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Monday is the first trading day for May. 2022 has been an utter beatdown, so far. The S&P 500 is down 14% YTD. But what makes 2022 more painful is that we have seen already 2 major drawdowns of >10% in just the first 4 months.
In fact, as noted by Ryan Detrick, Strategist at LPL, 2022 is the worst Jan to April start for the S&P 500 since 1939. Because the S&P 500 index was not launched until 1945, this is actually the worst YTD start for the S&P 500 ever.
- so it is no surprise that investors are dejected
…May FOMC this week 5/3 to 5/4 and markets will be on edge
The Fed May FOMC meeting is this week and markets are anticipating 50bp hike and forward guidance is expected to skew hawkish (ie, 50bp for June) as the Fed is moving to lift rates to Neutral. The speed of this process has unnerved markets and given the tumult in Ukraine-Russia plus China, and this has contributed collectively to a buyer’s strike for stocks. But this doesn’t mean stocks have to go down. In fact, as JPMorgan’s Marko notes, starting month dynamics (rebalance) plus gamma positioning plus buyback window means stocks are expected to act better in early May.
Household wealth loss YTD >$13 trillion, nearly 50% of US GDP = markets done a lot work for Fed
So it should be no surprise that investors are angry, sour and dejected. Of course, it is not just stocks that have done poorly. Bonds are off to a terrible start as well. So, this unusual combination has already generated significant loss of wealth surpassing $13 trillion in the US.
- US GDP is $24.4 trillion.
- YTD household wealth loss is 50% of GDP
Perhaps this is why macrostrategists are again noting that financial markets have done a lot of work for the Fed. That is, by tightening financial conditions, this in turn raises the cost of capital and generates net worth losses. This impacts forward consumption.
- Goldman Sachs Macro strategist Nohshad Shah notes this in his most recent commentary
- He notes that financial conditions (FCI) tightened dramatically in the past week
- Per Shah “however, this week has seen a repricing in the growth outlook, which if sustained, will do some of the Fed’s heavy lifting for them.“
This is important perspective. As painful as this sell-off has been, this is creating conditions that are self-reinforcing FOMC goals.
STRATEGY: 4 reasons to respect FAANG, the first cohort to fall, has outperformed quietly at the end of April
Lost amongst the carnage of the past 5 trading days is the quiet outperformance of FAANG. Take a look at the last 10 trading days (15 minutes) below:
- S&P 500 down -1.2% since 4/26
- Nasdaq 100 down -1.3%
- FAANG (NYFANG Index) is up +2.4%
- FANNG has outperformed the broader market by +360bp in the past 3 trading days
Granted, some might view this as a mere deadcat bounce. And in the larger story arc of a decline. But there are 4 reasons we believe this might be signal:
- First, last 3 trading days was a bloodbath and FAANG actually gained. FAANG peaked two months ahead of broader market. So this is worth watching
- Second, 4 (almost 5) of 7 components of FAANG outperformed in past 3 trading days, so it is not just a single name
- Third, market valuations are now inverted. Faster growing stocks are trading at a discount to slower growers = panic out of stocks broadly = bizarre inversion
- Fourth, only 18% of NASDAQ 100 stocks are trading above 200D moving average. 5 of the 5 most recent instances marked major bottom for NDX (flagged by Shane Murphy CMT)
4 (almost 5) of 7 FAANG outperformed at end of April crash…
The last 3 trading days of April was an outright market panic into month-end. And as shown below, since 4/26, 4, and really 5, of 7 FAANG components outperformed:
- laggards were AMZN 3.74% and NVDA 1.39%
- but outperformers were FB MSFT 0.97% GOOG 0.88% AAPL -0.43% and even arguably NFLX 1.11%
- it is interesting that these stocks, awful since November, are not falling with the broader market
Market has flipped and now faster growing companies trade at a discount to slow growers… Growth is now Value?
Moreover, look at how growth rates and valuation have completely inverted:
- Faster revs growth = lower valuations vs slow growers
- Faster revs growth = higher FCF yields vs slow growers
- the coefficients have completely flipped, as shown below
- Why would the market price faster top-line at a lower valuation?
This is sort of the opposite of common sense. Companies with faster growth (Growth stocks) are trading at a discount to slower growers. This is true for either P/E or free cash flow. I am not sure this makes a lot of sense.
Finally, only 18% of NASDAQ 100 stocks are above their 200D = oversold
As for signs of a bottom, I found this post by Shane Murphy @murphycharts interesting. This is the % of NDX stocks trading above their 200D.
- figure is 18% and below 20% for the first time since March 2020 (pandemic bottom)
- 5 of 5 prior instances <20% was a bottom for NDX
- of course, the future is uncertain
- but this surely seems to suggest that a lot of bad news is priced in
- hence, risk/reward for FAANG and NDX are vastly improved
- this also argues broader market is closer to a bottom as well
China declared 6 of 16 districts in Shanghai “zero-COVID” which is encouraging
Finally, in China’s seemingly challenging battle to achieve zero-COVID, Shanghai has declared 6 of 16 districts COVID-free. That means 3 days since the last COVID-19 positive test.
- 5 of 6 districts will have public transport resume
- there are many widespread stories of hardship, starvation and protests
- so progress and achievement are positive developments incrementally.
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 -0.78% GBTC -0.97% BITW -2.01%
– Energy
– FAANG FNGS 1.35% QQQ 1.15%
Combined, it can be shorted 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 -0.43% AMZN 3.74% NFLX 1.11% GOOG 0.88%
All in all, one wants to be Overweight BEEF
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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
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POINT 3: Tracking the seasonality of COVID-19
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