Market Ends Week on Upswing After Dovish FOMC, Soft Job Numbers
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Our Views
- Over the past few weeks, wariness and apprehension towards equities increased. In our many conversations with institutional investors over the past few days, this is apparent. Many have become outright bearish because of the fears of accelerating inflation and the choppy markets (volatility always discourages). In our view, we expect this “fear of May” to shift into “buy in May” as we expect the cadence of incoming data to be supportive of improving financial conditions.
- We viewed the Fed’s rate decision and press conference as “dovish,” though the number of expected Fed cuts is unchanged. In our view, as long as the Fed is focused on the business cycle, and not trying to tighten further to slow inflation, that is a dovish Fed.
- The key takeaway from Wednesday’s FOMC, in our view, is that the Fed is not comfortable with higher interest rates. Powell dismissed talk of hikes and “stagflation,” reiterated confidence on falling inflation, and hinted that the Fed is ready to ease if the labor market weakens.
- AAPL showing evidence of having stabilized, and weekly charts remain attractive.
- Cycles on AAPL go sharply higher into mid-June initially.
- Election-year seasonality suggests a better back half of May.
- In our view, yesterday marked the turning point that risk assets needed, as two of the three criteria outlined in our Crypto Comments video on Tuesday were met—QT tapering and a dovish stance from the Fed.
- The Fed’s decision to taper QT to a greater degree than the market anticipated, along with their confirmation that their next move is likely to be a cut, provided the necessary relief for asset prices.
- Likely intervention by Japanese authorities in the JPY further supports the evidence of a local DXY peak.
- COIN reports after the market closes on Thursday. We anticipate that the company will beat top-line estimates. However, a particularly interesting aspect of this earnings report will be the examination of the assets on Coinbase’s balance sheet, as they will begin marking cryptoassets to market.
- Crypto Equities – Despite trading at a sustained premium over the value of the BTC on its balance sheet, we are adding MSTR to our crypto equities basket following its recent pullback.
- Core Strategy – Our view is that the QT taper and the Fed’s dovish commentary signal a local top in the DXY, suggesting improved liquidity conditions going forward, which bodes well for crypto. Although there’s a risk of short-term consolidation as capital flows resume, we believe the current prices offer an attractive risk/reward. Consequently, we are shifting our Core Strategy’s allocation from stablecoins toward BTC, and plan to increase our exposure to altcoins following confirmation of BTC’s strength.
- Reauthorizing the FAA will be on the agenda when Congress returns next week from its extended weekend.
- Rep. Marjorie Taylor Greene has indicated she intends to attempt to have House Speaker Mike Johnson ousted from his post when the House goes back to work.
- Johnson appears to be better positioned to survive an ouster attempt than his immediate predecessor, Kevin McCarthy, was.
Wall Street Debrief — Weekly Roundup
Key Takeaways
- The S&P 500 closed the week up 0.55% at 5,127.79. The Nasdaq also advanced, up 1.43% to 16,156.33. Bitcoin was at $62,418.20 on Friday afternoon down 1.09% from Monday levels.
- The Fed remains dovish, having played down speculation of a rate hike and announcing plans to slow QT.
- Soft jobs numbers on Friday could prove to be a catalyst for gains in May after a painful April.
“You must understand that there is more than one path to the top of the mountain.” ~Miyamoto Musashi
Good evening,
For stocks, April was the worst month of the year so far, ending 4% down from its levels on April 1. It was the first down month for all three major indices since October 2023, and also one of the worst Aprils in the past 40 years. (Only April 2012 was worse for equities.)
The second half of the month has seen equities enter what Fundstrat Head of Research Tom Lee describes as a “two steps forward, one step back” market, with rising though choppy trading, as illustrated by our Chart of the Week:
This was the backdrop for the meeting of the Federal Open Markets Committee on May 1, during which FOMC members voted to keep rates unchanged from the levels set in July 2023. Ahead of the meeting, recent inflation prints had some speculating that Fed Chair Jerome Powell might signal a future hawkish pivot and hint at possible rate hikes soon.
Lee saw it differently.
After the meeting, the Fed announced its intentions to slow its quantitative tightening (QT), while Powell reiterated the central bank’s overall confidence and its base view that inflation is going to fall throughout the year. Afterwards, Lee asserted: “The hawks were wrong. The Fed remains dovish.”
For Fundstrat Washington Policy Strategist Tom Block, a key moment came when Powell was asked about the possibility of rate hikes: “I think it is unlikely the next move will be an increase,” he said. Block, who used to help prepare public officials for press conferences earlier in his career, parsed the response thusly: “The Chair and his staff knew that he would be asked about the chances of a hike, what might cause a hike etc., and to me, it was clear that Powell’s response had been well-rehearsed and intended to pre-empt that line of questioning.”
During the press conference, Powell also noted that strong labor markets do not preclude the possibility of rate cuts. “I just want to be careful that we don’t target wage growth or the labor market,” he said, hinting that the Fed might consider easing if the labor market weakens.
On the heels of soft job numbers on Friday, those remarks could take on added significance. Ahead of the jobs report, Lee had suggested that soft jobs numbers could inject confidence into the markets, pull forward the odds of a cut, and break the pattern of “two steps forward, one step back.”
Head of Technical Strategy Mark Newton agreed that, since the lows of April 19, we’ve seen a rally that has been “pretty choppy and uneventful.” He agreed that the jobs report could prove to be important. Still, to him, “what we need to see is really a break in yields. Historically, that correlation has been very strong.”
Nevertheless, “despite what’s happened in the past five weeks, there hasn’t been a whole lot of damage from a technical perspective. We're still at or near the highs, and breadth is still in very good shape,” he noted.
“Looking at the bigger picture, last month we obviously saw a very difficult month for Technology, Discretionary, and Healthcare – a lot of underperformance by some of these key sectors. I would argue now Technology is down to a really pivotal, important spot and Healthcare has actually begun to rally so I'm actually pretty optimistic on the market.”
On Apple
Newton noted that the Cupertino-based company’s results are important not just for its shareholders, but for the market as a whole, given that Apple (AAPL 2.17% ) is roughly 8% of the S&P 500 and almost 12% of the QQQ -0.25% . The tech titan rallied on Friday after beating estimates and announcing a reality-distorting $110 billion share buyback program and dividend increase after the close on Thursday.
“Since the latter part of December, Apple has fallen from almost 200 down to 160, so it’s still within a downtrend,” said Newton. “Technically speaking, getting above 178 would be important for Apple and important for the market and for Technology.” He conceded that, from a strictly short-term perspective, Apple’s stock performance arguably “has been a mess.” However, in the bigger scheme of things, he does not see that much technical damage. “I actually like Apple. I think that this is a pretty decent spot to consider taking a shot and owning it, even though we obviously need to see some technical improvement before it really starts to accelerate, and other stocks should be favored within the Magnificent 7 right now.”
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 May 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
Eurozone GDP expanded 0.3% in the first quarter of the year, led by the German economy and beating expectations of 0.1% growth. Both Germany’s and the Eurozone’s expansion marked reversals from the contractions seen in 4Q2023. Meanwhile, core inflation in the Eurozone fell from 2.9% to 2.7%.
Cocoa farmers are hiring armed guards to protect their crops amid a surge in prices of the much-loved bean. With drought in Ghana and Cote d’Ivoire causing shortages of the key ingredient in chocolate, the crop that remains has become so valuable that one industry expert estimates that as much as 30% of the cocoa crop in Uganda has been stolen.
Eight newspapers filed a federal lawsuit against OpenAI, alleging copyright infringement through unauthorized use of content to train its generative AI models. The plaintiffs, among them The Chicago Tribune and New York Daily News, make claims similar to those made in lawsuits brought by other news outlets such as The New York Times, and by authors including George R.R. Martin, Michael Chabon, and John Grisham.
Binance founder Changpeng Zhao was sentenced to four months in prison after pleading guilty to money-laundering violations. CZ’s deal with the Justice Department also includes his resignation as Binance CEO and a personal $56 million fine.
Ford’s efforts to achieve autonomous driving will be scrutinized more closely, with the National Highway Traffic Safety Administration (NHTSA) opening an investigation into two fatal crashes involving Ford’s Mustang Mach-E SUVs believed to have been using Ford’s hands-free driving BlueCruise technology.
President Biden honored 19 individuals with the Presidential Medal of Freedom, the highest civilian honor in the U.S. Among the honorees are civil rights activists Clarence B. Jones and the late Medgar Evers, Olympic champions Katie Ledecky and the late Jim Thorpe, entrepreneur and former New York City Mayor Michael Bloomberg, and the award-winning actress Michelle Yeoh.
Noel Quinn, CEO of HSBC, unexpectedly announced his retirement “to get a better balance between [his] personal and business life.” Quinn is a 37-year veteran of HSBC who became interim CEO in 2019 before taking the helm outright in 2020.
Scientists have made progress in their quest to enable universal blood donations, so that patients can receive blood transfusions from a broader range of donors. Researchers believe they are close to developing a combination of enzymes that would remove the antigens present in blood donated by people with Types A, B, and AB blood. These antigens can cause some recipients' immune systems to reject the blood. (Currently, only those with Type O negative blood are considered universal donors.)
And finally: Hawaii’s lawmakers have approved an official state gesture, the shaka, which is colloquially used to urge everyone to “hang loose.” Commonly flashed by surfers, the shaka is the hand shape that results when one makes a fist and then extends the thumb and pinky as straight as possible. No other U.S. state has an official gesture.
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