Also please note that I do often add to or tweak items after first publishing, so it’s always safest to read it from the website where it will have any updates.
I know not everyone can be on X several times a day like I can, so I really encourage you to click the link in each daily update to just scroll through that day’s posts, as I am moving away from the time consuming process of going through them to add to the weekly blog.
Also, as a reminder, some things I will still leave in from prior weeks (although much less than before). Anything not updated is in italics. As always apologize for typos, as there’s a lot here, and I don’t really have time to do a good double-check.
The Week Ahead
This week in the US in terms of data it remains busy with some key reports particularly at the end of the week. We’ll start with flash PMI’s then get new home sales, durable goods, jobless claims, goods trade balance, inventories, and UofM final consumer sentiment for April. But the two heavyweights this week are the 1Q GDP report on Thursday (which importantly includes a prices deflator which is basically the 3 month version of PCE prices) and the March personal income and spending report with PCE prices on Friday (which will though have been incorporated in that GDP report). With the market very sensitive to all things inflation right now, those price indicators will almost certainly be market moving almost no matter where they in although in between those two reports will be Microsoft and Alphabet earnings on Thursday after the close.
This week we’ll also get back to more watched Treasury auctions with a healthy schedule of $69bn in 2yr’s, $70bn of 5yr’s and $44bn of 7yrs (in addition to the typical $181bn in T-Bills (<1yr in duration) which are discussed more in the Bonds section). Hopefully they will be taken down more like the excellent 20yr auction last week and not the very weak 10 & 30yrs the week before.
One thing we won’t get is Fedspeak. Ah, the sounds of silence.
Of course it’s not just Microsoft and Alphabet earnings that we’ll get this week but a full 40% of the SPX earnings weight reporting. From Seeking Alpha (links are to their website):
Earnings spotlight: Monday, April 22 - Verizon (VZ), Truist (TFC), and Albertsons Companies (ACI).
Earnings spotlight: Tuesday, April 23 - Visa (V), Tesla (TSLA), PepsiCo (PEP), Texas Instruments (TXN), Philip Morris International (PM), UPS (UPS), Lockheed Martin (LMT), Mattel (MAT), and General Motors (GM).
Earnings spotlight: Wednesday, April 24 - Meta Platforms (META), IBM (IBM), AT&T (T), Boeing (BA), Chipotle (CMG), General Dynamics (GD), Hilton Worldwide (HLT), and Ford Motor (F).
Earnings spotlight: Thursday, April 25 - Microsoft (MSFT), Alphabet (GOOG), Merck (MRK), Caterpillar (CAT), Comcast (CMCSA), Intel (INTC), and Altria Group (MO).
Earnings spotlight: Friday, April 26 - TotalEnergies (TTE), Exxon Mobil (XOM), AbbVie (ABBV), Chevron (CVX), and Colgate-Palmolive (CL).
Here’s what markets expect for that key data from BBG:
Policymakers’ preferred inflation gauge — the personal consumption expenditures price index — probably stayed elevated in March, according to data due in the coming week. The measure is seen accelerating slightly to 2.6% on an annual basis as energy costs rise. The core is expected to rise 0.3% from the prior month after a similar gain in February.
The fresh inflation numbers on Friday will be accompanied by March personal spending and income figures. Against a backdrop of healthy job growth, economists project another solid gain in household outlays for goods and services. Income growth is also forecast to accelerate.
Other data for the week include the government’s initial estimate of first-quarter growth, which probably cooled from the prior period’s robust pace but still ran above what policymakers deem is sustainable in the long run.
“Real GDP likely cooled to about a 2.7% pace in 1Q following 4.2% average growth in 2H23. That’s still above the longer-run sustainable pace of 1.8%, according to FOMC projections, suggesting persistent inflationary pressures. Looking forward, activity will be challenged by weakness in discretionary spending with consumers increasingly sensitive to prices amid elevated inflation.” — Anna Wong, Stuart Paul, Eliza Winger and Estelle Ou, economists.
Ex-US at least it appears that the Mid-East situation has cooled for the time being. The BoJ will meet but with much less excitement than in March with no change in policy locked in. Still we’ll be looking for any clues as to the future path for rates, and the bank will release updated inflation forecasts. Elsewhere there are important data releases including global flash PMI’s but otherwise little of market moving potential.
Looking north, the Bank of Canada’s summary of deliberations will shed more light on the debate between officials about what they want to see before cutting rates. Retail sales for February and a flash estimate for March may confirm signs of a consumer slowdown at the start of the year.
With Japan’s central bank widely expected to keep policy on hold after mothballing its massive easing program, economists and investors will scrutinize updated inflation forecasts and the BOJ’s characterization of inflation risks for any hints on the pace of future rate hikes. Continued weakness in the yen will add an extra layer of tension when Governor Kazuo Ueda speaks at a briefing after Friday’s decision. Preliminary export figures from South Korea will provide a snapshot of the strength of world commerce. Indonesia’s central bank is likely to keep borrowing costs unchanged at 6%.
European Central Bank President Christine Lagarde will deliver a speech on Monday at Yale University. Key euro-zone releases include consumer confidence on Monday, the initial results of monthly purchasing-manager surveys on Tuesday, and the ECB’s consumer-expectations survey on Friday. Germany’s Ifo business sentiment index on Wednesday will be a highlight at a time when policymakers are observing a turn for the better in Europe’s largest economy after a period of stagnation and contraction. Tuesday is set to be busy in the UK. PMI numbers will be released in tandem with those of the euro-zone, and the latest public finance data are due then too. Bank of England Chief Economist Huw Pill and fellow policymaker Jonathan Haskell are scheduled to speak that day. Several monetary decisions are scheduled around the wider region:
On Tuesday, Hungary is poised to further slow cuts to the European Union’s highest rate as officials confront multiple risks while trying to shield the volatile forint.
Two days later, Ukraine’s central bank will set policy in the wake of slowing inflation.
Also on Thursday, Turkish officials may keep the key rate at 50% after a surprise hike last month. Some analysts aren’t ruling out another increase if policymakers see the inflation outlook deteriorating from the peak they see of around 75% in the coming months.
On Friday, the Bank of Russia is set to maintain its rate at 16% after officials signaled “a long period” of tight monetary conditions this year amid persistently high inflation and worsening foreign trade due to sanctions.
The same day, Botswana is predicted to keep borrowing costs unchanged, with inflation below its 3% to 6% target range.
In Mexico, early-April inflation data is likely to boost speculation that the central bank will pause at its May meeting, as analysts expect that the mid-month print pushed back up over 4.5%. Also on tap are February GDP-proxy figures, very possibly showing a fifth straight month-on-month decline, and the March labor market report. On the monetary policy front, Paraguay’s central bank is seen trimming borrowing costs for a ninth straight meeting, to 5.75%, before taking a breather at its May gathering. In Brazil, the central bank’s survey of analysts will likely show further erosion of inflation expectations following the government’s proposal to water down its budget targets.
And here’s BoA’s cheat sheets for the upcoming week.
And here’s a calendar of 2024 major central bank meetings.
Market Drivers
So let’s go through the list of items that I think are most important to the direction of equity markets:
Fed/Bonds
As noted previously this was one of the sections that had grown unwieldy, so I’ve really pared it down. Given I provide daily updates on Fed expectations, Fedspeak, and analyst thoughts on the Fed, it’s duplicative (and time consuming) to gather it all again so, again, I encourage you to look at those (the daily posts) for updates. I will just give more of a quick summary.
As detailed in the reports this week, yields jumped to new highs on the strong retail sales report and were kept around those levels by a confirmation of the Fed’s pivot to a “high for longer” (with outside potential for higher for longer) by a succession of Fed speakers most notably Jerome Powell himself. Here’s the link to the Friday report for where things ended.
As I noted last week,
I believe I have to, like most of the rest of Wall Street, take June off the table. I’m not jumping to December like BoA, Goldman, and some others have, but I just don’t see how with just one CPI report between now and the June meeting there’s any chance unless we get a negative print (or two) in the two NFP prints. I think though that’s highly unlikely, and even then I think they’ll probably wait until July when they’ll get not only two CPI prints but also two more PCE prints and another NFP report.
I need to see where the PCE prices report this week and probably the next CPI report come in before being able to intelligently talk more about the July meeting.
Turning back to where we are now, with both 2 and 10yr Treasuries moving up the 2/10 curve remained in its narrow range since mid-Feb at -0.35%.
But 3mos/10yr yield curve (considered a better recession signal than 2/10’s) moved to the least inverted since November at -0.78% at one point this week.
While long term inflation expectations, as judged by the 5-yr, 5-yr forward rate (exp'd inflation starting in 5 yrs over the following 5 yrs) moved to the highest since January last week at 2.38%, moving towards the higher end of its range over the past two years+ up 9bps this month.
But 2yr inflation expectations have moved more, now up by 19bps in April.
But with nominal Treasury yields seeing a much bigger move than inflation expectations last week, the move higher saw 10yr real rates push further over 2% to 2.24%, the highest since Nov.
Shorter-term real yields though (Fed Funds - core PCE from GDP (so 3mth annualized as of Q4)) remain over 3%, the highest since 2007.
While the 10yr term premium estimate as of Apr 18th edged to the highest since November but still remains just under 0 at -0.04%. This is something markets were laser focused on when it hit +0.38% last October, but now have lost interest with. I continue to think if you get into 2H of this yr without a rate cut on the horizon (or heaven forbid a rate hike potentially coming) that this may resurface as an issue that will push yields higher.
The extended discussion on term premium (what it is, why it’s important, etc.), can be found in this section in the Feb 4th Week Ahead.
As the MOVE index of bond volatility edged lower after hitting the highest since early January.
And the Chicago Fed National Financial Condition Index and its adjusted counterpart (which each include 105 indicators) in week through Apr 12th, a little surprisingly (given the rise in rates and drop in equities) fell for a 6th week after a brief period of mild tightening at the start of the year, now at the loosest since Jan & Feb ‘22 (before the start of the Fed tightening cycle), respectively.
BoA’s financial conditions index actually fell slightly in the week ending April 18th, but still 0.66 standard deviations above normal. “We characterize financial conditions as moderately restrictive; tighter since the Fed began its tightening cycle, but well below prior cycle peaks.”
Turning to the discussion on the Fed’s balance sheet/QT we’ll continue to keep get steady, sizeable auctions of T-bills (<1 yr) through at least the next Quarterly Refunding Announcement May 1st (where Janet Yellen tipped us in February that sizes would be reduced), but despite a monthly clip of around $800bn in T-Bill (<1 year) auctions, RRP on Friday was still at $397bn. While it’s the least since May ‘21, it’s just down $10bn w/w (and $16bn since March 15th) so overall RRP has been relatively stable now for over a month despite the continued large T-Bill auctions which had previously sucked out $1.8tn since last May. This week reserves did fall the most in 2 years by -$286.2bn through Thursday but that’s consistent with tax day (see below) historically and over the past month they’ve fallen by only -$160.0bn and since June ‘22 by just -$27.9bn, leaving them at around $3.3tn, so it remains a bit of a mystery to me who has picked up the slack from RRP in absorbing all those T-Bills.
Bank reserves see largest tax-day related drop in 2 yrs falling -$286bn in wk through Apr 17th taking them down to $3.33tn & moving closer to the "scarcity" level est'd in the $3-3.25tn range. In '22 they leveled off but eventually fell to $3tn in Sept.
For background on various estimates of when reserves will be “too low” see the Feb 4th Week Ahead.
Getting back to rates, I remain where I was last week thinking 2 years are a good buy here and 10 years are very close (I’ll be slowly moving in at 4.7%). had said previously I thought 10yr rates would trade in the 3.5-4.5% range this year “unless we got an inflation resurgence” which would mean perhaps a retest of the 5% level. Well, we got the resurgence so I have to put 5% firmly on the table, but I don’t see things moving any higher than that (and I am doubtful we actually see 5% on the 10yr). In that regard, I think even 2yrs may have overshot. Remember, at the last peak, a large contingent of the Fed was still thinking that one or two more rate hikes was necessary, something that I think currently remains something they are not really considering (despite the rhetoric).
Also removing all the legacy “final hike” and “first cut” materials, which can also be found in the Feb 4th blog post. I will put in new things if they come up.
Earnings
As a reminder, I have removed most of the background material, which you can get in the Feb 4th blog post. As noted last week, it’s time to move on from 2023 earnings and look forward to 2024. For a recap of 2023 you can see last week’s post.
We’re now far enough into Q1 earnings that I’ll update for the next couple of weeks where things stand (after next week though Q1 will basically be locked in). As a reminder, coming into earnings season expectations were around +3.2% expected growth (which was lower by just -2.5% since Dec 31st), but that had dropped to +0.9% last week on some big drops in expectations for a few health care companies (in particular BMY & GILD). With now 14% of earnings in (as of Thursday), we’ve dropped further though to +0.5% on more health care revisions making the upcoming week all the more important. That’s despite reporting companies coming in +7.8% above expectations (below the 5yr avg of +8.5% but above 10yr of +6.7%),
Turning to full year expectations, as noted in previous weeks back in July analysts had penciled in a nice jump of almost 12% for 2024 earnings to over $247. Typically we would see that number steadily deteriorate through July of the following year (2024) when it should basically “lock in” and we can turn to 2025 (earnings generally end the year w/in 2% of where they are estimated in July of that year). But as you know by now we saw very little deterioration in the 2024 earnings number since July ‘23, and that continues at this week although with those health care earnings revisions noted above it did drop nearly a buck to $242.97, still though less than 2% lower than where we were last July (although as also noted in weeks past, that masks a big discrepancy between the top 10 which have seen earnings revisions increase ~+18% over that time versus the “other 490” who have seen a more typical ~-6% drop).
And I’ve covered this in earlier weeks, but in Q1 earnings growth is all a Mag 7 story…
Five of the seven companies in the “Magnificent 7” are projected to be the top five contributors to yearover-year earnings growth for the S&P 500 for Q1 2024. These five companies (in order of highest to lowest contribution) are NVIDIA, Amazon.com, Meta Platforms, Alphabet, and Microsoft. In aggregate, these five “Magnificent 7” companies are expected to report year-over-year earnings growth of 64.3% for the first quarter. Excluding these five companies, the blended (combines actual and estimated results) earnings decline for the remaining 495 companies in the S&P 500 would be -6.0% for Q1 2024. Overall, the blended earnings growth rate for the entire S&P 500 for Q1 2024 is 0.5%.
… but that shifts as we move though the year.
Analysts predict these five companies in aggregate will report year-over-year earnings growth of more than 15% for the remaining three quarters of 2024. However, it is interesting to note that analysts believe the other 495 companies in the index will see improving year-over-year earnings growth during the course of 2024. By Q4 2024, analysts expect the other 495 companies in the S&P 500 to report double-digit (year-over-year) earnings growth as well.
And while it’s impossible to disconnect this from the overall market downturn, negative earnings surprises seem to be punished even more than would be expected w/an average price decrease of -6.1% vs 5yr avg of -2.3%. Positive surprises are flat vs +1%.
Companies that have reported positive earnings surprises for Q1 2024 have seen no change in price (0.0%) on average two days before the earnings release through two days after the earnings release. This percentage is smaller than the 5- year average price increase of +1.0% during this same window for companies reporting positive earnings surprises. Companies that have reported negative earnings surprises for Q1 2024 have seen an average price decrease of -6.1% two days before the earnings release through two days after the earnings. This percentage decrease is much larger than the 5-year average price decrease of -2.3% during this same window for companies reporting negative earnings surprises.
Looking ahead, Q2 and Q3 earnings expectations have unlike Q1 moved higher again this week to 9.6% and 8.7% respectively, while Q4 2024 remains a tall order at 17.7%, and 2025 is +13.8% down slightly from +14% last week. As always of course the question will be if earnings can exceed whatever bar the market has priced in.
Factset’s analysis of analyst bottom-up SPX price targets for next 12 months as of Thursday moved up to 5,750.86, a 14.8% increase to the close that day, remaining up ~600 points from 9 weeks ago. As a reminder, in 2023 they were within a couple percent, but typically they are b/w 3 and 8% too high (towards the lower end the last 10 yrs). Of course that range masks a wide discrepancy between big up and down years for the SPX.
In terms of analyst ratings, same as last week with buy and hold ratings continue to dominate at 54 & 41% respectively (not unusual).
And some other analyst charts/notes on earnings:
Economy
As I’ve written over the past 18 months, part of my earnings optimism has been due to the economy holding up better than expected. While earnings only track the economy loosely (and markets look forward 6-12 months), there is a clear correlation between recessions, lower earnings, and lower stock prices (although stock prices generally fall in advance of the recession and bottom 6-9 months before the end of the recession). Regardless, seeing a recession coming is helpful, although very difficult. You can reference this Week Ahead (see the Economy section) for a lot of material on how every recession is preceded by talk of a “soft landing” as close as a month before the start. On the IRA infrastructure act, the November 26 report has good info on how that should be supportive at least through the end of this year. I also have removed the notes about how small caps have shorter maturity profiles and more debt which can also be found at that report.
As I’ve been stating since I started doing the Week Ahead posts in mid-2022, the indicators to me are consistent with solid (which at times has been robust) economic growth, and I certainly do not think we’re on the verge of a recession. We got a lot of data again the past week week, and it remains consistent with that message. If anything it seems like the economy (or at least parts of it) may be reaccelerating after cooling off from the red hot end of 2023. We’ll see if that can continue with yields now back to November levels. But as of now the economy remains on stable footing. Manufacturing seems to have bottomed and is inflecting higher, the service sector remains relatively healthy even if slowing, the jobs market is quite strong supporting very healthy income growth and household balance sheets, productivity remains a hidden benefit, and consumer sentiment has improved (even if small business sentiment has not). Below is BoA’s list of major releases through Thursday and you can refer back to the the daily summaries to see more.
While retail sales and manufacturing production were strong, housing data and leading indicators were not and overall the the Citi economic surprise index took a step back for the 1st time in a few weeks to 33.1 from 39.5 the prior week, but remaining for now firmly in positive territory.
And GDP estimates are also consistent with a no recession call (again though remembering GDP going into recessions generally doesn’t look like one is coming (it was up around 2% in Q2 & Q3 2008 well after the recession had started)).
Goldman’s 1Q GDP estimate is at a very healthy 3.1%.
BoA ups their 1Q GDP est (which we’ll get this week) two tenths to 2.1% (through Thursday) on increases in next exports after import price data, in consumption expenditure and residential investment after retail sales. and a small increase in inventories after business inventories, offset somewhat by a slight decline in residential investment from housing starts/permits data. Industrial production was mixed with slightly stronger than expected utilities and business equipment production offset by weaker than expected mining and downward revisions in the prior two months.
Atlanta Fed (which as a reminder came in closer than consensus for another quarter in 4Q) dropped its 1Q GDP Nowcast to 2.4% from 2.5% the prior week mostly on a -0.14% decrease in the contribution from consumer spending while a -0.07% drop in fixed investment offset slightly by +0.07% rise in the contribution of private inventories.
And the NY Fed’s 1Q GDP Nowcast, remained unchanged at +2.23% with again very little changes in the components this week. Q2 though up to +2.71% from +2.58% mostly on an upgrade from the Philly Fed mfg biz outlook (+0.20%).
And the St. Louis Fed GDP tracker which was been consistently lower (and further off) than the NY and Atlanta Fed versions continues to remain well below those for 1Q but also improved for a 5th week to 1.71% up from 1.23% three weeks ago. Still this is well below any of the other GDP estimates.
While the Weekly Econ Index from the DallasFed (scaled as y/y rise for GDP) as of Apr 13th improved again to +2.01%, the highest since the 1st week of Jan from r +1.71% the prior week (this series is consistently revised down), but the 13-wk avg has not yet inflected higher remaining at +1.62%. This series is more useful in terms of direction which has been some economic softening since peaking late last year but perhaps now starting to move in the other direction?
Here’s the components.
Multiple
Like the other sections, I’ll just post current week items regarding the multiple. For the historical stuff, see the Feb 4th blog post.
The significant index declines last week, took some of the air out of forward P/E’s. The large cap SPX forward P/E fell back under 20 to 19.7, the least since early January. Mid and small caps fell to 14.8 & 13.8 (the former the least since Jan and the latter since December). The “Megacap-8” is a week behind so actually moved higher in the week through Apr 12th to 28.7 but will certainly drop when this is updated through Friday.
As BoA reminds us according to their work, valuation matters little in the near term, but is almost all that matters in the long-term.
And some analyst thoughts on valuations.
Breadth
As I go over this daily, I won’t reprise that information. I noted last it week had gone from “more mixed than it was a month ago but just strong enough to keep things moving in the right direction” to “very weak and definitely going in the wrong direction” and that continued into this week but that said some indicators are showing some potential green shoots. Overall, though, need to see more to have any confidence in anything more than an oversold bounce.
The NYSE McClellan Summation Index & its volume based Nasdaq cousin (red/black lines) ("what avg stock is doing") continue to fall, consistent with falling indices, now the least since November.
While the NYSE A/D volume line which has been dropping along with prices did see a tickup end of last week (positive divergence) but overall never caught up to the gains in prices.
While the new high minus new low indices (red/black lines) bounced last week after hitting the lowest since October, but for now the 10-DMAs (thin blue lines), which have been declining since early March, continue to drop. I asked last week if the indices (thicker solid lines) would eventually follow, and so far they have.
As % of stocks over 200-DMA fell along with prices last week now at the least since November so no positive divergence here.
% of equities trading above 50-DMAs, which had been falling sharply like new highs-new lows, did hook up end of last week after falling to the least since November, a positive divergence if it can continue. That said as you can see they often will retest a low, some times several times, before moving higher so this supports the idea of a bounce and retest with the indices.
While % of stocks above 20-DMAs also bounced after hitting levels around where they’ve generally bounced in the past.
While the equal-weighted SPX vs cap-weighted ratio saw its best week of the year but remains near the lowest since 2009).
And IWM:SPY (small caps to large caps) bounced this week after hitting the 2nd least since 2001.
In line with some green shoots in the breadth statistics noted last week’s sector performance improved with four green sectors (none the previous week) with five down more than -1% (versus 10 the week prior). Growth got the worst of it along with RE & industrials.
Which was also reflected in last week's SPX sector map which was very red in the growth sectors but less so elsewhere. Mag 7 all down at least -5% except Alphabet which was still down -2% with NVDA and TSLA down double digits.
Flows/Positioning
BofA using EPFR data in the week through Apr 17th saw global equity flows remain negative -$9.1bn, and while only the the 7th outflow in the last 25 weeks, it was the 3rd in 4 weeks and follows the 2nd largest this yr. That said equity flows are still ~+$304bn the last 43 wks (and +~$117bn last 13 wks):
Tech returned to the lead +$0.5bn, now +$20.4bn last 14 weeks (and $47.9bn last 37).
Financials saw the only other inflow, a 4th consec week of inflows (but the only inflows since Jan and just the 8th though in the last 35wks) +$0.4bn (+$2.1bn last 4 wks).
Healthcare led outflows for 4th week -$0.7bn (-$13.3bn last 28 weeks)
Energy returned to outflows (-$0.1bn), the 18th outflow in 22wks despite leading all sectors this yr in stock performance.
Materials saw only the 2nd outflow in 12 weeks (and 1st in 10 breaking the longest infow streak since early ‘22) -$0.6bn.
Real estate saw another outflow -$0.5bn (-$1.4bn last 2 weeks).
Utilities the 23rd outflow in 27 weeks and 14th straight the longest streak since 2003, -$0.2bn.
Consumer -$0.7bn (-$13.9bn last 27 weeks).
Breaking down EPFR data in the week through Apr 17th by country flows:
US saw a 2nd week of outflows, -$4.1bn after -$17.1bn the previous week, largest 2 week outflow since Dec ‘22, but still ~+$138bn the last 22 weeks.
Japan also saw a 2nd week of outflows, only the 2nd in 14 weeks -$0.6bn, still +$11.6bn YTD after +$7.3bn in all of 2023.
Europe saw a 57th week of outflows in 58 weeks (and 16th straight) -$1.8bn, now -$19.0bn YTD after -$66.9bn in 2023.
EM saw its 5th outflow in 6wks (but the only outflows since Nov) -$2.1bn (-$3.9bn last 2 wks), still though +$53.1bn YTD, on pace for a record year, as China saw a 5th week of outflows (-$0.7bn) (but still +$47.3bn YTD). India continued to see inflows though with another +$0.4bn (now +$8.9bn YTD and on pace for largest annual inflow ever). EM took in +$91bn in 2023.
US large caps saw another -$1.2bn outflow after the largest outflow since Dec ‘22 last week, although only the 7th in 33 weeks, still ~+$117bn last 24 weeks after $125bn in all of 2023.
Small caps saw an even bigger -$1.7bn, now +$2.5bn YTD.
US value returned to outflows (13th in 17 weeks) -$2.2bn (now ~-$24bn so far in 2024 after a record -$73bn in 2023)
Looking at EPFR data in the week through Apr 17th for fixed income saw a 54th inflow to bonds in 56 weeks (and 17th straight) +$5.7bn, ~+$191bn YTD:
IG/HG a 25th consecutive week of inflows (and 51st in 55 weeks) +$3.8bn (smallest since December) w/~$142bn the last 16 weeks, on track for >$500bn in 2024 (ATH) after +$162bn in 2023.
Treasuries 10th week of inflows, accelerating to +$5.0bn.
EM debt saw 3rd week of inflows (still only 6th in 36 weeks), +$2.1bn (+$3.0bn past 3 weeks), after -$37.0bn in 2023.
Bank loans 1st outflow in 8 weeks -$0.1bn.
Munis 2nd outflow in 15 weeks -$0.8bn.
HY 3rd week of outflows, still only the 6th in 25 weeks -$2.3bn (the largest since October & -$4.0bn last 3 weeks, but still +$22.0bn last 23 weeks).
TIPS the 27th outflow in 32 weeks -$0.5bn. TIPS saw record outflows of -$33bn in 2023.
Gold saw another outflow according to EPFR data through Wed (no performance chasing here) the 34th week of outflows in the last 46 weeks -$0.9bn.
EPFR saw cash funds with a huge (tax-related) outflow in the week through April 17th -$160bn cutting the YTD total to +$153bn after record +$1.3T in 2023 and +$3.3T since 2019 through the start of 2024 The total inflow to money markets over the last 20 weeks is still ~+$584bn.
EPFR saw crypto funds (assuming bitcoin) with a small inflow week through April 17th. Inflows have fallen dramatically the past 5 weeks (but still inflows) from the breathless run post ETF approval. This week +$0.026bn (+$1.4bn last 4 weeks).
ICI data on money market flows sees a similar big drop in the week to April 17th as EPFR data which is historically normal as it includes “tax day” in the US although it was the largest since 2008 (which perhaps bodes well for the upcoming Treasury refunding announcement) at -$112bn. It was also the 4th outflow in 5 weeks and cut the YTD total to +$82bn and leaves the total sitting in MMF’s as of Wednesday at $5.97tn, ~-$140bn off the record high set two weeks ago. Institutional outflows totaled $96.6 billion - the largest drawdown since an extended tax-filing deadline in mid-October- while retail investors pulled ~$15.5 billion.
Turning to systematic flows, BofA est's that CTAs (trend followers) have unwound most all of their "stretched positioning" noting that with indexes crossing past sell thresholds, “the [#SPX’s] now 6-day losing streak is overlapping with a pickup of unwinds in our model CTA’s long position…[and while] the specific price action around our model’s triggers seemed a little less dramatic than some of our clients may have come to expect…our model’s trigger for a stop loss is not a level in which the entirety of the CTA complex is expected to unwind immediately. It instead represents a level that we believe most CTA’s positions will start to fall under the pressure to cover and the more the price reversal continues past our model’s trigger, the greater the likelihood that most CTAs will have unwound. Some CTAs may also unwind slightly before trigger, some after, but as we did not aggressively pass our triggers this week it could mean that a portion of CTA equity longs remain.
Importantly, the positions are in a fragile state after Friday’s declines. At its peak this year, trend follower global equity positions may have been $150bn to $300bn in size. After this week, it’s not unreasonable that at least half of that remains long but which then also implies that half of that size came off in the last week or so. From here we expect continued selling but the path of spot could have an impact. In flat to down markets, we could see more significant CTA equity unwinds but in an up market the remaining positions may see less selling.”
They see similar implications for other global equity markets with most now in trend following drawdowns. As noted, the selling has at least seen the “stretched positioning” from a few weeks ago fall to neutral levels for the SPX, NDX, RUT, Nikkei225 & SX5E with their net exposure at 57, 48, 46, 57, & 73% respectively from 71, 57, 55, 69, and 86% last week.
In terms of gamma positioning, BoA estimates that with the declines delta-hedgers still remain long gamma (as the speed of the decline allowed them to time to trade down their positioning) but it’s now dropped to the 19th %ile from the 35th last week and 76th two weeks ago (and 91st three weeks ago) the least since October. This low level of gamma means they aren’t cushioning declines much but also aren’t yet adding accelerant. They now see 4855 as the level where gamma would flip negative, but they note “this short flip point is a moving goal post. If equities slowly grind lower, then new option flows may potentially have time to push the flip point further away. For example, our analysis last week indicated the short flip point was at an S&P level of 5000, but this point was only breached on Friday allowing ample time for trading activity to alter the gamma profile.”
And BoA estimates volatility targeters (risk parity) dialed back leverage significantly last week although may actually be buyers in the upcoming week given the amount of selling.
Another thing not helping equities the past two weeks has been the "max blackout" on company buybacks which will start to ramp back up this week.
Analyst Commentary
As might be expected, with the market declines, the bears have been emboldened, and some of the bulls have moved into the short term cautious camp:
JPM team led by Mislav Matejka: “Equities have already had a good run into the results, suggesting that investors are more optimistic than the downbeat earnings projections by sell-side analysts convey,” he said. “We need to see clear earnings acceleration in order to justify current equity valuations, which we fear might not come through.” Matejka said equities were underestimating the impact of elevated price pressures on central bank policy and bond yields. “While some of the move in yields was likely due to the optimistic growth outlook, we believe most of it was driven by sticky inflation,” the strategist wrote. “The risks of interest rates spiking for the ‘wrong reasons’, the Fed pivot getting fully reversed and inflation staying too hot are all elevated.”
Morgan Stanley strategist Michael Wilson warned about the impact of higher rates on stock valuations. He expects equities to show greater sensitivity to rates with the US 10-year bond yield spiking above 4.4%. “Under the surface, valuation dispersion is on the rise as the market becomes more discerning around quality and earnings achievability,” Wilson said. “Stock reactions during earnings season will likely provide an indication as to how much risk there is to valuations.”
“The markets have been buoyed by strong corporate profits and the elixir of lower rates, but it seems like those two things are increasingly at odds with each other, so we would exercise some caution in the near term,” said Chris Zaccarelli at Independent Advisor Alliance.
“Fed Chair Powell was downright hawkish,” said Win Thin and Elias Haddad at Brown Brothers Harriman. “The Fed wants the market to do the tightening for them. Financial conditions remain too loose and so some combination of higher yields, wider spreads, stronger dollar, and lower equities is needed to tighten conditions.”
“This is a more cautionary market,” said Larry Tentarelli, chief technical strategist at the Blue Chip Daily Trend Report. “I’m more cautious right now than I have been over the past five months.”
BTIG’s Jonathan Krinsky is still expecting the market to turn lower in the longer term. “Another messy open with breadth opening very strong with ~85% upside volume, falling down to 70%. We continue to think the next few days should be higher, while the next few weeks have further downside risk,” Krinsky said in a Wednesday note. He is also cautious on semiconductors, noting that the VanEck Semiconductor ETF (SMH) is trying to break its 50-day moving average
Mike Wilson notes that while multiples are “actually” fair value given the rate move to date, in order for stocks to keep moving higher, estimates would have to “continue to increase at a faster rate” in order to “offset multiple compression.” Maybe that’s possible for some names, but not for all of them, Wilson said, which points to more dispersion. He also noted that history suggests multiples re-rate ahead of realized earnings inflections and de-rate “once the stronger earnings arrive” in a kind of sell-the-news phenomenon. That pattern’s observable in mid-to-late cycle growth re-accelerations,” he said. The upshot, Wilson wrote, is that considering “the recent increase in rate sensitivity for equities, a further rise in yields from here can lead to a normalization of P/E multiples.” That’s one, but not the only, “consequence [of] the shift in the macro view from ‘soft landing’ to ‘no landing.'”
Although there remain plenty of bulls even in the short term:
Societe Generale SA strategist Manish Kabra expects a strong earnings season to continue to drive the bigger US stocks. While rising bond yields may be a headwind for the S&P 500, a “long plateau of Fed rates should keep a lid on yields,” he said last week.
“Recent inflation data has laid to rest the notion of a Goldilocks US economy. Instead, investors and the Fed will have to put up with a bumpier disinflation path than they assumed at the start of the year,” said Jason Draho at UBS Global Wealth Management. “But overall macro conditions of trend-level growth, slow and bumpy disinflation, and a Fed ready to exercise its put of rate cuts is still supportive for risk assets.”
“Rising bond yields are a sign that the global economy and corporate profits are strong and resilient,” said Demmert at Main Street Research. “While this economic and corporate strength may result in fewer than expected or even no rate cuts for the foreseeable future, that isn’t something that will ruin this new bull market.”
“In the early phase of a new business cycle, it’s earnings — not the Fed - that drive stocks. Earnings have been far better than expected and we envision a similar outcome as earnings season is once again in full swing,” he concluded.
While global equities are facing tactical headwinds, this is just a consolidation phase and stocks are expected to keep rising this year, according to UBS strategists led by Andrew Garthwaite. They noted positive developments including artificial intelligence pushing productivity and earnings higher, lower warranted equity risk premium, likely falling labor costs and less worries on margin pressures.
Rising interest rates do not necessarily signal that stocks are due for a big pullback, according to BMO strategist Brian Belski. “Our work shows that investors should not fear higher rates, despite current conventional thinking to the contrary. In fact, we found that some of the strongest periods of S&P 500 performance have coincided with rising or higher levels of interest rates over the past few decades,” Belski said in a note to clients. But even if stocks do rise along with rates, that does not mean it will be smooth sailing. “The era of ‘easy money’ investing is likely behind us, and the transition to a more “normal” rate structure is likely to be challenging causing many fits and starts for market performance in the coming months as it adjusts to this reality, in our view,” Belski added.
Fundamentals and technical trends for equity markets still appear supportive, suggesting the recent pullback should prove temporary, according to HSBC strategists led by Max Kettner, who are using the decline to add to their bullish stance. “Sentiment and positioning are not flashing a warning signal, though real money investors have started to extend their constructive stance on equities lately”, they wrote.
Corporate earnings will now have to do the heavy lifting for any rally, according to strategist at Barclays Plc and Bank Julius Baer who recommend buying the dips in anticipation of an economic recovery that could boost profits.
“We would actually advise to use such an opportunity to gradually increase exposure to cyclicals in the anticipation of the new economic cycle starting to unfold in second half of this year,” said Leonardo Pellandini, equity strategist at Bank Julius Baer. He likes shares of companies tied to the business cycle, those poised to gain from growth and inflation.
“Over the near term, our sense is that U.S. equity markets are likely to experience some additional downward pressure,” Chris Senyek of Wolfe Research wrote on Thursday. “However, over the intermediate-term, we continue to believe that the Market Cycle will have the biggest impact on overall equity market returns, sector rotation, and thematic performance.” In fact, Senyek said markets remain in what the firm calls the early acceleration phase, a period when equity returns have “historically been robust and it’s paid to be cyclically-positioned.” He added traders should remain in short-cycle industrials, which are especially sensitive to the economy in the near term, as well as analog semiconductors and energy services.
An improving outlook for the US economy and continued easy financial-market conditions have prompted Wells Fargo Investment Institute to boost its outlook for the US stock market and corporate earnings estimates. The investment adviser raised its S&P 500 Index 2024 year-end forecast to range of 5,100 to 5,300.
“A point of emphasis is that these year-end targets allow for potential market disappointments related to the track of inflation and the federal funds rate,” strategists at WII wrote.
Sentiment
Sentiment (which I treat separately from positioning) is one of those things that really only matters at the extremes (and even then, like positioning, it really is typically helpful more at extreme lows vs extreme highs). Sentiment as might be expected pulled back sharply last week, and I would expect it will continue to in the upcoming week absent an unexpected quick bounce. During a decline it is a headwind, but it’s more of a coincident indicator than a forward looking one. We’re not yet really at a place where sentiment is signaling a good buying opportunity, but we’re moving in the “right” direction.
The correlation between the 10-DMA of the equity put/call ratio (black/red line) and the SPX has finally started acting more normal after spending much of the year with unusual behavior, first with the SPX completely ignoring a spike then with the put/call ratio just slowly drifting higher regardless of what was going on with the SPX. I asked last week if its move higher this time will coincide with a longer period of equity weakness as is more typical, and so far that’s been the case.
CNN Fear & Greed Index now down into Fear territory, the least since November.
While the BofA Bull & Bear Indicator continues to soften now down to 5.0 from 6.5 six weeks ago, although still outside of the last 2 months the highest since early ‘22.
While the Citi Panic/Euphoria Index remains in Euphoria (it’s a much slower moving index) which it entered the last week of March.
“euphoria levels generate a better than 80% probability of stock prices being lower one year later.”
And Helene's followers most bullish they’ve been in 7 weeks.
Seasonality
We’re starting to enter into a seasonally weaker period for election years (for non-election years things have generally have been pretty good until around the end of June). But as I’ve noted in previous weeks, we’ve very much front run typical gains to this point, so the weakness we’re seeing is completely understandable and may continue for a while.
I'm not sure how Jeff defines "top election yrs" but this Q1 was above even that. But as he notes those outperforming years on avg saw a decline into June before things ramped up in line with the normal election yr seasonality.
Bespoke: The 30% rise of the #SPX on a total return basis in the yr through March ranks as the best since Oct 2021.
“A correction can happen at any time, but the S&P 500’s median performance one, three, six, and 12 months after initially rallying 30% in a year was better than the average for all periods."
Since 1950, there have been 11 prior instances where the S&P 500 rose at least 10% in the first quarter, per Keith Lerner of Truist Advisory Services. The equities gauge was higher the rest of the year 10 out of 11 times, with an average gain of 11%, Truist data show.
And from BBG:
Since 1950, whenever the SPX finished higher in both January and February, full-year returns for the index have averaged 19.8% — with 27 of 28 occurrences producing positive full calendar-year returns, according to Adam Turnquist at LPL Financial. “Can the winning streak continue?,” Turnquist said. “March has historically been a good month for stocks as the S&P 500 has posted an average return of 1.1%. However, during election years, average March returns dip to only 0.4%, with notable historical weakness midmonth.”
For references to all of the “up YTD through Feb” see the March 3rd post.
As you know, my message since around the third week of January was “things are primed for a pullback of some magnitude (meaning more than the 3% we’ve seen since October), but that doesn’t mean one is coming at any particular time.” As I noted in previous weeks, I’m glad in hindsight I added that caveat, as the market though the end of March ran much further than I (and I think most) thought it would without a significant breather, just continuing to build on its momentum. But as I asked last week,
After another down week, are we seeing that widely predicted pullback?
We saw a break of [key] lows on the back of the “all-important CPI report” (as I said last week, ”it will be difficult for the market to overcome a hotter than expected CPI print that sees yields extend to new YTD highs”) bringing the SPX down to a key technical level (50-DMA) we haven’t seen since November. Not only that but we’re seeing lots of other cracks in the armor. Breadth is the weakest arguably this year, technicals definitely the weakest this year, sentiment is fading, the Fed is no longer friendly with bond yields at the highest since November, and, perhaps most importantly, systematic positioning has, as noted in the Flows section, started to turn negative and breathing room between current levels and bigger “sell” levels has tightened up considerably.
That makes index performance from here important. Further declines which break the key 50-DMA, raise volatility levels, hit CTA stop losses, panics “weak longs”, etc., could quickly escalate into a 5-10% decline. I’m not predicting it, but as noted below, it’s bound to happen at some point, and the setup is as good for that as it’s been since at least early January.
And after we did see those “further declines” we also saw things escalate to the low end of the targeted 5-10% decline. So of course the natural question is “how much further does it go”? I would say further, but likely not without a bounce first. It doesn’t always work like this, but very often we get a bounce on a “weak” short term oversold condition (weak in that the intermediate conditions are not oversold like now) and then a retest (and sometimes a break) of the prior low. If I had to guess I would say that’s my most likely scenario. Of course, we could also keep dropping down to the 10% area which would be a natural stopping point, as it would take us down to the breakout from the 2022 highs. We could also just bounce from here without ever coming back down, but I think that’s the least likely of the three scenarios. As always, time will tell.
Longer term, I continue to remain bullish, looking to buy any such extended correction/consolidation:
Overall this feels like a bull market (the economy is growing, earnings are growing, the Fed is much more likely to be cutting than hiking, the technical picture and seasonality are strong overall for this year, balance sheets are solid, there’s lots of liquidity, and there’s lots of stocks other than the biggest ones that are performing well (the equal weight SPX hit a new ATH in March, etc.) So if/when we do get that sharp pullback I would think it will likely be an opportunity (like most sharp pullbacks are), not a reason to run for the hills.
And remember as I noted three weeks ago,
At some point we’ll get that 3%+ pullback that will then see a lot of selling in a scramble to preserve gains (and you’ll hear a lot of people who are now saying to buy the dip suddenly become cautious).
And in that regard, just remember when the 5-10%+ correction inevitably happens, it’s just part of the plan.
Portfolio Notes
More picking this week with some small buys. New positions in LVMUY, ON, MCD, BLK. Added to a number of other positions but nothing of real significance. Exited UNH. Half of HBAN was called away and all of WFC.
Cash = 18% (this is more than I want to hold, but I’m looking for a pullback in 1Q to add at this point, held mostly in SGOV and MINT but also TLH (if you exclude the longer duration bonds, cash is around 15%)).
Did put on some SPX and QQQ shorts end last day of December, but haven’t added. Around 1% total (stupidly, I have been waiting for a 5% pullback and now I feel pot committed even though I know that’s a dumb way to look at it).
Positions (after around the top 20 I don’t keep track of their order on a frequent basis as they’re all less than 0.5% of my portfolio).
Higher risk due to business or sector issues; own due to depressed valuation or long term growth potential (secular tailwinds), but at this point I am looking to scale out of these names on strength. These are generally much smaller positions outside of the top few.
Note: CQP, EPD, ET, MMP, MPLX, PAA, WES all issue K-1s (PAGP is the same as PAA but with a 1099).
Reminder: I am generally a long term investor (12+ month horizon) but about 20% of my portfolio is more short term oriented (just looking for a retracement of a big move for example). This is probably a little more given the current environment. I do like to get paid while I wait though so I am a sucker for a good well supported dividend. I also supplement that with selling calls and puts. When I sell a stock, I almost always use a 1-2% trailstop. If you don’t know what that is, you can look it up on investopedia. But that allows me to continue to participate in a move if it just keeps going. Sometimes those don’t sell for days. When I sell calls or puts I go out 30-60 days and look to buy back at half price. Rather than monitor them I just put in a GTC order at the half price mark.
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