June FOMC is a reminder key story arc is "inflation war" not hard landing. 10 "fresh money" ideas to leverage expanding market breadth. Array ( [cookie] => b318ad-0f76d3-634d3e-9688d0-75bb0f [current_usage] => 2 [max_usage] => 2 [current_usage_crypto] => 0 [max_usage_crypto] => 2 [lock] => [message] => [error] => [active_member] => 0 [subscriber] => 0 [role] => [visitor_id] => 130809 [reason] => Usage under limits [method] => ) 1 and can accesss 1

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Today, I was speaking with the Director of Research of a major hedge fund (based in CT) and this person told me of their frustration of missing most of the 15% gain in equities YTD. In their view, they view the rise as almost entirely attributable to the market liquidity, as their business cycle indicators told them stocks should be down big in 2023.

• This is a widely held view. I mentioned that I believe the key story arc is the Fed is fighting an inflation war. Thus, this is not a classic Fed cycle where the Fed only pivots when something breaks. In this inflation war, the Fed can stop when inflation has “broken enough.”
• It might surprise many but Volcker ended the inflation war on Oct 5, 1982 (first ever utterance of ending the war, which he made in a speech). Here are the inflation stats on Oct 1982 (Sept):
  – Headline CPI 3.7% YoY
  – Core CPI 4.5% YoY
• See the point? The Fed can end this inflation war, aka pivot, when the collective public believes inflation is broken. I don’t know when this moment will arrive. Will it be when shelter/rent prices finally tank in CPI? Maybe. Actually, that is my best guess. That will be sometime in 2023.
• The stock market is beginning to adapt to this view. This, in our view, explains much of the surge in stocks YTD. It also helps that EPS estimates are finally starting to creep higher. In fact, 2Q23 EPS is expected to be +0.1% ex-Energy. The regional PMIs and ISM also seem to be bottoming, so this makes sense. EPS growth finally curling up:
  – 4Q22 S&P 500 ex-Energy -7.1%
  – 1Q23 -1.7%
  – 2Q23 +0.1%
• This is the first positive YoY EPS growth (ex-Energy) since 1Q22. And it also shows the low in EPS growth rates was 4Q22 — which is also when the S&P 500 bottomed, in our view.
• This is an argument for market breadth to start expanding. In our view, the Fed FOMC rate decision and press conference (yesterday) was essentially a “green light” for financial conditions to ease and for business CEOs to breath easier — thus, we see these are conditions to allow a greater number of stocks to outperform, beyond FAANG.

BOTTOM LINE: 10 “fresh money” ideas for those wanting to leverage expanding market breadth…

In the latest update of the “tireless Ken” model, 37 of 67 GICS Level 3 industries generate a positive overall score. This is up from 5 at this point 8 weeks ago. A dramatic increase in market breadth. (This model combines fundamental, momemtum, and technicals to generate rankings.)

• The top 3 industries are:
  – Interactive Media GOOG -1.08% , META 1.51%  GOOGL -1.01%  MTCH -2.09%
  – Comms Equipment CSCO -2.24%  MSI -0.95%  ANET 2.11%  FFIV -0.45%  JNPR -0.81%  
  – Passenger Airlines LUV 8.87%  AAL -7.12%  ALK -2.69%  DAL -6.37%  UAL -2.19%  
• The first group is essentially a subgroup of FAANG. But Comm Equipment and Airlines might be groups where an investor could consider adding “fresh capital” — after all, these groups are sufficiently healthy to warrant a new look and also the Comms Equipment and Airlines hardly look overbought.

Below is the list of the top 20 industries which are overall attractive on the “tireless Ken” model which combines fundamentals (DQM) with momentum (IBD) and overall trading technicals.

And this recovery in stocks is supported by the recovery in earnings growth. As this latest report from Thomson Financial Refinitiv shows, EPS growth ex-Energy is expected to rise in 2Q23.

• this is the first rise since 1Q22
• is the earnings recession over? maybe.

And if one is wondering what differs between a Fed cycle and inflation war? Below are the highlights:

• the key is the Fed doesn’t have to necessarily break anything
• they can stop when inflation breaks
• this threshold is not entirely clear, though

But if this is true, one is not fighting the Fed if one is buying equities even as Fed is tightening. The key is when inflation breaks.

And recall, Volcker ended the inflation war when inflation was still higher than the pre-1970s average of 2%. But the trend in inflation was falling sufficiently to end the war.

And as we highlighted previously, the stock market was way ahead of the Fed.

ECONOMIC CALENDAR: FOMC key in June

Key incoming data June

• 6/1 10am ET May ISM Manufacturing Tame
• 6/2 8:30am ET May Jobs report Tame
• 6/5 10am ET May ISM Services Tame
• 6/7 Manheim Used Vehicle Value Index May Tame
• 6/9 Atlanta Fed Wage Tracker April Tame
• 6/13 8:30am ET May CPI Tame
• 6/14 8:30am ET May PPI Tame
• 6/14 2pm ET April FOMC rates decision Tame
• 6/16 10am ET U. Mich. May prelim 1-yr inflation
• 6/27 Conference Board Consumer Confidence
• 6/30 8:30am ET May PCE

Key data from 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 Tame
• 5/26 10am ET U. Mich. April final 1-yr inflation Tame
• 5/31 10am ET JOLTS April job openings

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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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