While equities have gone into "grind" mode, as odds of a +25bp May hike rise to 88%. But softening labor markets (4-wk claims at 15-mo highs) suggest a "dovish" (vs hawkish) hike in May

Be sure to catch our webinar next week on Thu April 27th, where we discuss signs supporting the end of a bear market.

On Friday last week (4/14), the S&P 500 closed at 4,137.64 and as of Thursday’s (4/20) close, the S&P 500 closed at 4,129.79, a loss of 0.19%. So a flat week.

• But as the first chart below highlights, it has been a week of a grind. Equities managed multi-month high of 4,169.48 (4/18 Tuesday) but on Wed and Thu, ground lower. One can never really tell what compels market direction in any single day.
• In our conversations with investors, some high profile earnings misses (TSLA CDW) coupled with softer-side readings on incoming economic data (initial jobless claims and Philly Fed 4/20) added to the concerns that economic weakness is further deepening.
• Further economic weakness is arguably “dovish” from the Fed hike perspective, except that earlier in the week, the stronger Empire Manufacturing (+10.8 vs -18.0 expected 4/17), along with solid housing (4/17 NAHB, 4/18 Housing Starts) means that markets are dealing with countervailing signal regarding the type of hike and Fed tone on the May meeting (5/3-5/4). This is summarized in the second chart (Bloomberg table)
• In the past week, the odds of a +25bp hike have risen from 69% (4/14) to 88%, with the initial spike higher coming on the heels of the U Mich Consumer Sentiment survey showing 1-year inflation expectations rose 100bp. But as we noted earlier this week, in the precedent instances of seeing such spikes, these are often quickly reversed.
• In our view, this is shaping up to be a “dovish” +25bp, meaning the Fed likely raises +25bp (given its prior commitment to this hike) but the probabilities of future hikes diminishes because of incrementally higher downside risks. Most notably, there are increasing signs of employment softening (4-week jobless claims are at the highest level since January 2022. Yes, claims are at a 15-month high. And considering other signs of job softening, this is affirming labor markets are moving in the direction consistent with Fed seeking to reduce inflationary pressures.
• And 1Q23 EPS season continues to come in “better than feared” and with 84 companies having report (17% of S&P 500), 79% are beating with a beat margin of 5.7%. So it has remained consistently high as we moved through the week. For the reported companies, 1Q23 EPS is tracking to be -1.2% YoY on sales growth of +7.3% (see below). The nadir in YoY EPS growth continues to be tracking to 2Q23 (maybe 3Q23) and for those keeping tabs, historically equities bottom 11-12 months before EPS bottoms. Hence, this would be supportive of Oct 2022 representing the low.

Bottom line: While odds of a +25bp hike rose in the past week (U Mich), it increasingly looks like a dovish hike

This is our key takeaway. While the odds of a hike have risen since Friday last week, we think the softness of data this week argue more for a dovish hike. In particular, the softening labor market. And couple this with a better than feared earnings season, and we believe probabilities favor stocks grinding higher in the coming week.

WEEK: GRIND

It has been a week of a grind. Equities managed multi-month high of 4,169.48 (4/18 Tuesday) but on Wed and Thu, ground lower. One can never really tell what compels market direction in any single day. This is obviously frustrating for investors.

FED: Probabilities rose to 88% of a +25bp hike

In the past week, the odds of a +25bp hike have risen from 69% (4/14) to 88% (third chart), with the initial spike higher coming on the heels of the U Mich Consumer Sentiment survey showing 1-year inflation expectations rose 100bp. But as we noted earlier this week, in the precedent instances of seeing such spikes, these are often quickly reversed.

• We noted last week, the 6 most recent spikes of U Mich >100bp saw 4 of them quickly reverse. We think this is likely to be the case next week when U Mich final is reported.

ECO DATA: Hawkish to start the week, then dovish

Earlier in the week, incoming data was somewhat hawkish:

• the stronger Empire Manufacturing (+10.8 vs -18.0 expected 4/17), along solid housing (4/17 NAHB, 4/18 Housing Starts)
• but as the week progressed, jobless claims rising and weaker existing home sales and the drop in the Leading Index were dovish data points.
• But the most dovish of these, arguably, is the rise in jobless claims. After all, this is a pattern of a continued rise in claims and a soft labor market is key for Fed to see progress against inflation.

Most notably, there are increasing signs of employment softening (4-week jobless claims are at the highest level since January 2022. Yes, claims are at a 15-month high. And considering other signs of job softening, this is affirming labor markets are moving in the direction consistent with Fed seeking to reduce inflationary pressures.

1Q23 EPS SEASON: STILL BETTER THAN FEARED

And 1Q23 EPS season continues to come in “better than feared” and with 84 companies having report (17% of S&P 500), 79% are beating with a beat margin of 5.7%.

• So it has remained consistently high as we moved through the week. For the 84 reported companies, 1Q23 EPS is tracking to be -1.2% YoY on sales growth of +7.3% (see below).
• Technology (8 of 66 reported) are showing the smallest beat ratio at a low 50% and miss by an average of 12.5%. And revenue growth for Technology is running flat (+0.1%).
• The nadir in YoY EPS growth continues to be tracking to 2Q23 (maybe 3Q23) and for those keeping tabs, historically equities bottom 11-12 months before EPS bottoms.
• Hence, this would be supportive of Oct 2022 representing the low.

ECONOMIC CALENDAR: Key is inflation, and April so far is “tame”

The only negative data point this month has been the U Mich mid-month April inflation expectation. As we highlighted earlier, this seems like a fluke as prior instances of a 100bp monthly jump were reversed. Wed is Fed beige book, so there will be some macro news.

Key incoming data April

• 4/3 10am ISM Manufacturing Employment/Prices Paid March Tame
• 4/4 10am ET JOLTS Job Openings (Feb) Tame
• 4/7 8:30am ET March employment report Tame
• 4/12 8:30am ET CPI March Tame
• 4/12 2pm ET March FOMC Minutes Tame
• 4/13 8:30am ET PPI March Tame
• 4/14 7am ET 1Q 2023 Earnings Season Begins Better than feared
• 4/14 Atlanta Fed Wage Tracker March Semi-strong
• 4/14 10am ET U. Mich. March prelim 1-yr inflation Hawkish
• 4/19 2:30pm ET Fed releases Beige Book
• 4/25 10am Conference Board Consumer Confidence/Expectations April
• 4/28 8:30am 1Q23 Employment Cost Index
• 4/28 8:30am ET PCE March
• 4/28 10am ET UMich April final 1-yr inflation

In fact, incoming data on inflation has been soft since the start of March (the start Feb data) and supports the idea that the “hot” inflation readings in Jan (reported in Feb) was the anamoly.

Key incoming data for March 2023

• 3/7 10 am ET Powell testifies Senate Hawkish
• 3/8 10am ET Powell testifies House Neutral
• 3/8 10am ET JOLTS Job Openings (Jan) Semi-strong
• 3/8 2pm ET Fed releases Beige Book Soft
• 3/10 8:30am ET Feb employment report Soft
• 3/13 Feb NY Fed survey inflation exp. Soft
• 3/14 6am ET NFIB Feb small biz survey Soft

• 3/14 8:30am ET CPI Feb Tame
• 3/15 8:30am ET PPI Feb Tame
• 3/17 10am ET U. Mich. March prelim 1-yr inflation BIG DROP
• 3/22 2pm ET March FOMC rate decision DOVISH
• 3/31 8:30am ET Core PCE deflator Feb Tame
• 3/31 10am ET U Mich. March final 1-yr inflation Tame

STRATEGY: S&P 500 is at the critical 50% retrace of the entire 2022 bear market decline

We think 1Q23 earnings season will ultimately enable the S&P 500 to push to new highs for the year. YTD up 8% and we see the uptrend intact. In fact, the swoon to 3,800 post-SIVB has since sharply reversed.

Technology could be the winner of results season. Technology is still the strongest sector YTD but has ceded gains, and is up only 11% ex-FANG. FAANG is up 30% YTD, so clearly having a good year.

TECHNOLOGY: -1 Z-score likely reverses post results

Technology stocks have been among the worst sectors in the past 20 days (month) and as the table below highlights:

• -0.98 z-score vs S&P 500 (-1 std deviation weakness) and
• -1 z-score vs Materials, Energy and Financials and close to that for Healthcare
• So Technology has been a source of funds in the past month

But as shown below, it is at critical support. This is a rising trendline (zscore) and we think demand and margins holding up better (our view), will support a rally in Technology stocks.

This same support is seen at pairs of Technology vs Materials, Energy and Healthcare.

• so the logic remains the same
• we see Technology reversing this recent weakness as we move through 1Q23 results season.

STRATEGY: Staying above 200 week moving average = good

The S&P 500 has been above its 200 week moving average for 25 weeks now as shown below. On Oct 12, 2022, the S&P 500 touched this level and has since moved higher.

In fact, as the table below shows, in the 12 instances of crossing above 200 week moving average and staying there for 25 weeks:

• S&P 500 higher in 12 of 12 instances
• for all periods, 1M, 3M, 6M and 12M
• doesn’t this sound like a bull market?

We arrived at “25 weeks” based upon the table below.

• since 1957, there have been multiple crosses above 200 week
• but many failed and led to new lows
• the longest of these “fake recoveries” is 13 weeks
• thus, we looked at 15 weeks as the threshold

STRATEGY: Cyclicals outperforming more than Defensives

We have highlighted the 2-yr relative performance of the major groups below and as shown, the leadership is more cyclical.

• Leading are Tech/FAANG, Energy, some Industrials, Materials and Staples.
• The drags on S&P 500 performance have been Utilities, Financials, Telecoms and Healthcare.
• In other words, the drags have been largely Defensives.
• This is counter to those saying this rally in 2023 is Defensive stocks.

And our base case for April remains a strong >4% rally, following the pattern of “Rule of 1st 5 days.” The Rule of 1st 5 days looks at years when S&P 500 gains >1.4% in 1st 5 days and is negative the prior year.

• This has happened 7 times since 1950: 1958, 1963, 1967, 1975, 2003, 2012 and 2019.
• Based upon those 7 years, April implied gain is +4.2% and was positive 6 of 7 times (only 2012, -0.7%). This implies +175 points, or S&P 500 >4,275 by the end of April.

A gain of 4%, or +172 points would put S&P 500 >4,250 by the end of the month. And we think this would ultimately force a bear capitulation.

We publish on a 3-day a week schedule:

Monday
SKIP TUESDAY
Wednesday
SKIP THURSDAY
Friday

 _____________________________

37 Granny Shot Ideas: We performed our quarterly rebalance on 1/30. Full stock list here –> Click here

______________________________