After >2.5% decline in 5D, many calling a top, but we see "buy the dip" regime in force, aided by IPOs picking up and substantial cash on sidelines. Stay cyclical.

Tom Lee, CFA
After >2.5% decline in 5D, many calling a top, but we see buy the dip regime in force, aided by IPOs picking up and substantial cash on sidelines. Stay cyclical.
After >2.5% decline in 5D, many calling a top, but we see buy the dip regime in force, aided by IPOs picking up and substantial cash on sidelines. Stay cyclical.

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

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Please click below to view yesterday’s Macro Minute (duration 2:27):

After >2.5% decline in 5D, many calling a top, but we see buy the dip regime in force, aided by IPOs picking up and substantial cash on sidelines. Stay cyclical.

Equities have struggled in the past week. After the S&P 500 surged to 4,448 on June 16 (last Friday), equities have since fallen 2.2% in the past week. A period of consolidation is understandable, considering the equity markets have been surging in the 3 weeks previously.

  • The obvious question for everyone is whether this 2% pullback represents a local top (or even a major top) or is this a shorter term pullback that needs to be bought. There are many willing to argue this is a top, possibly major top. Their reasons encompass the Fed is “set to hike more” and to “EPS estimates will fall in second half” to “its a bubble like 1999”
  • Since March 2023, the “buy the dip” regime has been in place (we wrote about this on 5/18) and is based upon measuring how resilient equities are in the face of a sell-off. In summary terms, we measured whether stocks recover a 2% drawdown within the next 20 days. Since March, this has been the case, as stocks have recovered losses pretty quickly. And we generally view this pullback as a consolidation and equities will soon recover.
  • There are several reasons we see this as a “buy the dip” type pullback, that likely gets some support in coming weeks. Foremost is some key economic data:
    – 6/30 May PCE deflator
    – 6/30 U Mich final inflation 1-yr
    – 7/5 FOMC minutes
    – 7/6 JOLTS
    – 7/7 June Employment report
  • In our view, this will support our view that inflationary pressures are cooling (Case Shiller next week too), coupled with an employment market coming off a boil. To us, this looks increasingly like an economy slipping into an expansion, not sliding into a recession. And this makes early cycle/risk-on positioning more appropriate.
  • Similarly, the IPO market is coming back to life. There have been several high profile IPOs this past week including CAVA. IPOs are a way for institutional investors to gain risk-on exposure, as they allocate and participate in new issuance. For June MTD (2 weeks), IPO issuance totaled $30 billion, which exceeds the $19 billion issued in all of June 2022. A return to the calendar is positive. In 2021, IPOs totaled $1.4T and were a mere $740 billion last year.
  • Cash on the sidelines remains mountainous at $5.5 trillion. And as data from Pantheon Macro shows, the top 1% of households raised their cash balances by +52% since 2019. Wow. And the 80th to 99th percentile raised cash balances by +32%. This is staggering and shows how the public remains deeply skeptical.
  • 2Q23 Earnings season is coming up and more strategists are noting that this looks like EPS growth ex-Energy could turn positive YoY. This is something we noted a few weeks ago. And as such, would be a positive development for risk-on

BOTTOM LINE: We see this pullback as buyable as positive catalysts are coming in the next week

The 2.5% pullback in the past few days is overdue, given the strength recently. But we do not view this as a local top and rather, we would be buyers of this pullback. We continue to favor a risk-on tilt and stick with Cyclicals.

  • as the chart below highlights, staying cyclical has produced the best returns in the past month.
After >2.5% decline in 5D, many calling a top, but we see buy the dip regime in force, aided by IPOs picking up and substantial cash on sidelines. Stay cyclical.
After >2.5% decline in 5D, many calling a top, but we see buy the dip regime in force, aided by IPOs picking up and substantial cash on sidelines. Stay cyclical.
After >2.5% decline in 5D, many calling a top, but we see buy the dip regime in force, aided by IPOs picking up and substantial cash on sidelines. Stay cyclical.

After >2.5% decline in 5D, many calling a top, but we see buy the dip regime in force, aided by IPOs picking up and substantial cash on sidelines. Stay cyclical.

After >2.5% decline in 5D, many calling a top, but we see buy the dip regime in force, aided by IPOs picking up and substantial cash on sidelines. Stay cyclical.
After >2.5% decline in 5D, many calling a top, but we see buy the dip regime in force, aided by IPOs picking up and substantial cash on sidelines. Stay cyclical.

After >2.5% decline in 5D, many calling a top, but we see buy the dip regime in force, aided by IPOs picking up and substantial cash on sidelines. Stay cyclical.

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 Tame
  • 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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