Good evening, everyone, and happy Friday. We need a breather.
In April, stocks posted their worst month since March 2020. The NASDAQ and S&P 500 clocked their fourth consecutive losing week, which doubled as the NASDAQ’s worst month since 2008. The U.S. economy shrank in the first quarter at a 1.4% annual rate, a sharp reversal from a 6.9% annual growth rate in the fourth quarter. It was the weakest quarter since spring 2020, when the pandemic and related shutdowns drove the U.S. economy into a brief recession. All of this comes amid a recent uptick in COVID-19 cases in China, where stringent lockdowns are giving rise to growth concerns, the ongoing war in Ukraine, and persistently high global inflation.
Where do we go from here? This kind of fraught environment was the focus of our FSInsight weekly “huddle” meeting on Friday morning in New York, where our research heads discussed this challenging time for markets. Here are some key takeaways from the meeting:
How much bad news is priced into the market?
This is the question that Brian Rauscher, our head of global strategy, led off our meeting with. There’s no clear answer. As earnings season hits full swing, absolute results have been largely positive, while guidance has been tepid to bearish. One FAANG name performs well, in Apple, while another, Amazon, posts one of its worst reports in decades. The ecommerce giant missed on almost every metric. “This plays to the idiosyncratic nature of what’s going on,” Rauscher says, “and I think this is going to continue.”
Tom Lee, our head of research, noted this week that most of the bad news is already priced into the market, and days such as Friday’s selloff will prove to be extreme. Rauscher notes that while this might be true, there’s still a good chance markets break to the downside in the coming weeks. “I keep coming back to this point: the Fed hasn’t even started tightening,” he says. “Will we bleed for three to five months? It sucks when the market bleeds down. It’s like paper cuts. Or will it be a fireworks display, like we had in December 2018, where it’s very explosive and dynamic? I don’t know where we’re going.”
“I think consumers will spend quite nicely during the summer,” Rauscher adds. “This is going to make the Fed feel even better about tightening because we’ll have no more fiscal stimulus, energy prices will be escalating, inflation is soaring, and the Fed will slow down the economy with tightening. That’s my story. I’m sticking with it.”
Adam Gould, our head of quantitative research, reiterates his view that the market remains overvalued, based on his models for market valuation. Companies that miss on earnings, he notes, are getting punished. Take Amazon, whose shares sank 15% Friday for its worst day in 16 years.
“What that means is there’s still plenty of opportunity for stock picking,” Gould says, “and I’m still thinking volatility will remain.”
Bitcoin expected to continue trading sideways
Since January, Bitcoin, a key piece of our BEEF theme for 2022, has been holding on around the $40,000 range, while Ethereum has been sitting around $3,000. Both networks have traded sideways, which is expected to continue; they’ve been marked by low volume and choppy price action. But despite all the red in equities through April, Bitcoin and Ethereum have remained relatively steady.
“Overall, it’s pretty encouraging and better than I expected that those asset prices are holding up,” says Sean Farrell, our head of digital asset strategy. “I still think there’s a lot of uncertainty once the Fed starts to really ramp things up, but all things considered, given the strength of the dollar index and tech (stocks) getting killed, we’re holding up pretty well.”
This week, the Central African Republic became the second country in the world to adopt bitcoin as official currency after El Salvador took the same step last year. Here’s Farrell: “We’re going to see these small, beleaguered countries that start to embrace crypto. Are there ulterior motives to the passing of this bill? Perhaps, but it doesn’t matter because people are now talking about (Bitcoin) in this country of 5 million that’s the second-poorest country in the world. I just think we’re going to continue to see momentum build in this game-theoretical competition between nation states.” (Panama also has unanimously approved legislation to regulate Bitcoin and cryptocurrency markets in the country.)
Also, this week, Fidelity announced plans to become the first major retirement-plan provider to put Bitcoin on its 401(k) menu. The question, now, becomes whether the move drives a domino effect. And Goldman Sachs issued their first-ever lending facility backed by bitcoin, which, Farrell notes, is a significant step for a major U.S. bank that accelerates Wall Street’s embrace of crypto. The U.S. Department of Labor called the move a “grave concern,” but it’s an important move. On Farrell’s check list for the next few months: More activity; upticks in realized cap; and a larger number of small wallets entering the space.
Despite the choppiness, there are opportunities
Mark Newton, our head of technical strategy, says investors continue to grapple with a market that’s not technology led. The key takeaway from this week, he says, lies in how the cornerstones of the market have showed vulnerability. Netflix shares were hammered last week. Shares have fallen from nearly $350 to $190 since it reported declining subscriber growth. Alphabet is down almost 20% in the last month, and Amazon is trading at its lowest levels since the spring of 2020. That leaves us with two giants still standing strong: Apple and Microsoft. Both posted very strong earnings this week, although Apple mentioned it could take some hits because of supply chain difficulties in coming quarters.
“Those are the two stocks to really keep an eye on,” Newton says. “If those break March lows, then to Brian’s earlier point, we’ll see an acceleration down. If we break their lows — $150 for AAPL, $270 for MSFT — we will see a much larger and quicker decline. But I think the consumer is in good shape. Earnings are good. A lot of this is likely going to be over in a couple of months.
“Bottom line: It pays to be defensive,” adds Newton, who likes Utilities, REITs, and consumer staples, with names such as Wal-Mart and Waste Management showing strength. “I think we’ll re-test at about 3815 in the S&P, which should be a great place to buy dips in the next month.”
These gut-wrenching stock swings are not for the faint of heart. Just bear in mind, this is a marathon, not a sprint, and our team believes volatility will continue for the time being. A reminder: the average year (since 1980) sees a 14% pullback and the average midterm year (since 1950) sees a pullback 17%. “I am still a long-term bull,” Newton said Friday on FOX Business.
“It’s all a matter of risk tolerance and time horizon.”
