On Wednesday afternoon, the Federal Reserve released its FOMC statement and plans to reduce the size of the balance sheet. I’ve highlighted the key points here:
During the press conference, President Powell made the following points that ignited the market:
- A 75 basis point hike is not something the committee is actively considering.
- 50 basis point hikes on the table for the next two meetings.
- Waiting for a soft/soft landing.
- Households and businesses are still in good shape.
- There are still excess savings.
- Labor market still strong.
- Expects inflation to have peaked or at least stabilized.
- Basic CPE may have maxed out.
And with that, we’re off to the races:
And while the S&P 500 is now up about 5.5% from lows, there’s still a lot of wood to cut to get back to new highs (as I asked alone in a recent podcast | videocast (S).
Late last week I was on Fox Business – The Claman Countdown – with Cheryl Casone. Thanks to Ellie Terrett, Liz Claman and Cheryl Casone for inviting me. In this segment, I laid out the case for separating emotions from data. The sentiment was completely wiped out, but the data didn’t justify all the gloom and doom (especially the earnings data). I closed with a handful of “disgraced” picks that are now catching a nice bid.
Here are my show notes before the segment:
The negative impression of Q1 GDP is not as bad as it looks
-Fear: Two consecutive quarters of negative GDP growth (technical definition of recession)
- 1st printing, may be revised up.
- Most of the decline was related to 1) a record US trade deficit 2) shrinking inventories 3) reduced government spending. (these three subtracted 5% from GDP).
Good points :
- Consumer spending grew at a healthy pace of 7% after inflation – the highest in three quarters.
- Business investment jumped 3%. This is the largest increase in a year.
- Look at the final sales to US customers. This measure excludes exports and inventory and focuses on how much Americans buy from US and foreign sellers. At over 2.6%, this is an increase from 2H 2021.
Earnings tell the whole story:
The Generals resisted (MSFT, GOOGL, FB)
– Profit estimates still rising S&P 500: Moved from $225 to $230.09 for 2022 in the past two months.
-For CY 2022, analysts predict profit growth 10.9% and increase in income 9.5%. The S&P was above 4800 in 2021. Imp: 5100-5200 high.
-For the first quarter of 2022 (with 20% of S&P 500 companies reporting actual results), 79% of S&P 500 companies reported positive EPS and 69% of S&P 500 companies reported a positive earnings surprise. For the first quarter of 2022, the S&P 500 blended earnings growth rate is 6.6%.
The forward 12-month price-to-earnings ratio for the S&P 500 is 18.1. This P/E ratio is below the 5-year average (18.6)
– CITI Economic Surprise Index ~70 in his most recent reading. Highest levels for over a year.
–Growth in plant activity in the United States High in seven months: Manufacturing PMI 59.7
– Unemployment rate still at 3.6%.
Two weeks ago, the AAII sentiment survey fell to a 30-year low at 15.8% bullish. Last week it rose slightly to 16.4%.
When sentiment is this low, over the past 25 years, 30 times out of 31, the S&P 500 is up six and 12 months later.
6mo later on average = +12.6% 12 months later on average = +19.8%
What to buy (if the time)?
It’s time to get back to value technology (low multiple, cash-generating companies that sold out). Managers vomited technology and turned to commodities in the first quarter. This will reverse as yields begin to stabilize. FB, INTC, TSM, GOOGL
We’ve featured the case for our two biggest positions – Alibaba and Biotech – in recent podcasts. The key elements of the bear thesis are:
- Tech/Biotech will not work in a squeeze cycle/rate of upside environment.
- Emerging markets ((China)) cannot work when rates are rising and the dollar is strong.
I always try to weigh myself down with the facts, and in these cases, the facts just don’t support the exodus. The last tightening cycle (2016 to 2018+) was one of the best performing periods for BOTH Biotech (XBI) and Alibaba. The underperformance of both assets preceded the tightening. A classic case of “sell the rumour, buy the news”.
During the last Fed hike/balance sheet downgrade period (2016-2019 period), not only did XBI appreciate ~140% (trough to peak), but Alibaba appreciated ~263% (from trough to peak) on the same tightening cycle.
The two black lines at the bottom of the charts are the federal funds rate and the US dollar. We can see – by the vertical blue lines – exactly where we are in the tightening process and what happened next…
I also want to highlight another key factor that Chinese bears are currently pointing to:
This Bloomberg note points out that the last time the yuan weakened so much in five days was in August 2015 and it “triggered months of ‘crisis-like conditions’ in global markets.”
What is not highlighted in this article is that the devaluation of the yuan sparked one of the biggest multi-year rallies in China Tech’s history – with Alibaba rallying around 270%. from August 2015 to July 2018. If it is “conditions close to the crisis” SIGN ME UP!
Here is an excerpt from last week’s video regarding China Tech:
The good news is that stimulus measures have been pouring into the Chinese economy since November. As the rest of the world tightens, China is the only major economy to aggressively stimulate with fiscal policy and monetary policy easing. The bad news is that this won’t be felt in the economy until the lockdowns end.
There is a light at the end of this tunnel as cases are now rolling like they did in the first wave over two years ago:
Now let’s move on to the more short-term view of the general market:
In this week’s AAII sentiment survey result, the percent bull jumped to 26.9% from 16.4% last week. The bearish percentage dropped from 59.4% to 52.9%. Retailer sentiment is melting, but investors are still apprehensive.
The CNN “Fear and Greed” index fell from 39 last week to 39 this week. Sentiment is still fearful in the market.
And finally, the NAAIM (National Association of Active Investment Managers Index) has crashed to 46.25% this week from 74.05% equity exposure last week. Managers were caught off guard yesterday and will have to ‘panic buy’ strength in the coming weeks.
The author and/or clients may hold beneficial interests in all or part of the investments mentioned above.