PWA 2022 Year-End Letter, Part 4: Short-Term Bull and Bear Arguments -- And -- Long-Term Setups

We've probably spent ample time of late on our view that the current bear market likely has more downside to play out before the coast is clear, but I'll go ahead and offer up the 3 main (most obvious) fundamental bullet-points explaining why that makes sense to us:

• Odds favor recession (albeit mild in our present view) in 2023.
• Corporate earnings estimates (embedded in stock prices) don't appear to reflect recessionary conditions.
• The Fed, and the ECB, in particular, continue to voice their commitment to tighter monetary policy in order to tame inflation, despite rising recession risk.

If, on the other hand, as some strategists contend, should factors such as the relative strength of the consumer (read service sector activity), a still-strong labor market, inflation continuing to abate, China reengaging with the global economy (although that one could get initially dicey as covid cases spike) and so on, ultimately overcome otherwise recessionary forces, then, in fact, the worst may indeed be over... Which is a possibility we're open to.

But, before we move on, allow me to state the bears' counterpoints to that last paragraph:

PWA 2022 Year-End Letter, Part 3: Structural Change -- And -- Ideology Can Get in the Way

Lots on my mind as we close out a telling 2022... Clients and regular readers know that in our view we are living the early stages of what we'll call a structural regime change... In essence, the world has crossed the threshold that leaves behind a 4-decade long "capital-friendly" regime, which -- as capital-friendly regimes historically do -- culminated in extreme (and politically unsustainable) wealth and income inequality, and enters a new "labor-friendly (read populism)" regime.

 

As this reality evolves, many challenges will emerge, persist (divisiveness -- both intra and inter-nationally -- is a hallmark of the populist ethos), and ring downright depressing to many... But, make no mistake, it comes rich with attractive macro investing opportunities.

PWA 2022 Year-End-Letter, Part 2: The Economy

In June 2017, after decades of parsing volumes of economic data, constructing our attendant views and applying them, we decided to create our own index and formally track the data we felt were most telling in terms of giving an on-the-ground, real-time assessment of general conditions.

We then ran it back a ways to determine how revealing it would have been over the past couple of cycles.

PWA 2022 Year-End Letter, Part 1: Still Icy Waters For Now, But Warmer Temps (in spots) on the Horizon

We'll begin this year's final message with a look back at the market metaphors we explored in last year's Year-End Letter, Part 1.

But first (as in previous Part 1s) we'll list what we believe to be the essential characteristics of the world’s best portfolio managers -- the traits we everyday strive to embody:

Bonus Chart of the Day: "Most Anticipated Recession in History"

As a follow-on to our earlier post, and to my concern over being in the consensus (by the way, our view on next year wasn't consensus when our economic assessment called for it back in August), here's from BCA Research:

Chart of the Day: Pre-Election History Conflicts With Our First Half 2023 View

As clients and regular readers know, we're not bullish on US stocks (as a group) the first half of next year, but we are open to all possibilities.

As I've stated recently, my greatest hesitation on our economic and market view for early next year is that it seems to have become consensus... I.e., all too often (but not always, mind you) the consensus -- particularly when it becomes overwhelming -- gets it wrong.

Stock Market Snapshot and the Go-Forward Setup 12/21/2022 (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Japan's Big Surprise!

Yesterday's late-session action saw stocks moving off their lows, with a bit of momentum that I saw (per the charts) as a technical signal that looked to carry into the overnight futures session and, likely, into this morning's cash session.

Morning Note: Careful With (reacting to) That Headline

Before we get into this morning's brief message, two heads up:

1. Blog posts will be a bit sparse for the next couple of weeks as I devote my writing time to our year-end message.

2. Clients, today is "ex-dividend" day for the majority of the ETFs in our core portfolio... So, if you're one to frequently check your account, you'll note that today's move won't jibe (it'll be lower) with asset markets, as shares will reflect the dividend payout... This Thursday you'll notice a difference as well (it'll be higher), as those dividends are credited to your account(s).

Morning Note: Non-Fundamental Factors and a Quote to Keep in Mind

In yesterday's video commentary I -- in reference to the abundance of short-dated options being traded of late, and to today's massive expiration -- suggested that factors other than fundamentals, and other than the retail trader may be aware of, can move the market in a big way, in a hurry.

Economic Update: Consumer Spending Sustainability in Question (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Stock Market Snapshot: Are Stocks Beginning to Price Recession Risk?

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Key Highlights

So, the Fed delivered the expected .50% rate hike, but, on balance, didn't deliver the bulls the assurance that they're near-done with their quest to put the screws to what, in key areas, remains stubborn, or sticky, inflationary pressures... Hence, stocks finished the day moderately lower.

Morning Note: It's ALL About the Fed, Now and Next Year

While the CPI report inspired yet another wild day of action in equity markets, when we get right down to it, it's really all about what transpires during J. Powell's post-Fed-meeting press conference later today.

In fact, allow me to rephrase the above: Yesterday morning's softer than expected CPI report initially got traders thinking that Powell will play the dove tomorrow, until, that is, they, perhaps, realized that the stuff Powell says the Fed's focused on remained elevated in price, and that a rallying market defies the Fed’s desire to keep financial conditions tight, and that last week's PCE read (which came in hotter than expectations) is the Fed's preferred measure, yada yada. 

The Feel From Small Business

This morning's release of the National Federation of Independent Business (NFIB) -- i.e., small business -- Optimism Index (an input to our "PWA Index") jibes pretty well with our present assessment of overall general conditions, and with this morning's inflation read from the CPI report.

Recall that we see odds favoring recession in 2023, although, at this juncture, we see it to be mild by historical standards.

Morning Note: Stay tuned...

While we labeled the short-term technical setup for stocks "ambiguous," we noted that the technical setup for bonds, and for the dollar, leaned bearish for stocks, and, per yesterday's note, overall positioning suggested that traders were on-balance betting on further declines after last week's drubbing.

Well, the thing about positioning, particularly when it's notably off-sides, is that its unwinding can bring on quite the violent market reaction... This morning is no exception (monster rally!), for, as we suggested in yesterday's note:

History, and today's price action (except in the VIX), says CPI's coming in cool tomorrow (not a prediction btw)...

Fascinating action in stocks today! 

If you told me at the beginning of today's session that the VIX (tracks implied volatility in SP500 options contracts) was going to close up 9.51%, I would've guessed that stocks would take a significant hit on the session. I mean the two have carried a daily negative correlation coefficient this year of -0.8 (that's negative!).

Well, I would've guessed resoundingly wrong! The S&P 500 closed up 1.43% on the session!

Morning Note: The Bulls Need Inflation Cooling and Powell Cooing

This week will be, to put it mildly, interesting... CPI Tuesday, Fed decision and, most importantly, Powell's press conference Wednesday, and then the largest options expiration of the year come Friday... Oh, and not to mention, the European Central Bank and the Bank of England both hold their policy meetings on Thursday.

Economic and Stock Market Snapshot: Signals From the Dollar & Bonds

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: A Virtual Tossup for the Short-Term Equity Market Setup

Last evening's log entry:

12/8/2022

Tomorrow’s PPI number, and next week’s CPI print – while some of the data suggest they could very well come in soft – with regard to equities, it’s all about how they score relative to expectations, and the extent to which traders have price in the consensus bias ahead of time.

Morning Note: The Good Old Days

I'm having to stretch my thinking this morning to come up with something that isn't just a repackaged repeat of my most recent messaging... And, alas, it hasn't yet been a week since our last highlights-of-recent-messaging post... 

So, given some of the conversations I've been having of late with folks who seem gloom-ridden by the current state of political and geopolitical affairs, I'm thinking it's as good a time as any to offer up an essay I penned several years ago in an effort to shine some positive light on otherwise gloomy global setups.

Stock Market Snapshot (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Never Cut and Dried

While yesterday looked a lot like Monday in terms of the move (down) in the S&P 500, the signaling from some other asset classes was markedly different.

For example, Monday saw gold and treasury bonds get whacked every bit as much as stocks, while yesterday, as stocks continued to get shellacked, the 2 turned in nice gains. 

Morning Note: What a Difference a Data Point Can Make!

So, China ramps up its own breakout from covid restrictions and the ISM US Services Index comes in (yesterday) at a surprisingly optimistic 56.5 (above 50 denotes expansion)!

Morning Note: Equity Market Conditions Remain Negative

According to the latest scoring of our own Equity Market Conditions Index (EMCI), the go-forward equity market setup, while still net-negative, has improved a bit over the past month.

Here's the summary from our internal report:

Today's Log Entry

From our internal market log:

12/3/2022

The near-term outlook for equities has grown quite fuzzy… 

We anticipated the strong positive move off of the October low, but defined it as yet another bear market rally, doomed to die near the 200-dma and the bear market trend line… Which is precisely where the SP500 sits today.

Economic and Stock Market Update: Recession Risk Rising (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Key Highlights -- And -- November Wage Data

Here are some key highlights from our latest messaging herein:

Morning Note: Dovey

Last night's log entry:

11/30/2022

Fed-speak right up to the day before Powell’s Brookings speech today was explicitly about smaller (than 75 bps) hikes going forward, although with ultimately a notably higher terminal rate when it’s all said and done, and extremely low odds of a rate cut in 2023.

Brief Stock Market Snapshot (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: The Tilt

While seasonality continues to support the bulls right here, one has to wonder if it can indeed hold up through Christmas -- given generally weakening conditions, souring consumer sentiment, and a Fed narrative that remains notably more hawkish than market actors, in the aggregate, seem to believe credible, on, say, a 7-month time horizon.

Morning Note: Retail Sales, So Far... Meh

Before you go celebrating the higher (record breaking!) retail sales numbers for this holiday season vs last, know that we're talking nominal, as opposed to real, terms (i.e., not counting vs counting inflation).

Morning Note: VIX Approaching Interesting Territory

As I stressed in Friday's video (worth watching), while we're open to the notion that a new bull market is in the near-term offing, it's still not our base case, per the general conditions backdrop and the technical indicators I continue to illustrate.

Economic Update and Stock Market Snapshot: When Consumers Get Covid Relief out of Their Systems (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Chart and Quote of the Day: Recession Looms, However....

This week's "Flash" (preliminary) Composite Purchasing Managers reading dipped further into contraction territory, supporting our thesis that odds favor recession vs continued expansion in the coming months.

However, as I've stated numerous times herein, our current assessment is that any recession here would likely be mild, by historical standards -- due to existing and developing factors of both a domestic and an international nature. 

Wednesday's Wall Street Journal article titled Global Economy Slows, but Seems to Be Faring Better Than Feared agrees with our thesis... The areas I bolded will sound familiar to regular video watchers:

"Business surveys released Wednesday pointed to declines in output across the U.S. and Europe’s largest economies in November. But the figures and other economic readings pointed to a mixed outlook, with some parts of both economies continuing to show resilience despite high inflation and rising interest rates.

In China, the world’s second-largest economy, the outlook is highly uncertain as the country faces a surge in Covid-19 cases. Economists expect a rebound in growth next year as Beijing attempts to ease tough pandemic policies.

A tight U.S. labor market and still strong household balance sheets are supporting consumer spending, the economy’s main engine. A healthy consumer helped power retail sales in October and could keep the world’s largest economy growing at the end of this year. The U.S. outlook depends in part on how it weathers the Federal Reserve’s interest-rate increases aimed at cooling inflation that is running near a 40-year high.

Europe is experiencing less economic disruption from Russia’s decision to limit energy supplies than analysts earlier feared. Many households and businesses in the region are adapting by, for instance, cutting back on energy consumption, said Adam Posen, president of the Peterson Institute for International Economics. European governments also distributed larger-than-anticipated sums of fiscal support to households to help address rising energy and food costs, he added.

“We’re going to end up with more than 75% of the world’s economy actually doing pretty well,” Mr. Posen said. The U.S. and European Union “are likely to have relatively short, not terrible recessions and return to growth possibly by as early as the fourth quarter of 2023.”

The General Setup and a Brief Stock Market Snapshot (video)

This morning's message comes to you by way of video... My monologue on current conditions takes up the bulk of the presentation, although pay close attention to my volume analysis on the daily chart, as it presents a picture somewhat at odds with the price action of this very nice Q4 rally to this point.

All of us here at PWA wish you and yours the best of Thanksgivings!

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: The Market's Thinking Doesn't Quite Jibe With the Fed's

In yesterday's note I casually offered up 5 reasons for bulls to be, well, bullish on equities right here, I then proceeded to turn each on its head to justify a bearish stance... With regard to the bull's narrative, clearly, the presently most telling aspect is the somewhat softer tone emerging from Fedheads of late.

Question then being, are traders prudent in bidding up stocks based on, for example, the Fed walking back its earlier threats to hike by .75% come December 14th?

Morning Note: We Find What We're Looking For -- OR -- The Sage Gas Station Attendant

Anybody looking for signs that the worst is over for stocks can indeed find what they're looking for:

Economic and Stock Market Snapshot (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Key Highlights

Here are some key highlights from the past week of messaging herein:

Morning Note: The Fed Doesn't Relish Rallies Right Here!

In yesterday's note I quoted myself from Tuesday's note... Now, here's me, today, quoting myself quoting myself from yesterday:

"In yesterday's blog post I suggested that the Fed isn't quite yet ready to welcome, nor support, rallying markets:

"It’ll be interesting to see (amid softening inflation reads) the degree to which Fedheads push back against what amounts to a market-induced loosening of financial conditions.""

In yesterday's Wall Street Journal, James Mackintosh pounded home the notion that the Fed indeed does not relish market rallies right here.

Stock Market Snapshot (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Signs the Consumer's Pulling Back

In yesterday's blog post I suggested that the Fed isn't quite yet ready to welcome, nor support, rallying markets:

"It’ll be interesting to see (amid softening inflation reads) the degree to which Fedheads push back against what amounts to a market-induced loosening of financial conditions."

News from Target this morning, however, is, frankly, what the Fed is after:

Morning Note: China, A Not-Small Positive Going Forward

Last night's log entry:

11/14/2022

I listened to all of Lael Brainard’s Bloomberg interview today… As expected she was notably dovish relative to several other Fed members, including Powell… The equity market action (up) while she was talking confirmed her relatively accommodating tilt… Nevertheless, stocks rolled over late in the session, closing notably lower.

Morning Note: Powell's Problem

My dialog yesterday evening with our well-tutored, deep-thinker on markets, on the economy and on history, friend/client Sam is timely and instructive enough to use as this morning's main message.

Sam offered up an accurate depiction of the rate environment of the late-70s/early-80s:

Economic Update: Equity Sector Signals Positive (video)

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Stock Market Snapshot (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Perpetual Works in Progress

While skimming financial gurus' postings on twitter last night, I -- and please pardon my condescension -- found it somewhat comical reading the bears angry, if not disdainful commentaries with regard to yesterday's incredible rally, alongside the celebratory sermons of the bulls.

Morning Note: Acute Myopia and Acute FOMO

Last night's entry to our internal market log:

11/09/2022

Today’s equity market drubbing, if one believes the headlines, was more about an implosion in crypto than it was about looming uncertainty over mid-term election results.

Stock Market Snapshot and the Good and the Bad (for markets) of Gridlock (video)

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Morning Note: Clarity Yet to Come

As you'll see if you catch this morning's yet to be produced technical update video, the short-term setup for stocks is a little suspect right here.

As for sentiment, traders and investors, on balance, lean somewhat more positive than they were, say, early October, which, frankly, is having me a bit short-term hesitant right here... Although the latest scoring of our own fear/greed barometer still reads net fear, which, in a contrarian sense, is still net bullish. 

Morning Note: Key Highlights

While markets await mid-term election results tonight/tomorrow/?, and CPI on Thursday, I'm thinking today's a good day to touch on some key highlights from our recent messaging herein:

Morning Note: 'For Now' Investors Buying the China Rumor...

Friday saw quite the rally, particularly in asset classes and regions that sit prominently in our core portfolio mix.

While the jobs number was billed to be a big needle-mover come last Friday, the rally -- across primarily commodities and foreign equities -- in our view can be mostly explained by persistent rumors that China is diligently crafting a plan to exit its economy-stifling "covid-zero" policy over the next few months.

Well, at a press conference Saturday, Chinese health officials pushed back aggressively by vowing to "unswervingly" stick to the country's zero covid approach.

Economic Update and Last Week's China News Effect (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Stock Market Snapshot (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Jobs Report Not a Needle-Mover

According to the Bureau of Labor Statistics, the US economy created 261k new jobs (vs 195k expected) in October... The unemployment rate rose .2% to 3.7%... Leisure/hospitality up by 35k (surprisingly low), manufacturing by 42k (surprisingly high)... Average hourly earnings were up .4% month-on-month...

Of course, given how the market's trading of late, the issue for traders is how today's report influences the Fed... As I type, equity futures, after going from green to flat on the news, have quickly turned back around and are now trading nicely in the green.

Morning Note: Mixed Messaging From the Fed

Interesting action yesterday... While listening to the official statement issued along with the announcement that the Fed funds rate will be bumped by .75%, Nick and I agreed that stocks should indeed be rallying, as they were at that moment.

Reason being this (new) language in the statement:

Stock Market Snapshot (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Equity Market Conditions Remain Negative (beyond the short-term) for now...

Here's from last month's post where I reported on the then score of our "PWA Equity Market Conditions Index."

Morning Note: It's All About the Vicinity of a Break

So, what to write about on day-1 of the Fed policy meeting?

How about p/e ratios relative to interest rates, or interest rates relative to inflation, or earnings prospects relative to recession risk, or mild recession risk vs deep recession risk, or interest rate differentials among countries vs their respective currencies (and if that's forever the be-all-end-all of what drives them), or the fact that Powell can't do a Volcker given the present-day debt setup, or that the Fed can't slay inflation without hiking rates significantly higher, or the fact that the Fed can't raise rates significantly higher without seriously breaking something in the credit markets (again, can't be Volcker), and, by extension, the equity markets, or yada, yada and yada.

Morning Note: This Week's Minefield

So, let's call them land mines -- the events this week that markets will find themselves tiptoeing through.

Arguably, the potentially most explosive being the November Fed Policy Meeting come Tues/Wed... A .75% rate hike is 100% baked in - so no surprise there... Also, and most-importantly for traders, what markets have recently baked in is a softening of the tone in the post-meeting announcement, and, therefore, in J. Powell's presser.

Economic Update (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Market Snapshot, General Conditions, and the 1981 Analogue (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Compelling Analogue...

Now, before I share what I know will excite a number of our readers (you know who you are 😎), I have to warn you, while analogues can be useful in sizing up probabilities, just because patterns similar to today's have formed during markets past, it in no way means today's pattern will continue to play out in that same manner going forward.

So, as interesting/compelling as the following may seem, let's keep the above front and center in our minds.

Morning Note: Key Highlights

Here are some key highlights from a week's worth of messaging herein:

Stock Market Snapshot (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Earnings Misses Warrant (at least) a Pause in the Rally...

In yesterday's morning note I suggested that it may not take much, in terms of a negative earnings surprise or two, to see traders turn tail amid what is otherwise a pretty bullish short-term setup.

Charts of the Day: Gifts for a Maybe Nervous Fed...

If we're reading between the Fed lines correctly, and they're indeed getting a bit nervous about cracks forming in credit markets, and, therefore, are looking for excuses to walk back their tough talk, this morning's data releases were a gift:

Morning Note: Ideology Aside

Yesterday was an absolute blood bath for Chinese stocks. So much so that, frankly, it was amazing that US stocks were able to turn in a positive performance on the session. 

The signal -- an albeit one-day signal -- was loud and clear; the world's second largest economy being held hostage by a communist party ideologue who just consolidated his power is a most bearish development. 

Morning Note: The Other Pivot to Watch For...

Data out of China last night, while better than forecast, certainly didn't inspire the post-Party Congress rally many, yours truly included (early on), anticipated... In fact, according to the headlines, Xi's successful cementing of authority supremacy by surrounding himself with loyalists, while not delivering a strong stimulus surprise, nor offering up any light at the end of the zero-covid policy tunnel, sent the communist nation's stocks reeling in last night's Asia session... While, simultaneously, it appeared, stealing the oomph from what was an impressive early-session rally in other Asian markets, and in US equity futures.

Stock Market Snapshot (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Economic Update (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Imagine When...

The precariousness of the present setup continues to express itself... This morning has the runaway freight train that is the US dollar gaining speed as traders abandon the yen (contagious for the pound in particular this morning), and as treasury yields give way (higher) to what may be growing liquidity concerns.

And while our base case says odds favor yet lower lows as the present bear market plays itself out, it is indeed time to begin focusing our attention on how best to exploit what we see as emerging macro opportunities.

Morning Note: Morning Note: Q4 Setup -- AND -- Setting Traps

Here's last evening's entry to our internal market log:

10/19/2022

We’re heading into Q3 earnings season and Q4 seasonality with net negative earnings revisions, high readings on our fear gauge, notably net-short positioning among speculators in US equity averages (save for the Nasdaq) and fund managers (per the BofA survey) sitting on the highest cash levels since 2001 -- with 49% of them “underweight stocks.”

Stock Market Snapshot (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Emerging Opportunities...

An overnight rally in equity futures -- aided by impressive earnings results from the likes of Netflix and United Airlines -- has since given way to a rise in the dollar, ostensibly inspired by still-high UK and Eurozone inflation prints, yet more dovish messaging out of the Bank of Japan, and a not-small spike in treasury yields.

Morning Note: Key Highlights

For this morning's note we'll review some key highlights from our latest messaging:

Chart of the Day: Consumer Still Good, For Now...

A key input to our, for now, mild recession thesis remains the relative strength of the US consumer... Bank of America echoed this morning what we heard recently from JP Morgan; that the consumer sits on bank balances notably greater than pre-Covid levels... 2 to 5 times greater according to BofA:

HT Jack Farley

Morning Note: Like What We See, Beyond...

I'd say it's generally the case that as we work our way through the latter stages of a given market cycle that many (if not most) folks either believe that (amid a bull market) stocks will deliver milk and honey as far as the eye can see, or (during a bear market) that market-armageddon is virtually upon us. 

Economic Update (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Stock Market Snapshot (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Behind Yesterday's Action

Another thoughtful, well-constructed comment by my friend Sam in response to yesterday's morning note solicited the following, which will serve as my narrative on yesterday's crazy action:

Morning Note: Not Time to Get Greedy, but...

Stocks were rallying notably in the pre-market ahead of this morning's CPI number. But, as I suggested in yesterday's video (one to watch if you haven't yet), we did not expect a market-friendly read out of September's inflation numbers... The way certain components are measured, along with base effects, simply didn't offer much hope of a downside (upside for stocks) surprise.

Stock Market Snapshot (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Advisor Bearishness Reaching a Bullish Level (but don't hold your breath right here)

This is meaningful in the sense that when the market bottoms, it'll likely coincide with the likes of the following investment advisor sentiment reading (as of yesterday):

Morning Note: Fever Pitch

Per yesterday morning's note, stocks staged a turnaround during Monday's session (going from notably red to a little green) upon Fed Vice Chair Lael Brainard laying out the logical case that the tightening already implemented needed time to work its way through the economy, thus warranting caution... That, however, wasn't sufficient to sustain the positive tone, as stocks slipped back into the red by the close.

Morning Note: Volatile Setup This Week

The setup for this week is, yet again, for volatility, now watch it be blah when it's all said and done 😎.

As for potential market-moving events, in terms of US data, today we get speeches from Fedheads Charles Evans and Lael Brainard, both lean dovish (i.e., if there's the potential for a market-friendly Fed message it'll likely come from one, or both, of these two)... 

Quote of the Day: "10-Week Window"

Gotta come at ya one more time today... And, please, do not construe this as a "take it to the bank" message.

Listening right now to the Market Huddle podcast, and I hear the featured guest (Paul Krake, founder of institutional research firm View From the Peak) make a statement that echoes what I've been suggesting of late about the present (very out of consensus) upside risk to stocks during Q4.

Here you go:

"Let's call it a 10-week window."

"We are 1 weak data point away from one of the greatest squeezes we have seen in years... If you get a weak inflation print next Wednesday*, S&P finishes the year at 4400**."

"Let's put it this way, we've got about 37 clients who we deal with at View From the Peak, every single one of them is either short, underweight, underexposed or underleveraged."

Host Kevin Muir chimes in:

"Yeah, I went to New York last week, I spoke to people, every single one of them, there was nobody, you're the first person I've met who is willing to say out loud that there might be some right tale risk***."

Then Paul goes on to describe how the market is geared to .75% rate hikes and continued rising inflation going forward... But that inflation has actually already peaked and if/when it gathers some downside speed, the reality of recession in Q1 2023, and easy monetary policy thereafter, is something markets will begin to sniff that out as weak data points emerge... And he then reminds of the hugely positive Q4 seasonality (a topic we've broached herein of late as well).

Now, to be clear, I'm not making a call on next week's CPI report, and our base case remains lower levels for the present bear market... I'm simply stating (as I have in recent videos) that, for example, a cooler than expected inflation reading will likely spark a not-small rally, coming off of these very weak sentiment readings, and into what is a historically very bullish season for stocks.

Stay tuned...

*Next Thursday actually...

**That's a 21% rally from here...

***Kevin doesn't read our blog...

Chart of the Day

A common theme/concern among market pros of late has been the prospects for corporate earnings destruction amid the presumably looming recession. This is a concern we've voiced ourselves herein the past few months.

Economic Update and a Look at Market Sentiment (video)

In the opening I mentioned that our index came in at 8.89, meant to say "negative 8.89." 

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Stock Market Snapshot (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Bulls Want Less

So, new jobs came in at 263k against 255k expected. Manufacturing picked up 22k, unemployment 3.5% (from 3.7%), services picked up 244k (although retail actually lost 1,100 jobs). Average hourly earnings up 5.0% (as expected). 

Morning Note: Traders to the Fed, "We Dare You"

For short-term traders, tomorrow's jobs number is a big deal!!

While intuitively you'd think that a good jobs number would be good for stocks, well... not when the Fed is hellbent on slowing the economy in its efforts to cool inflation... I.e., a hot jobs number may make believers out of traders who -- the past few days anyway (even yesterday, while closing slightly lower, saw an impressive rally off of the day's lows) -- have essentially said "we dare you" in response to the following (yesterday) from the Fed:

Stock Market Snapshot (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: The Fed's Behest Will Be the Test

So, after an amazing two-day run, off of (per Saturday's video) severely oversold levels, now the test... No fewer than 7 Fedheads will be taking their respective podiums before the weekend.

Morning Note: China Oomph -- And -- Meh Manufacturing

In Saturday's video I made mention of "mum" being the word of late around China's economy-crippling zero-Covid policy.

Well, if we're looking for a visual that suggests maybe the policy is about to be abandoned, here it is:

Morning Note: Equity Market Conditions a Little Less Bad

In recent posts we've presented a case for a bear market rally, and even dared to hint at the notion (as opposed to the conviction) that a bottom may not be in the too distant (whether in terms of price or timing) offing. 

Now, I need to be clear, market skies are anything but, well, clear, right here... However, and make no mistake, they indeed won't be as stocks begin to form their ultimate bottom this go round. On the contrary, they'll likely be exceedingly dark, precisely then.

Economic Update and an Important Look Below the Stock Market's Surface (video)

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*Note, at 12:20, meant to say "best day in 2 years" not "20"

Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Stock Market Snapshot (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Where's Waldo?

Yesterday's final look at Q2 GDP came in unchanged at -0.6%, with personal consumption besting consensus expectations with a 2.0% annual increase. Initial jobless claims continue to defy the recession narrative, with a sub-200k print for last week. 

Morning Note: Train Wrecks

This from Bloomberg's David Finnerty last evening pretty well sums up the consensus among macro gurus with regard to yesterday's action in the pound:

Stock Market Snapshot: Getting Crowded on the Bear Side of the Boat (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Analysts Getting the Message

Equity futures were nicely green last evening, that is until word hit the wire that Apple instructed its suppliers to pull back on iPhone 14 production, citing reduced demand... On that, futures promptly rolled over.

Recall from our September 20 morning note:

Morning Note: Another Bull Bites the Dust

Okay, so, the June low in stocks wasn't, on a closing basis, the ultimate low after all -- not after yesterday. Yesterday's session confirms the present bear market is still alive and well, making it the 12th longest in history, although the 24% decline (SP500) makes it, frankly, benign, thus far, in the grand historical scheme of things. Even our own (subject to change) downside target doesn't get us to -30%... 

Just throwing that out there...

Morning Note: Taking the Fed at Their Word

No fewer than a dozen (voting and non-voting) Fed board members will be speaking this week... It'll be interesting to see which, if any, of them will waiver from their hawkishness -- as, indeed, they continue to tighten the monetary screws on an already weakening economy.

Quote for the Next Bull Market -- OR -- As (If) You Worry Your Way Through What's to Come

Clients, you've all heard me say during our review meetings that -- while we remain humble, open minded and offer no guarantees -- I probably have more conviction with regard to how we are/will be allocating assets with a 5+ year time horizon than I believe I have at any time during my 38-year career. Followed by "the next 5+ (or 15+) weeks or months are anybody's guess (uncertain, to put it mildly)."

Economic and Stock Market Snapshot (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Stock Market Snapshot (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Equal Odds (technically-speaking), Short-Term...

Check this out...

The circled area in the graph below captures a notable move in the futures market night before last:

The white line represents the SP500 E-mini future contract, the blue is the US dollar index... Yeah, stocks were still reeling in the after hours session following the US Fed decision day. Until, that is, the Bank of Japan stepped into the currency market and sold dollars/bought yen -- sparking an impressive, although unsustainable, rally in equities. 

Morning Note and a Fed Day Analysis (video)

Yesterday's market action was something to behold! As for equities, they were down notably on the Fed's interest rate announcement and statement, then an impressive (although with volatile swings) rally during Powell's press conference, then smashing lower into the close.

Morning Note: Key Highlights

Yeah, it's Fed decision day, and let's just say we've beaten that horse aplenty herein of late... We'll tackle the outcome, and the market reaction, in tomorrow's note.

For today, let's revisit some key highlights from our latest messaging:

Market Snapshot, and What the Fed's Up Against (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: "Fanciful"

Yes, tomorrow's Fed decision is a biggy for near-term market direction. But of course it's beyond the near-term that we're ultimately concerned with... As I hear myself repeating during virtually every client review meeting these days, we -- as we see the world at this juncture -- have high conviction with regard to our present strategy on a 5-year time horizon. It's the next 5 (or 15) weeks or months that remain notably precarious in our view.

Morning Note: Experiences vs Exercise Equipment

Last Tuesday's CPI number sent a jolt through the markets and had pundits talking up a 1% rate hike come this Wednesday. While such odds immediately popped higher (pricing in a 34% chance) in Fed funds futures, they've calmed back down since to a roughly 21% chance as I type.