“If you don’t have clarity of ideas, you’re just communicating sheer sound.” ~ Yo-Yo Ma

Good evening,

Fundstrat Head of Research Tom Lee has repeatedly told readers that we are in a “buy the dip” regime, and this 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. Meanwhile, yields climbed, and so did the VIX. 

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. (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.” Lee also reminded us that, before the June FOMC meeting, we will see three more CPI reports (March, April, May). “In my view, by then, we will be able to have a lot more confidence that inflation is falling,” he said. 

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. “I find it extraordinary that, when you look at large-cap Healthcare, large-cap Tech, and Discretionary – all have shown negative performance, and it's really been Energy, Materials, Utilities, and Financials that have been the best-performing and 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.” 

Newton on Tesla

“Tesla has obviously trended lower, but there are some cycle-based reasons to think that we're very, very close to a time when this should start to rebound and do well. So I like Tesla here, I think it’s a good risk-reward – not for a trade, mind you, but for those willing to buy and hold.” 

The Tax Man Cometh

It is worth pointing out that we could see some artificial, temporary headwinds affecting stocks until the approaching April 15 tax-filing deadline. Stocks notched strong gains in 2023, and some investors will need to raise cash to pay the capital-gains tax. An analysis by Fundstrat Head of Data Science Ken Xuan shows that weakness heading into tax day is correlated to the prior calendar year’s stock performance, and this is illustrated by our Chart of the Week.  

In Lee’s view, these headwinds will dissipate after the April 15 tax-filing deadline. In the meantime? “We suggest looking for chances to take advantage of this short-term distortion,” he said.

FSI Sector Allocation Strategy

These are the latest strategic sector ratings from Head of Research Tom Lee and Head of Technical Strategy Mark Newton – part of the April 2024 update to the FSI Sector Allocation Strategy. FS Insight Macro and Pro subscribers can click here for ETF recommendations, precise guidance on strategic and tactical weightings, detailed commentary, and methodology.

Elsewhere

The FDIC is reportedly considering new rules to help ensure that major index-fund issuers like BlackRock, Vanguard, and State Street will not wield an inappropriate level of influence over the management and boards of the banks the regulator oversees. The concerns arose due to the large stakes that index funds often take in such financial institutions. Details of the reported proposed rules were not immediately available.

Turkey raised interest rates to 50%, an increase of 5 percentage points, citing a “deterioration” in efforts to lower its sky-high inflation rates. Meanwhile, headline inflation fell to 2.4% in the EU in March, with the decline led by easing food and energy prices in Germany and France.

General Electric is no more. The troubled company, founded in 1892 by Thomas Edison, had spun off and sold many of its divisions in recent decades. It finally ceased to exist this week when the remainder of the company finalized its split into three independent, publicly traded firms – GE Aerospace (GE -4.23% ), GE Healthcare (GEHC -9.07% ), GE Vernova (GEV -9.22% ).

A 7.4 earthquake hit Taiwan, and the most-affected area was Hualien, a remote tourist destination known for its scenic mountain vistas. The current death toll stands at nine. At Taiwan Semiconductor (TSMC), arguably the most important company in Taiwan, production was suspended, with most operations resuming about a day later. Advanced chipmaking requires a carefully controlled environment in which even the slightest vibration or imbalance can ruin a batch of chips.

Argentina defeated six lawsuits brought by hedge funds, including Aurelius Capital Management, over payments on bonds based on the country’s GDP. In dismissing the suit, a federal judge in Manhattan cited “no-action” clauses in the bond agreements that bar litigation except under specific conditions, which the judge said had not been met.

And finally: Taylor Swift is officially a billionaire, with a net worth of $1.1 billion, according to the Forbes 2024 World’s Billionaires List. Also entering the billionaires list is OpenAI’s Sam Altman, basketball legend Magic Johnson, and Dick Wolf, creator of the “Law and Order” television series. There are 2,781 official billionaires in the world, according to Forbes – 141 more than last year.