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The July CPI report is released 8/10 at 8:30am ET and while we do not know if this report will be hotter than consensus, there will be some things to watch in this “hard” inflation report:

headline CPI will fall below “core CPI” driven by falling gasoline
headline CPI of +0.27% (per Cleveland Fed nowcast) is lowest reading in all of 2022
leading indicators of inflation, such as gasoline, travel-data, commodities, suggest “hard” data is way above real-time inflation
July gasoline likely subtracted -38 bps in July CPI
August gasoline could subtract -81 bps in August or 2.5X impact
gasoline could fall to $3.54 by end of August

So, even if there is an ugly July CPI figure, we think any sell-off will be short-lived. Recall, there are many warning some components of CPI remain elevated:

used cars/new cars (see discussion below)
shelter/rent is still rising
higher energy still working its way through pass-on pricing

Gasoline to subtract -38 bps from headline CPI in July…

CPI month-over-month is cooling because a big swing in gasoline as mentioned above. Gasoline prices have not yet caught up to the fall in gasoline futures because of the predictable lags.

in late June, our data science team forecasted the path of July gasoline (see scenario 2)
the actual path was identical to this forecast
this will subtract 38bp from CPI in July (month-over-month)
aka deflation impact

$3.54 gasoline? Gasoline deflation impact on August CPI could rise to as high as 81bp, or 2.5X greater

Analysis from our data science team, led by tireless Ken, shows that gasoline could fall further in August:

they forecast $3.54 gasoline by the end of the month
currently $4.03 (AAA gasoline)
this will subtract -71 bps from headline CPI in August. But if gasoline price falls further (to the start of the year level), -81 bps could be subtracted from headline CPI
this drop in gasoline not yet reflected in Cleveland Fed inflation forecast

The takeaway is CPI could be further decelerating in August. Thus, we expect markets to be sanguine post-July CPI.

USED CARS: Declining sequentially, but gonna show acceleration YoY

Used car prices are still easing month-over-month given the latest data from Manheim:

but the YoY is actually ticking up to +12.5%
this is because in 2021, used car prices fell month-over-month in summer, contrary to seasonals

The seasonal pattern of used car prices is shown below. And as we can see:

in 2021, used car prices fell, while not doing this in 2020 nor 2019
thus, YoY is showing an acceleration due to year-ago factors
this is why the month-over-month CPI is arguably more important

But there remains a shortage of cars for sale. The New Car inventory today stands at a mere 84k.

this is way below the long-term average of 1.3 million
supply chains and auto production are recovering
but there is still an inventory build needed

…auto inventory is modestly better than a few months ago

Auto production has improved so that there is a modest increase in inventories in 2022.

this figure was a mere 65,000 in February
so 84,000 is an improvement
but hardly near the 500k-1 million seen pre-pandemic

STRATEGY: 2022 Bear market was 164 days, or 25% duration of prior bull

Those who followed my work during my JPMorgan days might recall we published a report called the “Guide to Stock Bottoms: Part I.” And one of the notions we discussed is bear markets are mere retracements of the prior advance. Thus, a bear market is unwinding the prior gains.

The 2022 decline is different, as this sell-off is a reaction to aggressive and targeted Fed action. This is a tightening cycle which has attempted to quell demand by forcing risk assets lower. Thus, we do not think the context of a recession-driven bear market dynamic is as applicable.

but the duration of this bear market relative to the prior bull market is applicable
as this was a short bull market and thus, makes sense should be a short bear market

Bear markets are 21% of the prior bull market

Our data science team put together the comparative duration of bull markets and bear markets, and the corresponding ratio:

since 1942, there have been 14 such cycles
median ratio of bear vs bull is 31%, meaning a bear market is roughly 1/3 duration
since 1982, this ratio is only 15%

in 2022, the preceding bull market was 651 days
the current bear market was 164 (using 6/16)
or 25% ratio

As seen below, this ratio is solidly within the ranges seen since 1982.

many investors think “more time” is needed for this bear market
but given the shortness of the preceding bull market 651 days versus 1,309 median
the corresponding bear market should also be shorter

BUY THE DIP REGIME: Stocks already saw fundamental capitulation

And we want to revisit the chart below, which looks at the internals of the S&P 500 — the % stocks >20% off their highs, aka % stocks in a bear market.

this figure surged to 73% on 6/17
this was only exceeded 3 times in the past 30 years
each of the 3 prior instances was the market bottom
we think this is the 4th instance

BUY THE DIP: forward returns strong

And stocks have the best forward returns when this figure exceeds 54% as shown below:

in 3M, 6M and 12M
the best decile for returns
is when this figure is oversold >54%
hence, buy the dip regime is in force

BOTTOM LINE: If equities sell-off after the July CPI, buying the dip makes sense

Our head of Technical Strategy, Mark Newton, sees higher odds of a pullback into August. There are multiple signs he is watching and are discussed in his notes. In short:

he sees chances for S&P 500 to fall back towards 3,900 into August
but this is a buyable pullback

Frankly, a pullback would be welcome, given stocks moved up so sharply in the past few weeks. And our clients remain mostly skeptical. In our conversations, most cite the fundamental risks:

inflation is still high
recession is still coming
EPS downgrades coming
too short to be a proper bear
Fed still hiking

While many cite this, look at how well stocks are reacting to incoming news. The negative pre-announcements and lowered guidance by semiconductors.

if these negative announcements happened in May/June, equities would have gone into a death spiral
today, stocks are down but not that materially
arguably, this shows how light positioning is within equities
if investors are bracing for the worst, bad news itself has less impact
argues to “buy the dip”

33 GRANNY SHOTS: Updated list is below

The revised 33 Granny shots are shown below. The list is sorted by the most attractive (most frequently cited) to least. To be a “Granny shot” the stock needs to appear in at least two portfolios:

$AAPL in 5 of 6 portfolios
$GOOGL $MSFT in 4 of 6 portfolios
$AMZN $META in at least 2
This reinforces our favorable view of FANG in 2H2022

33 Granny Shot Ideas:

Consumer Discretionary: $AMZN, $AZO, $GPC, $GRMN, $TSLA

Information Technology: $AAPL, $AMD, $AVGO, $CSCO, $KLAC, $MSFT, $NVDA, $PYPL, $QCOM

Communication Services: $GOOGL, $META

Energy: $CVX, $DVN, $XOM

Financials: $ALL, $AXP

Real Estate: $AMT, $CCI, $EXR

Health Care: $ABT, $BIIB, $ISRG, $MRNA, $REGN

Consumer Staples: $BF/B, $MNST, $PG, $PM

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33 Granny Shot Ideas: $AAPL, $GOOGL, $MSFT, $ALL, $BF/B, $CSCO, $NVDA, $PG, $PM, $ABT, $AMD, $AMT, $AMZN, $AVGO, $AXP, $AZO, $BIIB, $CCI, $CVX, $DVN, $EXR, $GPC, $GRMN, $ISRG, $KLAC, $META, $MNST, $MRNA, $PYPL, $QCOM, $REGN, $TSLA, $XOM

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TECHNICALS: S&P 500 could pull back to 3,900 = buying opportunity