The Weekend Edition # 91

Welcome to another issue of the Weekend Edition. 

Thank you to all who’ve read and welcome to all the new subscribers this week! 

Here’s what we cover:

• Market Recap - Bull Market?!?!

• Macro - Market Price Targets

• Earnings - Final Tally

• The Week Ahead - Economic & Earnings Calendar

• Closing Thoughts - The Fed Next Week

Let’s dive in ⬇️

Market Recap - 05 Jun - 09 Jun, 2023 📉📈

The SPX has rallied from over 20% from the October lows and now everyone’s convinced that we’re in a new bull market. While technically that could be true, it could also be ahead fake similar to what we saw in 2001-2002 and again in 2008-2009.

Here’s a great chart from Bespoke Investment which shows the “bull market”:

But notice the periods I’ve highlighted in blue, where in 2001-2002 we had a 21% rally and then the market turned around to make new lows, down to -32%. Again in 2008-2009, we got a 24% rally, and the market subsequently dropped -27.6%.

So we don’t know if this rally is for real or whether it’s a head fake. What we do know is the following:

• Volatility (VIX) is now below 14 and more experts don’t believe it will go further down

• The rally has been on poor breadth, i.e., only a few stocks have led the rally. We need this to broaden for the bull market to be sustainable.

• Money flow is drying up and is indicating a reversal. I’m not a technical analyst but, looking at technicals is often interesting because the market follows them and they could prove useful.

June has historically been a month for sells offs. Market sentiment and positioning has also been indicating that this rally might be getting exhausted. This is perhaps a good time to take some profits.

Macro - Market Price Targets

Now, that we’re in technical bull market, a few banks have raised their year-end price target. Bank of America raised their year-end price target on the S&P500 to 4300, Deutsche Bank to 4500 and Goldman Sachs to 4500.

While GS’ track record has been hit or miss on this, as you can see from the chart above, we’re closer to the 4500 mark than the 3900 target, that Morgan Stanley has and the market could very well hit the higher target.

This is obviously quite detached from the macro view and we have the Fed meeting next week that actually move the market significantly. Most are in the “pause” camp and while you’d think that’s already priced in, a pause could actually cause the market to rally.

We also have to consider that there will be large scale Treasury issuances in the coming months at the short end of the curve, which is likely to push up short-term rates effectively creating tighter conditions. While there’s a lot of talk out there that this will not likely have a significant effect on the markets, we continue to stick with the view that there will be a meaningful tightening in liquidity and therefore, a negative effect on the markets.

Then there’s the tightening of lending standards that we’re seeing with banks. While this hasn’t happened to the extent that could be sufficiently restrictive, the Fed probably may take a pause here to see how it’s working out.

Earnings - Highlights 📝

We’re done with Q1 earnings. Here are the final stats:

• S&P500: Earnings decline of -2.03% YoY, much better than expected.

• Nasdaq-100: Earnings decline of -3.92% YoY

Here’s the final scorecard on the S&P500

Here’s the FactSet Summary for the Week: 

The Week Ahead 📅

US Earnings Calendar

US Economic Calendar in Eastern Time 

Closing Thoughts - Data next week

We have a heavy week for data next week with the CPI coming out on Tuesday and the PPI coming out on Wednesday. We also have Retail Sales, Manufacturing and Industrial Production data coming out on Thursday.

Most importantly we have the Fed Rate Decision on Wednesday. What will be important to watch is the Summary of Economic Projections (SEP) and the press conference. We believe that we will see some revisions to the SEP, particularly where the Fed Funds Rate and unemployment rate for 2023 is concerned.

The FFR is currently at 5.1% which means a range of 5-5.25%, where we are at now. If they increase it, we will know whether we’re getting another hike. If the Fed revises up their inflation estimate, that would be hawkish and it’s something to watch out for.

As always, we will do a breakdown of the Fed Press Conference, after the event so watch out for details.

Here’s wishing you safe investing. 

Please take a moment to share and subscribe, if you found this newsletter useful. 

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.