“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria." Sir John Templeton

Good evening:

“How low can stocks go?”

That was the ominous headline in The Wall Street Journal 14 years ago this week as the Dow had fallen four straight weeks, while the S&P 500 was below 700 for the first time in 13 years (1996). At the time, few people not named Warren Buffett or Tom Lee were bullish on U.S. equities. Yet March 2009 turned out to be one of the best-ever times to buy quality stocks.

Today’s environment is no comparison to the Global Financial Crisis, but the consensus on Wall Street is that markets likely will re-test the fall 2022 lows. Investor confidence remains low. Not here. We bring a contrarian view, away from noise and confirmation bias, rooted in our research. Both Tom Lee and Mark Newton believe the recent pullback in stocks aligns with seasonal trends, and Jerome Powell’s hawkish rhetoric is nothing to weigh too heavily. 

“A lot of people are debating the economy, and everybody seems confused as to 50 (bps) or 25 (bps), and it’s just back-and-forth banter,” Newton said. “Everyone has become an armchair economist. Even if you knew the data, you can’t correctly predict where things are going. It’s more useful to have an understanding of the stock market and where stocks are trending vs. trying to be an expert on where the economy is.”

Lee added that we’re on the verge of the best eight weeks of the year, and much of the hubbub around the Federal Reserve is noise. “You could never make an investment decision off their views because they always look at every data point and then start to think a recession or to crush it and now everybody takes their word like gospel, and I think it's made the stock market a lot more prone to panic.”

Newton said it’s important to remember that we’re still up almost 11% off the October lows and Technology is leading. The bigger pattern over the past four months outweighs any short-term pullback in the past month, Newton adds, and rates rolling over could strengthen the case for Technology. He likes semiconductors in particular.

Newton also notes that stocks tend to bottom around the 10th trading day of March in a pre-election year. That is likely Tuesday or Wednesday next week. 

“People have gotten dug in regards to talking about recessions and potential for economic weakness,” Newton said. “I don't disagree that eventually, these rate hikes will have an effect, I just don’t think it’s going to be this year.”

It was already a bad week for Financials before Silicon Valley Bank collapsed Friday. Newton had previously warned that the sector had violated the uptrend driving this group higher from the lows of October. After the SIVB news broke, Newton was firm in his assessment: “Financials will continue to lag and are to be avoided.”    

Meanwhile, Apple (AAPL-0.41% ), roughly 7% of the S&P 500, was just upgraded by Goldman Sachs, and Newton says the stock looks good technically on heavy volume. This should bode well for the overall market given Apple’s size, and Newton expects it will coincide with a bounce upward starting in the middle of next week. “This is a great stock to own,” Newton said of Apple. “It’s always important to keep track of what the biggest components are of any index.”

For nearly a year now, Brian Rauscher, Head of Global Portfolio Strategy and Asset Allocation, has advised caution. He’s still warning that further downside risk lies ahead. He said this week that the remainder of the first half will be a challenging period for equity investors. “It is difficult based on my research to make the case for a sustainable and significant equity move higher,” Rauscher wrote this week. His bull case for the S&P 500 is trading roughly 4200-3950, and his base case is that we re-test the October 2022 low near 3500. 

“Consequently, for me, that leaves either an equity trading range environment or unfinished business to the downside,” he added, “and with the 2-yr treasury and short-term yields near 5% risk-free, it sure looks like equities have some competition for investor funds.”

Rauscher added: “Strategic investors need to remain careful, cautious, and patient while being on full alert for potential opportunities that may present themselves during my expected challenging period.” 

Elsewhere

U.S. employers added 311,000 jobs in February, another stronger-than-expected showing, but labor-force participation numbers crept up, suggesting more people are re-entering the workforce. This is believed to have helped nudge unemployment beyond expectations, to 3.6% 

European Commission President Ursula von der Leyen met with President Biden at the White House on Friday, hoping to address EU complaints over green-energy subsidies in the Inflation Reduction Act that Biden signed into law in 2022. Negotiations are planned with Japan and the United Kingdom to address similar complaints about what U.S. allies believe unfairly benefits U.S. companies. Von der Leyen and Biden also discussed the war in Ukraine and China.

The House of Representatives voted unanimously to declassify intelligence on the origins COVID-19 pandemic. The unanimous House vote follows a unanimous Senate vote. The 18 agencies that make up the U.S. intelligence community are reportedly divided as to whether the pandemic originated from an infected animal or an accidental leak from the Wuhan Institute of Virology.

The worst drought in 60 years, along with midsummer frosts, could result in $20 billion in lost agricultural production in Argentina, a major producer of soybeans, beef, and corn. 

The new High Seas Treaty will place 30% of the world’s oceans under international protection from fishing, shipping, and other commercial activities such as mining. The treaty, the result of 10 years of negotiations, aims to protect marine wildlife and acknowledges estimates that 10% of oceanic species are at risk of extinction. The treaty still requires ratification by individual countries.

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