Despite crushing swings last week, stocks posted flat week… but signs inflationary pressures apexing

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Despite the dramatic “rethink” of May FOMC meeting, the S&P 500 closed out the week flat

There was so much drama in the final days of last week, as markets had a “rethink” of the May FOMC meeting, it felt like the entire equity market was upended. Yet, one might be surprised to see that the S&P 500 was essentially flat last week:

  • start 4,131.99
  • end 4,123.80
  • change -0.20%
Despite crushing swings last week, stocks posted flat week… but signs inflationary pressures apexing

…Similarly, the VIX fell 10% last week from 33 to 30

Similarly, the VIX actually fell last week, falling from 33 to 30. So it seems like despite the hysteria around Fed and “75bp not actively considered” etc, macro investors seemingly sold volatility. This might not be how things felt on Thursday and Friday last week, but the point to point observations make our point.

  • in the span of the past week, despite what seems like “bearish” reaction to the Fed
  • equities and VIX tell a story of market that has largely remained flat
Despite crushing swings last week, stocks posted flat week… but signs inflationary pressures apexing

…we stick with our view that a lot of bad news is baked in, which means upside surprises have higher reactions

In other words, the above commentary supports our view that a lot of bad news is baked in. Take a look at the latest positioning data from Goldman Sachs (shared by @Isabelnet) which looks at the positioning of retail, institutional and foreign investors:

  • positioning is -2.7 standard deviations below average currently
  • -1.5 is considered extremely light

This is affirming what we just noted. Positioning is light and thus, incrementally positive data points can see an asymmetric reaction.

Despite crushing swings last week, stocks posted flat week… but signs inflationary pressures apexing
Source: Twitter

…JPMorgan’s analysis of equity risk premia supports this as well

This is also supported by the latest JPMorgan Flows and Liquidity report. As the authors note:

  • equity risk premia historically is quite stable since 1967, even with large swings in rates
  • this is consistent with our analysis last week showing S&P 500 P/E was 18X when 10-yr rates were 5%

  • JPMorgan suggests 10-yr rates could rise another 200bp (to 5%)
  • and equity risk premia would only be equal to the pre-Lehman levels

In other words, their work supports that a lot of bad news is priced in. They also suggest that higher rates should not be compressing P/E (proxy for equity risk premia).

Despite crushing swings last week, stocks posted flat week… but signs inflationary pressures apexing
Source: JPMorgan Flows and Liquidity
Despite crushing swings last week, stocks posted flat week… but signs inflationary pressures apexing

And similarly, valuations are surprisingly low for Biotech stocks (proxy for high beta). As Liz Ann Sonders notes:

  • 20% of NASDAQ Biotech stocks are trading for less than cash
  • wow
Despite crushing swings last week, stocks posted flat week… but signs inflationary pressures apexing
Source: Twitter

…Wednesday’s CPI is big event for markets

We had a few conversations with macro portfolio managers over the weekend, and not surprisingly, they note that markets are highly responsive to inflationary data. And that makes this week’s CPI important. Prior to 2021, the monthly CPI was hardly the market-moving event it is today.

But if one is wondering why fund managers might be “selling volatility” (meaning betting markets are going to be less edgy), it may be that inflationary trends are not universally worsening. In fact, on the margin, some might seem to be modestly improving.

…Friday’s payroll report shows that the monthly increase in average hourly earnings is moderating

Take a look at the US average hourly earnings (AHE) from the May payrolls report (from Friday). We have added a few lines:

  • the lines are the 3M, 6M and 12M moving average of this series (monthly * 12)
  • it is pretty clear that AHE trends are slowing (moving average)
  • 3M average is down to 3.8% annualized
  • 12M average is 5.3% and 6M average is 4.7%
  • the high water mark for the 3M avg was June 2021

One fund manager pointed out to me that this is a data point supporting the view that inflationary pressures might be peaking, even for labor costs. To him:

  • this might explain why Powell said “75bp is not actively considered”
  • he views this as a deliberate statement, essentially providing some forward guidance
  • and central banks might be approaching the point where they no longer need to “shock markets”

In other words, this suggests that if there is a downside reading in inflationary trends, this would trigger a market repositioning — meaning, risk on, if there is a downside reading on inflation.

Despite crushing swings last week, stocks posted flat week… but signs inflationary pressures apexing

Tech wreck is going to lead to layoffs in venture-backed startups… which today employ ~4 million people

In our meetings last week in Atlanta, one client made an insightful point (thanks MM). He noted that the crushing decline of FAANG, will have massive second order impacts in Silicon Valley. After all, Facebook is the umbrella supporting social media. Netflix for streaming. Etc.

  • As David Sacks notes below, he sees investor sentiment in Silicon Valley the worst since dot-com.
Despite crushing swings last week, stocks posted flat week… but signs inflationary pressures apexing
Source: Twitter

This could lead to sizable layoffs. According to North American Venture Capital Association (NVCA), venture-backed start ups employ ~4 million people in 67,000 companies.

  • thus, if there is a downturn in Silicon Valley
  • it is not just the fund LPs getting hit
  • it is the employees working for these startups
Despite crushing swings last week, stocks posted flat week… but signs inflationary pressures apexing
Source: NVCA

And it is not just Silicon Valley. As the Business Insider article below notes, there is a way of layoffs sweeping across the US. This is something to watch.

  • Fed has commented that this is the “tightest labor market” in history
  • and while their metric of 2 openings for every available jobseeker supports this
  • this is key to watch

Wednesday CPI may not yet reflect the full impact of declining used and new car prices

It probably surprises many investors that autos, new and used cars, accounted for 197bp or the 393bp rise in inflation in the past 12 months. That is, cars represented half of the rise in inflation.

  • Friday last week, the April Manheim Used Car index was published
  • April prices again declined, the 4th consecutive monthly decline
  • YoY growth rate is down to +14% versus +45% in January
Despite crushing swings last week, stocks posted flat week… but signs inflationary pressures apexing
Source: Bloomberg

According to analysis by our data science team, this could subtract -1% from the CPI run-rate by June. That is:

  • using two-month lead of Manheim
  • CPI “car” contribution could fall to +0.4% by June
  • It was +1.4% in March
  • This is a 100bp swing, or -1.0% impact on CPI

This might be reflected in April (coming Wed) but the below suggests the fuller effects will be seen in May/June.

Despite crushing swings last week, stocks posted flat week… but signs inflationary pressures apexing

Cass Freight Index, which measures the aggregate goods moved on trucks, has fallen to flat YoY. And as shown:

  • Cass Freight YoY leads CPI YoY by 6M
  • this suggests that incoming CPI reports will have downside bias
  • again, would be a welcome development
Despite crushing swings last week, stocks posted flat week… but signs inflationary pressures apexing

Fed governors also push back on “behind the curve” as they note bond markets doing work of Fed

Lastly, Fed governors on Friday pushed back on the view the Fed is behind the curve. Essentially, they note the forward guidance is working.

  • as bond markets are already pricing in future hikes
  • this is a contrast to past cycles
  • where markets essentially ignored the first few hikes
Despite crushing swings last week, stocks posted flat week… but signs inflationary pressures apexing
Source: Reuters

…reiterating that markets historically did not respond to first 4 hikes, but in 2022, markets doing work of Fed

I know we have made this point several times in the past few weeks. But at a look at the markets around the first 4 hikes by the Fed in 2004-2006 and 2016-2018 versus 2022:

  • we look at financial conditions (Bloomberg FCI), US 10-yr rates and 30-year mortgages
  • in 2004-2006, markets FCI eased as Fed hiked and bonds and mortgage rates fell
  • in 2016-2018, markets FCI eased as Fed hiked and bonds and mortgage rates fell
  • in 2022, the opposite is taking place

This is again why we think the market has done much of the work of the Fed. And thus, risk/reward favors strongly dovish developments. In other words, there remains upside risk for asset markets.

Despite crushing swings last week, stocks posted flat week… but signs inflationary pressures apexing


STRATEGY: We lean relatively “bullish” into 2H2022 (but also 2Q22), but warn of jagged next few months… Stick with BEEF
To recap on equity strategy, we are leaning bullish into 2Q2022.

Stocks have continued to be treacherous in 2022. Investors are on a hair trigger.

– this is in context to a challenging 1H2022
– so jagged next 3 months

Broadly, our existing sector strategy of BEEF remains valid. Even in war. Even with inflation. In fact, the last few weeks are strengthening the case for our “BEEF” strategy. That is, BEEF is

– Bitcoin + Bitcoin Equities  BITO 2.85%   GBTC 2.90%   BITW -3.09%
– Energy
– FAANG  FNGS -0.07%   QQQ 0.02%

Combined, it can be shortened to BEEF.

Why is this making stronger BEEF?

– Energy supply is now a sovereign priority
– this helps Energy stocks

– Ukraine and Russia both want access to alternative currencies
– this strengthens case for Bitcoin and bitcoin equities

– if Global economy slows, growth stocks lead
– hence, FANG starts to lead  FB  AAPL -0.71%   AMZN 0.45%   NFLX -1.14%   GOOG 0.40%

All in all, one wants to be Overweight BEEF

Despite crushing swings last week, stocks posted flat week… but signs inflationary pressures apexing

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31 Granny Shot Ideas: We performed our quarterly rebalance on 4/5. Full stock list here –> Click here

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POINT 1: Daily COVID-19 cases
This data will be updated every Friday.

POINT 2: Vaccination Progress
This data will be updated every Friday.

POINT 3: Tracking the seasonality of COVID-19

This data will be updated every Friday.

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