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Monday
SKIP TUESDAY
SKIP WEDNESDAY –> Personal matter this day
SKIP THURSDAY
Friday
A big data week is ahead, with 3 major data incoming:
- 7/27 is July FOMC –> +75bp is base case and few surprises expected
- 7/28 2Q GDP –> investors expecting negative print given GDPNOW by Atlanta Fed
- 7/29 Core June PCE –> main event arguably given inflation is focus. +0.9% consensus
Extra credit and still important:
- 7/25 Case Shiller May home price –> +20.6% consensus
- 7/29 U Mich June Final –> biggie is 5-10 yr inflation +2.8% and downside would be positive
Clearly, this is a big incoming data week. Of these inflationary data points are the most consequential:
- inflation and inflationary expectations remain mysterious
- and thus, hardest to predict
- even as leading indicators point downwards, when this appears in “hard data” remains unclear
Market is really weighing 3 outcomes
In my view, equities and markets broadly are weighing 3 intersecting factors:
- how aggressive will Fed be? and do they quash all rallies?
- recession risk as economic momentum slows
- pace of disinflation as energy, food, housing all show signs of cooling
The headline from Marketwatch.com speaks to the biggest concern among investors. If equities rally, will this prompt the Fed to act more aggressively? As one client puts it (HA in NY):
- “it is all about this FCI (financial conditions) loop. If FCI eases too much (via stock rally), then will Fed step more aggressively with hikes?”
The answer, in my opinion, rests primarily with inflation’s trajectory. That is:
- if inflation pace is falling faster than consensus expects
- equity rally is reflecting this “downside surprise”
- thus, Fed doesn’t need to quash a rally
After July FOMC, Fed funds upper bound is “neutral” at 2.5%, thus more optionality
For several months, our relatively more sanguine view hinged on the fact that the Fed could proverbially “catch its breath” after reaching the “neutral” rate. This is defined as the rate where monetary policy is neither stimulative nor restrictive:
- Fed members view 2.5% as the “neutral” rate
- post +75bp in July, the Fed funds upper bound would be at this rate
- we think this gives the Fed optionality
- the pace of further tightening can respond to inflation risks
The entire yield curve will be “neutral” after July FOMC
In fact, after July FOMC, the entire yield curve will be above the “neutral” rate:
- meaning, the bond market is doing the work of the Fed
- all cost of money is above the neutral rate
Falling inflation in the “hard data” is more of a waiting game
We continue to hear from clients that inflation will be elevated for a long time, and they don’t see how inflation will come down anytime soon. That makes two assumptions:
- first, that leading indicators are wrong as these are tanking
- second, Fed is only looking at hard data
And as we noted in prior weeks, the incoming leading indicators of inflationary pressures show strong disinflation since mid-June. And we don’t think Fed is only looking at the “hard data” — but a sustained period of a downturn is convincing, even if it is more evident in the non-hard data.
Recession risks rising — JPMorgan sees 275,000 in initial jobless claims as the turning point
Initial jobless claims have been rising reaching +251,000 last week and above the 166,000 low seen on March 18, 2022. The March low is a multidecade low and speaks to a tight labor market. And in JPMorgan’s view, reaching +275,000 is the marker:
- the point is well made
- recession risks are rising as Fed tightens
- but this economic deterioration is also largely a result of Fed “declaration”
- this mirrors Volcker’s statement about the 1980 recession
- which he deemed “manufactured”
- and these are arguably easier to reverse
STRATEGY: Equity markets already declined 25% peak to trough, mirroring the -27% Volcker inflation killer recession
As we noted last week, the 1979 to 1982 bear market saw stocks fall 27% peak to trough. This was the carnage from Volcker’s war on inflation which saw inflation peak at >15% (after decade of elevated inflation) and fall to 6%.
- The inflation duration is far shorter today
- thus, 25% decline seems like an overshoot
And as JPMorgan’s strategy team highlights, valuations have collapsed looking at market internals:
- as @ryandetrick shared
- >12% of companies are trading below cash
- this is the highest in more than 30 years
- yup, even worse than GFC
And this comes at a time when institutional investors remain wary and outright negative on market outlook. As the latest BofA survey shows:
- as shared by @c_barraud
- fund manager survey shows “net % taking risk” is lowest ever
- even below 2008
TAKEAWAY: Risk/reward skewed to upside and supports stronger 2H
The upshot, in my view, is the risk/reward is skewed to upside in 2H:
- Fed reaching “neutral rate”
- If inflation cools, Fed doesn’t have to kill every stock rally
- Falling gasoline is stimulus
- and creates falling inflation in consumer perceptions
- valuations reflect doom arguably, see above with 12% stocks trading below cash
- positioning is bearish as seen by BofA survey
Thus, we see 2H rally intact. The 36 month 1982 bear market was reversed in 4 months. Yup.
33 GRANNY SHOTS: Updated list is below
The revised 33 Granny shots is shown below. The list on the table below is sorted by the most attractive (most frequently cited) to least. To be a “Granny shot” the stock needs to appear on at least two portfolios:
- AAPL 0.45% in 5 of 6 portfolios
- GOOGL 1.54% MSFT 1.69% in 4 of 6 portfolios
- AMZN 1.12% META 1.72% in at least 2
- This reinforces our favorable view of FANG in 2H2022
33 Granny Shot Ideas:
Consumer Discretionary: AMZN 1.12% , AZO 0.01% , GPC -1.22% , GRMN 0.20% , TSLA 3.30%
Information Technology: AAPL 0.45% , AMD -0.14% , AVGO 0.53% , CSCO 0.05% , KLAC 0.27% , MSFT 1.69% , NVDA 1.75% , PYPL 1.46% , QCOM -0.36%
Communication Services: GOOGL 1.54% , META 1.72%
Energy: CVX 0.73% , DVN 0.24% , XOM 0.09%
Financials: ALL 0.21% , AXP 0.53%
Real Estate: AMT 0.85% , CCI 0.36% , EXR -0.44%
Health Care: ABT -0.72% , BIIB -3.19% , ISRG 0.07% , MRNA -4.13% , REGN -2.72%
Consumer Staples: BF/B, MNST 0.67% , PG 0.08% , PM -0.40%
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33 Granny Shot Ideas: We performed our quarterly rebalance on 7/12. Full stock list here –> Click here
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