- MacroVisor
- Posts
- The Weekend Edition # 94
The Weekend Edition # 94
H1, 2023 Recap; Playbook for H2, 2023; Earnings - Quiet Period; Economic & Earnings Calendar; Closing Thoughts - Let’s get ready!
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 - H1, 2023 Recap
Macro - Playbook for H2, 2023
Earnings - Quiet Period
The Week Ahead - Economic & Earnings Calendar
Closing Thoughts - Let’s get ready!
Let’s dive in ⬇️
Market Recap - 26 Jun - 30 Jun, 2023 📉📈
What a close to the first half of the year! After a tough rout in equities in 2022, this rally probably provided relief to a great many.
US Markets
Looking at the scorecard above, the Nasdaq outperformed every other index, with the S&P 500 coming in a close second.
The Dow Jones Industrial Average and the Russell2000, while still closing in the green maintained single-digit performances for H1, 2023.
Short term yields were up as expected but long-term yields have not faired very well leaving the Yield Curve inverted. This is quite possibly the longest inversion in the YC that we’ve seen in decades, perhaps ever. (I don’t have enough data to confirm that)
Bitcoin was, however, the winner for the first-half with YTD performance of +84.57%. Looks like risk assets were very much in play this year.
US Equity Sectors and Cycle
Looking at the US Sectors, it’s no surprise that technology stocks outperformed every other sector this year, followed by communications and consumer discretionary. What is interesting however, is that Industrial and Materials followed these three which is not something you see in a late cycle environment.
What we’re seeing now is a mixed bag - we have the macro that is flashing late cycle with the slowdown in manufacturing data, inverted yield curve and overall, tightening of credit. Yet, equities are flashing early cycle - with tech leading the rally and defensives such as health care taking a back seat.
US Equity Industries
In terms of industries, we see semiconductors, software and internet rallying. Again, very early cycle plays. We also saw homebuilders rally despite a YoY slowdown in the housing market and spike in mortgage rates, primarily because of the shortage of housing supply, a topic we covered yesterday. Finally, we saw airlines perform well, particularly in the last quarter, mainly because of the relative weakness in the prior years and the reopening travel trade.
Not surprisingly, regional banks came out last on this scorecard. After the blowup of some significantly large regional banks, that industry has remained subdued as te market continues to believe that there may more problems to come. We have commercial real estate that remains a ticking time-bomb, and a large part of that exposure is with the regionals. Not to mention, the inverted yield curve is not helping with pressure on paying for deposits and lending rates remaining low.
This divergence between the macro data and the equity rally is interesting, to say the least. Even as the Fed continues to hike, equities have taken on a risk-on approach. Part of that has also been because of the Fed. After the regional banking crisis, the Fed’s Super Discount Window to prop up these banks has also found its way into propping up equities.
As the borrowing at this window continues to increase, banks have not tightened lending standards as much as expected. We’re definitely seeing liquidity come into this market.
But, the rally has been extremely narrow as everyone knows by now. We’re seeing stocks rally on the promise of AI led by the top few. These mega cap stocks not only have the story but also the safety. They have been a good place to hide out. The US is not the only country experiencing this. ⤵
Global Markets
Globally, stocks haven’t faired too poorly either. Central Banks remain in different stages in the fight against inflation and the monetary policy tightening.
(At Macrovisor, we’ve been progressively covering some of the major markets such as Europe, UK, Japan and China and over the next half, we’ll be looking into the other major regions)
Commodities
Last but not least, we have the commodities. It’s been a mixed year for commodities, with Precious Metals rallying towards the beginning of the year, Oil taking a beating and Industrial Metals looking dismal. Lumber has staged somewhat of a recovery on the back on the housing market and we’re likely to see this hold until, the housing market stabilizes.
Oil is in a precarious position. We have further cuts coming up for the rest of the year and traders continue to remain very short. Natural Gas has started to pick up during the last quarter with discussions of pressure on energy in the Eurozone, once again.
Commodities are signaling a slowdown in global growth. It remains to be seen how this plays out.
The charts in the recap section have been sponsored by Koyfin. We have a special discount of 15% for MacroVisor readers for any new sign-ups to Koyfin. To take advantage of this promo please sign up here - Koyfin MacroVisor Discount
Macro - Playbook for H2, 2023
It’s customary for all research firms to provide a mid-year outlook and we at MacroVisor have been thinking through this framework as well. We’re still learning and growing so bear with us.
Over the next two weeks we will come out with a more detailed outlook but, we also wanted to share an overview of what we were thinking for everyone.
The first issue that we were thinking though all the macro cycles that came before us. As I said above, my conclusion is that we’re not experiencing a typical late cycle. So, we’re going to have to make adjustments. Nevertheless, if we consider the Fed’s tightening cycle, a pause in rate hikes doesn’t necessarily result in a market collapse.
You can see this in the upper panel of the chart where the Fed Funds Rate is in orange. The ugliness begins when the Fed starts to cut rates. Now, the Fed has almost always had to cut rates when there’s some kind of disaster in the economy. So the question remains, does the disaster come first that leads to stock market decline or is it that the market declines when the Fed cuts rates? We will soon find out. But for now, we do have some thoughts on a playbook to follow.
The one thing that I could keep an eye out on is the Yield Curve. Obviously, the Fed cutting rates and Yield Curve steepening go hand in hand but, a very steep curve doesn’t bode well for markets either. So, we’re going to be monitoring that.
US Equities For US Equities, we’re broadly looking at an allocation to
Mid Cap Value and Growth
Long Low Volatility; Short High Beta
Companies that have operated under previous high-rate environments
Cash flow positive
Strong balance sheet
We looked at the period between 2000 and 2004 to see what performed best coming out of the DotCom Bubble and Bust - it was the Mid Caps. ⤵
US Sectors and Industries
As far as sectors go, we’re still leaning towards the defensives with select names from other sectors. Sectors we like are:
Healthcare (excluding pharmaceuticals and manged care)
Aerospace and Defense
Select Consumer Discretionary
Select Consumer Staples
Select Industrials
Select Cybersecurity
Global Outlook
Long Japan; Short China
Long USDJPY and GBPUSD
Emerging Markets Overweight - Selectively
Underweight Europe (excluding Greece)
Other Asset Classes
Fixed Income: Select Investment Grade Bonds; BB+ / BB bonds - Government Treasury Bills; Select Municipal Bonds
Commodities: Careful in this environment; Shorter Term Trades
Alternatives: None - we think there still remains challenges in Private Equity and Real Estate
Longer Term Outlook
We’re researching a theme that we are calling "from Abundance to Scarcity", where we see longer-term secular opportunities within key components of both the old and new economy.
Earnings Highlights
We’re not covering earnings this weekend, as it’s going to be a quiet period over the next two weeks, which means we’re also in the buyback blackout period - the time when companies can’t buy back their own stock.
Earnings season starts with JP Morgan reporting on Friday 14 July and we will do a review of the earnings season to come next weekend.
The Week Ahead 📅
US Earnings Calendar
US Economic Calendar in Eastern Time (shorter week for the US; Monday is half day; Tuesday is a holiday)
Closing Thoughts - Let’s get ready!
MacroVisor is almost 5 months old. We started this company with the vision of making the macro environment easy to understand, keeping track of the moving parts and providing the research supported by the data. As we’ve clearly experienced, the macro doesn’t always translate linearly into the markets and we see newer dynamics all the time that influence the markets one way or the other. Case in point, 0DTEs!
The other thing about understanding the macro is that cycles don’t always follow theory and often take time to play out. As we saw in the rotation charts above, we’re seeing a mix of cycle plays. After the GFC, we thought this housing bubble would collapse the same way it did during 2008-2009 but, the conditions today are not the same and therefore, we’re seeing a different outcome.
I bring this up now however, because my first article for MacroVisor was a valuation of the S&P 500 and a forecast. There were my worst case forecasts based on P/Es and on DCF. The DCF however, gave us a range of values.
Some have asked me if I still stick to this forecast. The answer is as far earnings is concerned - yes. I still don’t see earnings crossing $200 per share for the SPX. However, as new information comes in during Q2 earnings season, we will update our outlook.
As far as multiples go, I don’t know. Seeing as how the mega caps are pulling up the multiples, we may have to rethink the multiple. If we are to see a target of 4500 for the SPX, which we are currently close to, we need a multiple of 22.5x. If we believe the Street’s estimate of $218.84, we need a multiple of 20.56x, which is still super expensive. As far as the DCF model goes, there’s a range and much of that is predicated on the Risk Free Rate. The 10 year yield is still at 3.8%, what can I say? But the wildcard here will be buybacks. We don’t always realize how much of an effect buybacks have. And a dip can actually move the needle of the SPX by quite a bit. I’m not ready to update my forecast as yet. I want to get through at least the better part of earnings season. So I’ll be working on this in early August, when we have a better idea of how this plays out.
In the meantime, we’re not disregarding the macro and we’ll definitely be covering the data as it comes in and you’ve got our outline (in the Macro section above) of what we’re looking at for the next six months. This is not exhaustive and of course, as always we will continue to update our outlook with new information coming in.
We want to thank you for being with us on this journey. We’re excited to see what the second half of 2023 holds.
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.
Reply