A week of market churning (-1%... debt ceiling) but triumph of thematic investing (FAANG/AI +2.2%). Market breadth better than pundits argue as 142 stocks beating market (28%) YTD.

NEW: Section (above) added identifying Key Recommendations and Super Grannies

SKIP MONDAY <– Memorial Day Holiday
SKIP TUESDAY
Wednesday
SKIP THURSDAY
Friday

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In case you missed our webinar “Super Granny” Shots this week

• we discussed “Super Granny” shots that are expected to tactically gain near-term
• and “Sleeping grannies” which we expect to tactically underperform

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The S&P 500 is ending a tough week down 1%, as markets can never properly discount the binary outcome of a debt ceiling/default. As Tom Block, Head of Policy Strategy notes, getting a deal has many challenges and with a fast approaching “x date” (when funds depleted), financial markets are nervous.

• But it has been a good week for FAANG/Technology (+2.2%) fueled by Nvidia’s quarterly results. NVDA has been a Fundstrat “Granny shot” since 2019, and arguably this week’s FAANG/Tech gains are further evidence thematic investing is outperforming in 2023.
• The thematic driving FAANG/Tech is the seeming critical mass around AI/ChatGPT and at the heart of this is corporate America’s need to boost worker productivity (post-pandemic) and contain wage pressures. The thematic driver of “wage inflation/AI” has been evident for much of the past 18 months and is not necessarily impeded by Fed hikes.
• Today, we get two key inflation reports: PCE Core Deflator (April) and U Mich 1-yr inflation (May final). So far in May, 13 of the 13 critical inflation reports have been dovish (FOMC minutes, etc) and we do not expect these two key inflation data points to break this trend. But for markets, inflation cooling remains central to the upside case for stocks.
• While Fed May FOMC minutes were supportive of a sustained pause beyond June, Fed officials seem to speak relatively more hawkishly this week. And markets listened as the 2-yr yield is now back above 4.5%. But Fed officials have been focused on lagged inflation reports like CPI, PCE and thus, if inflation softens (as we expect) mid-year, we think Fed officials will similarly tilt less hawkish.

• Market breadth has not been great YTD as the bulk of gains have been driven by FAANG and Technology (our top sector picks). But breadth is not as terrible as many pundits say. Consider that YTD, 142 stocks or 28% of the S&P 500 have returns >8% and are beating the S&P 500. The worst market breadth and Defensives have been particularly Utilities (0% beating), Staples (22%) and Healthcare (28%).
• Sellside strategists are becoming incrementally more constructive, but this is a “relative term” more than 16 of the 24 sellside strategists tracked by Bloomberg see the S&P 500 falling into YE. 6 strategists have made adjustments to their price targets since start of 2023.
• 2 of 6 downgraded YE 2023 price targets:
  – 1/5 from 4,225 to 3,900
  – 2/17 from 4,100 to 3,500
• 4 of 6 upgraded:
  – 1/20 from 3,650 to 3,800
  – 4/19 from 3,900 to 4,000
  – 5/8 from 4,200 to 4,400
  – 5/22 from 4,000 to 4,300
• Notably, of these, only 2 of the revised price targets have any upside for the remainder of 2023. In other words, the price target changes are either changes to reflect increased bearishness or just “chase the market higher”

BOTTOM LINE: Still expecting an upside resolution towards S&P 500 4,200-plus but binary risk-on into “debt ceiling”

To summarize this week:

• equity markets stuck due to debt ceiling: S&P 500 down -1%
• AI/tech gain more traction fundamentally: FAANG up +2.2%

We still believe equity markets will resolve higher, but the brinkmanship around the debt ceiling means a binary event supplants that longer term view. In other words, our full year view on equity markets remain constructive but we also have to recognize that stocks in the near term are governed by a binary event.

Our key recommendations remain:

• We overweight FAANG/Tech, Industrials and Energy. Of these, only FAANG is leading and outperforming but as noted above, this is a validation of thematic investing in 2023.
• We also recommend a tactical overweight of regional banks (KRE) as we see a temporary Fed put due to the stresses there. The tactical OW of Industrials suffered this week, but debt ceiling trumps ISMs.
• We launched our Super Grannies this week (see report and replay), which are the tactically most appealing Grannies.
  – Fiserv (FISV)
  – Fortinet (FTNT)
  – Intuitive Surgical (ISRG)
  – Monster Beverage (MNST)
  – On Semiconductor (ON)
• Our core stock list remains Granny Shots (34 stocks) driven by best of the best of 7 tactical/thematic portfolios (See below)

Have a restful Memorial Day weekend!!!

BREADTH: 142 stocks outperforming YTD, not just FAANG and concentrated in 5 cyclical sectors

While many pundits argue that only FAANG account for gains YTD, that is true but its not true. Market breadth is better than that:

• YTD, 142 stocks or 28% of the S&P 500 have returns >8% and are beating the S&P 500.
• Granted, this is not 50% but this is better breadth than many realize.
• But the outperformers are essentially concentrated in 4 sectors: FAANG, Technology, Discretionary and Industrials. Meaning, there is better breadth in these groups. And we could also add in Communications Services (ex-FAANG) which at 33% is also above the 28% figure for the S&P 500 overall.
• These 5 sectors are cyclical and really underscores that cyclical stocks are outperforming YTD.
• The material underperformance is in Defensive sectors:
  – Utilities 0% outperforming
  – Staples 22%
  – Healthcare 28%

STRATEGISTS: YTD, 6 Sellside Strategists changed YE2023 price targets and only 2 > current price

Since the start of 2023, 6 strategists have made adjustments to their price targets. This is highlighted below:

• Of the 6, 4 changes are upgrades and two downgrades. The downgrades took place early in 2023.
• The downgraded YE 2023 price targets are:
  – 1/5 from 4,225 to 3,900
  – 2/17 from 4,100 to 3,500
• The 4 upgrades have been:
  – 1/20 from 3,650 to 3,800
  – 4/19 from 3,900 to 4,000
  – 5/8 from 4,200 to 4,400
  – 5/22 from 4,000 to 4,300
• Notably, of these, only 2 of the revised price targets have any upside for the remainder of 2023. In other words, the price target changes are either changes to reflect increased bearishness or just “chase the market higher”

MACRO: Strategists catching up to macro investors…

The macro community is shifting their views, progressively. Macro investors tend to focus on top-down factors like Fed policy and broader economic variables.

• Last week, Steve Cohen, founder of Point72 said “I’m making a prognostication — we’re going up…I’m actually pretty bullish.” He made these comments at the SALT iConnections event (story here). Steve Cohen and Point72 are considered among the most successful hedge fund managers today. So him being constructive carries a lot of influence in the investment community.
• Earlier last week, Paul Tudor Jones (PTJ) said he believes the Fed is done hiking and PTJ expects stocks to be higher by YE. Paul Tudor Jones, a legendary macro investor, on CNBC Monday suggested “Fed is done raising rates.” PTJ is the first major macro investor, we believe, to have shifted to a more constructive view on inflation/rates. He also noted he expects stocks to “finish the year higher from here” and granted, in his interview, he also noted that higher rates are like “chemo” and thus, a recession is on the horizon. But the key is he believes the Fed is done raising rates, and this means the inflation trade should be fading.

ECO: Generally light week ahead…

Many economic reports this week, but few will likely be as market moving as inflationary reports. As shown below, the highlights are:

• May Regional ISM surveys due (Empire 5/15 8:30am ET, Philly Fed 5/18 8:30am ET)
• April Retail Sales (5/16 8:30am ET)
• Housing data (5/16 10:00am ET May NAHB Index, 5/17 8:30 April Housing starts, 5/18 10am ET April Existing Home Sales)

ECONOMIC CALENDAR: Key May data is inflation and ISM, and April was overall “tame”

Key incoming data May

• 5/1 10am ET April ISM Manufacturing (PMIs turn up) Positive inflection
• 5/2 10am ET Mar JOLTS Softer than consensus
• 5/3 10am ET April ISM Services Tame
• 5/3 2pm Fed May FOMC rates decision Dovish
• 5/5 8:30am ET April Jobs report Tame
• 5/5 Manheim Used Vehicle Value Index April Tame
• 5/8 2pm ET April 2023 Senior Loan Officer Opinion Survey Better than feared
• 5/10 8:30am ET April CPI Tame
• 5/11 8:30am ET April PPI Tame
• 5/12 10am ET U. Mich. April prelim 1-yr inflation Tame
• 5/12 Atlanta Fed Wage Tracker April Tame
• 5/24 2pm ET May FOMC minutes Dovish
• 5/26 8:30am ET PCE April
• 5/26 10am ET U. Mich. April final 1-yr inflation

Key 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 Tame
• 4/28 8:30am 1Q23 Employment Cost Index Semi-strong
• 4/28 8:30am ET PCE March Tame
• 4/28 10am ET UMich April final 1-yr inflation Hawkish

BUY THE DIP: Returned since March 23, 2023

Our data science team, led by “tireless Ken” has created a new regime market analysis. The team examined how S&P 500 reacts to 2% drawdowns over a one week period. These are sharp sell-offs and generally:

• if we are in “buy the dip,” losses are recovered quickly
• if we are in “sell the rip,” further losses are seen

To model this, they looked at all 2% 5D drawdowns and calculated market returns over next month (20D) and to smooth this, looked at 6M rolling averages. The criteria for:

• “buy the dip,” is gain >2% next 20D
• “sell the rip,” is decline <-0.5% next 20D

Below is a time series and we can see the change of regime over time. The thresholds are marked with red lines:

• from April 2020 through early 2022, a “buy the dip” regime was in place
• April 2022 saw this flip sharply into a “sell the rip” as dip buys saw significant realized losses

But since March 2023, this regime has flipped positively again. And as we see, buying dips lead to recoveries within a month.

As shown below, the differences in returns during these regimes is quite significant. Since 1928, the regimes and resulting annualized returns are as follows:

• “buy the dip” 60 times and avg gain 28% (annualized)
• “sell the rip” 30 times and avg loss -25% (annualized)

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34 Granny Shot Ideas: We performed our quarterly rebalance on 4/26. Full stock list here –> Click here

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