"An investment in knowledge pays the best interest." — Benjamin Franklin

Good evening:

For months, our Tom Lee has said inflation would fall throughout 2023 and the Federal Reserve would take its foot off the gas. Markets, which are forward-looking, recognized both themes in the first half. In our view, this week functioned as more confirmation of what Lee has been calling since stocks bottomed last October. Don’t look now, but the tech-heavy Nasdaq – technology has been Lee’s top pick all year – is up nearly 31% year-to-date. 

Fed week began with inflation data coming in softer than expected, declining for the 11th straight month. Lee and his team looked closely at the data and concluded that the details were better than the headline core figure alone might suggest – and better than expected. With the bulk of core CPI driven by components that use lagging data (specifically, shelter and used cars), Lee concluded that the CPI number “is reflecting inflation pressures that have been gone for some time. Thus, forward inflation is tracking lower.”

Next month, we expect the 41-year-high CPI reading from back in June 2022 (+1.2% MoM) will result in a significant drop in June 2023 CPI YoY, which could fall to as low as 3.0% vs. May 2023 4.1% YoY. This is illustrated in our Chart of the Week:

Headline inflation is what matters to the public and thus, the White House, and this expected 3.0% reading is what investors will see against a Fed funds of 5.25% now. In our view, this would strengthen the case for a July pause.

Looking ahead, Lee continues to be constructive, viewing the FOMC decision and subsequent press conference as a “green light” for financial conditions to ease, business confidence to improve, and thus, for a greater number of stocks to outperform beyond FAANG. Plus, strong first halves tend to lead to continued strength for the rest of the year, with 2013 (+29.60%) and 2019 (+28.88%) as the most recent examples. 

Here are other highlights from Lee this week:

Expansion, not recession possible: Instead of a recession unfolding, it looks like the economy is slipping into an expansion, and that’s because we don’t have a commodity shock. We have businesses that de-stocked starting to restock, and we have things like employment, you know, the tightness kind of cooling off.

Valuations for giants like Apple and Nvidia are OK: As Peter Lynch would say, you don't want to be valuation-sensitive when you buy great companies. There isn't really another Apple out there or another Nvidia. As long as they're central to what's happening, especially AI or the consumer, I don't know if you want to say rate hikes will kill their stories.

Short-term weakness is possible: I think earnings have bottomed...but I think investors need to be wary that nothing goes straight up. There is a chance, of course, a window where there could be a tactical pullback. I think that's a dip (to) buy rather than thinking it's a top.

On the swing from bearish to FOMO: I think these are conditions for profits to actually outperform and at a time when investor positioning is so offside, it’s really been very obvious people have been really cautious. I think they’ve not turned from being bearish to having a bit of FOMO.

Staying risk-on: Our view is that you want to be risk-on this year. We do think we're largely through the worst of this tightening cycle, inflationary pressures are easing pretty quickly, and this is going to set the pathway for earnings to outperform. 

Why stocks aren’t overextended: I don’t think stocks are over-extended. I think the FAANGs did the heavy lifting, and I think if we’re slipping into an expansion, a lot of other groups are going to participate.

Notes from our Weekly Huddle 

Brian Rauscher, our Head of Global Portfolio Strategy and Asset Allocation, said he’s gradually starting to like more individual names in the market, though he still doesn’t see broad-based opportunities. “I think this has become a year of stock picking, where being in the right stocks – as opposed to just the right areas – would probably pay off,” he suggested.

That’s in contrast to both Lee and Head of Technical Strategy Mark Newton, who have seen improved breadth in recent weeks. At our weekly research huddle, Newton said, “We’ve seen a nice broadening out of this rally in recent weeks, which formerly was largely led by just large-cap tech. It’s now expanded to financials and industrials and discretionary. So that's been a good sign.” The broadening can also be seen in the various indices: “It's nice to see all these indices start to move up together as opposed to it just being a technology rally.”

Newton said, “We've seen a big move in the S&P. The trend has gotten parabolic, and there's a lot of momentum behind this. So it's very difficult to sell until there's really some evidence that markets are starting to peak, and I really do not see that right now. We've just gone straight up and that's obviously a very good thing. I expected markets can rally into about the latter part of June, early July. And then we should get a peak and a pullback.”

Despite the improved market breadth, Newton still likes the sector that has outperformed all year – technology. “I still think tech works really well. A lot of the large-cap technology stocks still look excellent.”

Newton’s views on asset classes outside of U.S. stocks

• European markets: “[ECB President Christine] Lagarde was speaking on Thursday and she was very firm. They’re going to continue hike, hike, hike. So the dollar is really starting to fall apart because the US is sort of wavering as to potentially being at a level where it might pivot, whereas the ECB is not. That's really interesting and has some good implications for European markets.”
  
• Emerging markets: “Emerging markets are enjoying a very nice breakout that happened about two weeks ago. So this is a really good risk-reward. For owning emerging markets as the dollar rolls over, I think that's going to fuel this trade. I like emerging markets here as one of my top calls.”
  
• China: “China actually has been coming back in a big way. The PBOC [People’s Bank of China] cut rates, and it's really fueling this thinking that they're going to add stimulus because they really want to catch up. Their whole COVID policy really had some damaging effects on the economy and Xi [Jinping] is really going to try to get the Chinese economy back. So I like China a lot.”
• Copper: “The other thing I like a lot is copper. The commercials have been buying like crazy. If China starts to add stimulus that's really going to eat copper. FCX 4.36%  is a way you can participate in that, or perhaps COPX 4.68% , which is the copper ETF.”

Elsewhere

A potential supply-chain crisis has been averted after dock workers reached an agreement with the operators of West Coast ports. With the help of acting Secretary of Labor Julie Su, the International Longshore and Warehouse Union and the Pacific Maritime Association on Wednesday reached a deal that covers employees at all 29 West Coast ports for six years. One immediate benefit of the agreement is that workers will halt a 14-day work slowdown and stoppage that had ports operating at 70% capacity.

China’s central bank cut several rates in an effort to stimulate the country’s economy. Earlier in the week, the People’s Bank of China lowered its 7-day reverse repo rate, the first time it has done so since August 2022. On Thursday, the PBOC followed up with a 10 bp cut to 2.65% on a one-year medium-term lending facility loan to various financial institutions.

Global food prices will likely rise amidst a worldwide decline in food security due to last week’s destruction of the Nova Kakhovka dam, according to United Nations aid chief Martin Griffiths. “This is a breadbasket - that whole area going down towards the Black Sea and Crimea is a breadbasket not only for Ukraine but also for the world,” he pointed out. Ukraine and Russia have each accused the other of deliberately setting off explosions on the dam, which is in Russia-controlled territory. The destruction has also jeopardized clean drinking water for 700,000 people.

The ECB hiked rates by 25bp a day after FOMC day, to 3.5%. The hike in rates to their highest level since 2001 comes despite inflation that is declining – though still high, at 6.1%.

The European Parliament has advanced a landmark Artificial Intelligence Act, the first major legislation regulating Artificial Intelligence and signaling the EU’s desire to lead the global discussion on the issue. The act – 100 pages, 85 articles – includes a ban on the use of “subliminal techniques” to manipulate people, strict rules on AI-powered biometric surveillance, transparency in the use of copyrighted material for AI training, and more.

Solar power was successfully harvested from space and beamed to an earthbound receiver for the first time this week, proof of concept from a satellite prototype launched by the Space Solar Power Project at the California Institute of Technology. The satellite was launched into space on a SpaceX rocket in January and came online Monday, successfully using an array of solar panels to generate electricity and a microwave-based array to send it to the roof of the Gordon and Betty Moore Laboratory of Engineering on Caltech's Pasadena campus – with minimal power loss.

And finally: It’s Beyoncé’s fault, according to some Swedish economists seeking an explanation for the country’s higher-than-expected 9.7% inflation in May. The theory is that the singer’s tour appearances in Sweden sparked such increased demand for hotels, restaurants, and other tourist-related goods and services that the resulting price increases affected inflation statistics.

“Your heart's desire is to be told some mystery. The mystery is that there is no mystery.” ~ Cormac McCarthy (1933 - 2023)

Notice to all readers: U.S. markets and Fundstrat offices will be closed on Monday, June 19, 2023, in observance of Juneteenth. We will resume our regular publishing schedule the following day.

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