is there any deterioration in the earnings revisions for Value/Cyclicals?
• How is FAANG looking?  Which is better – FAANG or cyclical Tech (Semis – Equip & Chips)?
• Idiosyncratic discussions increased as clients are back looking for what to buy.
• Sector discussions also returned.  Most asked about were Financials, CD, Tech, and Industrials. 

QUESTIONS AND ANSWER

Now that you have had more post-FOMC speakers, any follow up thoughts?

YES, the Fed did not turn hawkish last week. 

After doing a deep dive into last week’s events more and going through the speakers from the last five days, my conviction level has grown even further. 

First, I have heard from my most respected source, and he relays that the hawkish view is the MINORITY view among the FOMC.  Granted, they are vocal, but they do not represent the MAJORITY that will ultimately be impacting the policy decisions.  Thus, when a hawk “chirps” and the market reacts, it is my view that this is creating a tactical opportunity.  

Second, it has been impressed upon me that the FOMC is not looking at policy the way they have in the past.  Yet many market participants are still using the post financial crisis period as the guide, which ended up being a policy mistake.  In a world that is awash in excess capacity and supply in most industries, normalizing too quickly runs the risk of pushing the economy towards outright deflation, which would be more challenging to fight than slowing inflation that has run hot for a bit longer. 

Third, a bigger focus is going to be on the full employment policy target and NOT the immediate inflation readings.  In my view, Chairman Powell has made this quite clear and several of this past week’s Fed speakers also made this point.  So, let us keep our eyes on the labor market and how this unfolds during 2H21. 

Bottom line:  It is my view that the Fed will remain accommodative, which will be a big positive for the U.S. equity market to keep moving higher, and for our ongoing preferred positioning — Cyclicals/Value/Reopening, SMid over Large, and Fins/Industrials/Materials/Energy over Staples/HC/Utilities. 

If you had to pick one side for these issues, what does your work support?

• Persistent/ongoing inflation that is out of control vs. transitory/higher than 2020 but ultimately not an ongoing issue?

Transitory, but certainly higher than 2020 when there were three negative CPI prints.  Interestingly, a few forecasters have made calls for many years of hyperinflation during the past couple of weeks.  I mean no disrespect to anyone who has that view, but I will take the under. 

• 10-yr yields at 1.8-2.0% vs. 1.1-1.3%?

Based on my research, the 10-yr yield reached in mid-June is likely at, or near, the low that will be reached for the rest of the year.  Thus, I see 1.8-2.0% as being more probable.  

• USD (DXY basis) at 94-96 vs 86-88?

I am viewing the dollar and long yields as being very interconnected.  If the USD moves lower to 86-88, it is my view that long rates will be higher and vice versa.  Therefore, I am forecasting the greenback to begin moving lower into year end. 

Bottom line:  My read of the macro is likely to be supportive of my ongoing recommendations — Cyclicals/Value/Reopening, SMid over Large, and Fins/Industrials/Materials/Energy over Staples/HC/Utilities. 

What do you think causes the next leg up in the U.S. equity market and your preferred areas and specific names?

OK, enough with pure macro stuff.  Let us get into my wheelhouse, corporate profits and earnings revisions. 

When I go through my nearly 4000 U.S. stock universe that my ERM model looks at, I still see robust earnings revision readings that are quite broad based.  As we begin to move towards the domestic economy reopening nationally and the 2Q21 earnings reporting season, which will begin in the back half of July, I am expecting healthy, market friendly results that will keep our proprietary revisions metric – which I call the Analyst Sentiment Measure (ASM) – quite healthy. 

The next big driver for equity markets in my view will be a return of widespread green bars in my ERM model (see methodology link below).  In my view, they are going to be quite strong and stock prices will react quite favorably to not only the actual profit announcements but also to what I expect will be optimistic forward guidance.  

Fundstrat Global Advisors:  Global Portfolio Strategy — Intro to Methodology

What are your aggressive tactical indicators signaling now?

Flipped back to favorable mid-day Monday.  My key aggressive tactical indicators — HALO-2, and V-squared (see explanations at the end of the note) — have quickly inflected back to positive.  I was not expecting an extended down period, but the uptick on Monday was earlier than I would have guessed.  Regardless, the bullish signal is now active. 

Bottom line:  I had been viewing last week’s market action, both down overall equity indexes and our preferred ideas, as buy the dip opportunities.  With my preferred tactical metrics now bullish again, I am expecting the move to the upside to continue.

Bottom line:  As we move away from the recent FOMC meeting, the market’s perceived hawkishness has begun to abate, which makes sense to me since it is my view that the Fed did NOT turn hawkish.  Yet, like the mythical multi-headed Hydra from Greek mythology, which would have one of its severed heads grow back, the U.S. equity market has replaced central bank hawkishness with the recent appearance of the COVID-19 Delta variant as the new worry. 

I do not want to underplay the seriousness of this occurrence or the unfortunate impacts it may have on individuals or families, but from an investing perspective I am viewing any tactical weakness in the overall equity market or in our preferred themes as a result of Delta fears as opportunities to raise exposure.  Hence, I am reiterating my ongoing portfolio themes — Value/Cyclicals over Growth/FAANG, and SMid over Large— and preferred sector positioning — Financials, Industrials, and Materials as Full Above Benchmark and HC, Staples, Utilities, and Real Estate as Full Below Benchmark. 

However, before the S&P 500 can begin its next clear up leg, it is my view that we have to get by the next several weeks.  Until the back half of July, there will not be a tremendous amount of company specific news, so equity markets are going to be dominated by the macro and headline news story of the day.  On top of that, institutional investors will begin to leave for their 4^th of July breaks, which will likely lead to lower trading volumes.  Once we get past this period, the 2Q21 earnings reporting season will begin and the focus of investors will shift back towards corporate profits and single stock fundamentals.  Based on our research, the upcoming reporting season is likely to be quite strong and the catalyst to propel equity markets to further gains. 

Along with the ongoing earnings recovery that I have been writing about for many months, the other key drivers to my longstanding bullish view are still in place — the combination of accommodative monetary and fiscal policies and still historically low interest rates, as well as robust earnings revision readings that I still expect to strengthen.  Furthermore, the U.S. economy continues its trek towards nationally reopening and returning to pre-COVID levels. 

With that being said, if there is any volatility over the next several weeks, let us not get shaken out of our positions, but instead confidently try to take advantage of the market action as we keep focused on the bullish bigger picture.

So, you have read it before, but I am going to restate it once again — STAY THE COURSE. 

Definitions of HALO, HALO-2, and V-squared

HALO = The proprietary Fundstrat Portfolio Strategy Halo Model is a multi-factor model that attempts to predict the forward 1 – 6 month relative performance of a group.  The goal is to help both strategic accounts better time their implementation strategies that would be consistent with our more strategic conclusions derived by our sector/sub-industry 8-panels as well as our stock specific Estimate Revisions Model (ERM), and to generate tactical ideas for aggressive trading accounts. 

HALO-2 = The proprietary Fundstrat Portfolio Strategy HALO-2 Model is the raw tactical data behind our standard HALO multi-factor model described on the previous page.  It is useful for identifying aggressive tactical trading bottoms for the S&P 500.   

V-squared = The proprietary Fundstrat Portfolio Strategy V-squared indicator at its lowest level shows the ratio of VXV (the 3-month CBOE S&P 500 Volatility Index) and the VIX (the 1-month CBOE S&P 500 Volatility Index).  This tool is also useful for identifying aggressive tactical trading bottoms for the S&P 500.