Fundstrat Head of Research Tom Lee has repeatedly told clients that we are in a “buy the dip” regime, and last week the market presented investors with the opportunity to act on his suggestion. Equities were weighed down this week as the market digested the inflationary implications of the relatively hot “prices paid” component that went into calculating the March ISM Manufacturing index, and of the rise in oil prices.
Some hawkish Fedspeak did its part to pressure stocks as well. During an interview on Thursday, Neel Kashkiri, President of the Minneapolis Fed, floated the possibility of zero rate cuts from the Federal Reserve this year. (Note that Kashkiri is not currently a voting member of the FOMC.)
Still, heading into the next CPI release, Lee sees a high probability that the numbers will come in below Street expectations. In part this is due to the dissipation of the residual seasonality that artificially swelled January and February CPI numbers. We have already seen a preview of this in Europe, where March inflation numbers came in super-soft after hot numbers in January and February.
“If March CPI comes in below consensus, as we expect, then this would reinforce the predominant trend of inflation falling like a rock,” Lee told us. “This, in turn, would likely reverse much of the hawkishness that has crept into the bond market recently; we would expect yields to fall and the implied odds of a June cut to climb.”
In the meantime, Head of Technical Strategy Mark Newton is seeing an extraordinarily resilient market. This is only the fifth down week in the past five months,” he pointed out during our weekly research huddle. Newton’s constructive outlook comes in part from the broadening he’s seen in the current market rally. “Even though Technology is 28% of the S&P 500, and Technology has been down in the last month, the S&P has still managed to show gains,” he said. “Energy, Materials, Utilities, and Financials have really kicked in.” In the near-term, “I expect to see 5350 or 5400, and then, potentially, you might get a little bit more consolidation, or backing and filling. As we head into earnings season, a lot of my cycle work shows the potential for late-month weakness.”
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