Morning Note: IF

While present stock market levels, and recent action, seem bewildering to some, when we consider the soft-landing narrative that many are now embracing (along with the other points I've made herein of late), and the history of rallies closely preceding past recessions, in reality, it’s not all that puzzling how things -- non-fundamentally driven as they may be -- have played out since last October’s bottom.

Now, per BCA’s Doug Peta, IF a mild recession scenario ultimately plays out and we see a 15% hit to corporate earnings (a typical recession brings a ~25% hit), and were stocks to maintain their 20ish price-to-earnings ratio (p/e), the SP500 would experience a 15% decline… But of course a 20 p/e could be very fragile in a double-digit market selloff… I.e., a mere 15% hit to stock prices amid even a mild recession would be quite the optimistic scenario.

Thus, as I’ve maintained from the get-go, a meaningful second leg down in equities is a virtual assurance IF/when we end up in recession.

Of course the essential question therefore being, is recession on the foreseeable horizon?

Our PWA Index says such risk remains elevated, although less so in recent months... As it presently stands, the service sector continues to do the heavy lifting.

Thing is, while a number of metrics have indeed improved, there appears to be some potential (forward-looking) under-the-surface cracking that could ripple its way through the service side of the economy in a manner that could ultimately usher in what we, at this juncture, can no longer call the most anticipated recession in history.

Cases in point:

• US corporate bankruptcies during the first half of this year are just a hair lower than 2022’s full-year total.

• 30 and 90-day delinquencies (according to the Federal Reserve Bank of NY) for virtually every manner of loan, save for student, are on the rise (credit cards and cars most notably).

• Speaking of student loans, Covid forbearance (the reason they’re the exception to the preceding bullet point) ends on Sept 1, with payments resuming on Oct 1… Problem being, some 53% of those borrowers increased their credit card debt, 36% took out new car loans, and 15% added mortgages and unsecured personal loans since they got that soon-to-expire reprieve.

Back to our index, here’s the graph which shows that notable move off of the May low:



While the recent trajectory — and this morning’s GDP, jobless claims, etc., releases — is encouraging, and bolsters that soft landing sentiment, while we remain openminded, we’re still looking at only 23% of our inputs scoring positive, 40% negative and 37% neutral.

I.e., despite the bear-capitulation (and its attendant stock buying) that we’re seeing in the sentiment indicators, and, anecdotally, as we listen to even the strategists we most respect (well, some of them), we’re nowhere near an all-clear signal right here… In fact, I’ll, alas, argue that, if anything, bears capitulating -- amid the current economic backdrop, and a Fed that appears not the least bit eager to do anything but get inflation down to target -- increases the risk of something not-small to the downside as we meander into the second half of the year.

Clearly, to us at least, it remains prudent to keep hedging portfolios right here.

Stay tuned...

Asian stocks leaned green overnight, with 9 of the 16 markets we track closing higher.

Europe's definitely green so far this morning, with 15 of the 19 bourses we follow trading up as I type.

US equity averages (bucking a sharply higher dollar, and interest rates) are up to start the session as well: Dow by 74 points (0.21%), SP500 up 0.58%, SP500 Equal Weight up 0.31%, Nasdaq 100 up 1.23%, Nasdaq Comp up 1.00, Russell 2000 up 0.16%.

Worth noting: While US averages are enjoying a nice rally this morning, it's not an all-boats scenario -- at least not early on... As I type, 40+% of S&P 500 members are actually in the red, as are over half of the companies that comprise the Nasdaq Comp.

As for yesterday’s session, US equity averages were mixed: Dow up 0.2%, SP500 down 0.7%, SP500 Equal Weight up 0.2%, Nasdaq 100 down 0.4%, Nasdaq Comp down 0.1%, Russell 2000 up 0.7%.

This morning the VIX sits at 12.93, down 1.97%.

Oil futures are up 1.19%, gold's down 1.42%, silver's down 3.12%, copper futures are down 0.90% and the ag complex (DBA) is down 0.31%.

The 10-year treasury is down (yield up) and the dollar is up 0.91%.

Among our 34 core positions (excluding options hedges, cash and money market funds), 14 -- led by XLC (communications stocks), FEZ (Eurozone equities), XLK (tech stocks), EWW (Mexico equities) and JNJ -- are in the green so far this morning... The losers are being led lower by SLV (silver), Dutch Bros, GLD (gold), EWZ (Brazil equities), and ICLN (clean energy stocks).

Sadly, on student debt:

In order to slow the rising cost of college tuition, the federal government initially subsidized student borrowing and then forgave much of what had been borrowed. Both measures are guaranteed to make tuitions rise much faster than they would have otherwise, while saddling America’s future middle class with debt.

They also transfer billions from future taxpayers, most of whom will never earn college degrees, to big-name universities, many of which already possess endowments worth billions.

--Howe, Neil. The Fourth Turning Is Here 

Have a great day!
Marty