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On the eve of the very consequential March Fed FOMC decision (Wed 2pm ET press conf), many investors are confounded by the relative resilience of stocks (down <2% from pre-SVB highs) versus the carnage in credit world (where many macro credit funds experienced black swan-like drawdowns). And this even as the banking crisis is still an “oozing leak.”

We have 5 observations into this FOMC day:

#1: Fed path has changed. This is not in doubt. At some point in 2023, the Fed was expected to take rates to 5.50% or higher (Dec 2023 FF) and this has now tanked to 4.365% by YE. A full 110bp lower and below the current Fed Funds of 4.58%.
Why? With the fullness of time, we expect this to be more than responding to the bank crisis, but rather the trajectory of inflation has legged lower. The regional bank crisis will tighten credit. The start-up disruption is hurting job growth. And focus on bank stability means consumer focus on inflation is arguably “dead in its tracks.”
#2: Regulators taking steps to prevent further bank panic = solid step to contain crisis. Treasury Secretary Yellen spoke at the ABA (American Bankers Association) today and spoke of willingness to extend deposit insurance beyond $250,000. This is a first step towards allaying fears of a widening of the regional bank crisis.
#3: Bond market remains data reactive and the MOVE index at >100 (currently 162) signals ongoing skittishness. The stock market and bond market are experiencing different paths. The MOVE Index (bond volatility) has been pinned >150 for the past week (This is equivalent to a ~50 VIX.) The VIX is 21 and fell 12% and well off 31 last week.
As we wrote multiple times recently, the surge in bond volatility created significant carnage in credit/rates and led to some high profile losses by macro funds. This is a reason the MOVE index remains elevated.
#4: Equities could be beating bonds because the crisis is ebbing. Most of the pundits are saying stocks are set for a “whallop” as equities have demonstrated resilience even as bonds have experienced wrenching volatility. But looking at sector leadership, Technology/FAANG, suggests equities are rising because the crisis might be ebbing and largely contained within Financials. This has been our view.
#5: Sentiment is terrible, so even bad could be “half-full” relative to positioning. The latest BofA FMS (Fund Manager Survey) shows equity allocations absolutely tanking. The net % OW USA equities is lowest since 2004. Even lower than GFC.
We know sentiment is bad. But when it is this bad, this means even bad news may not push down equities due to positioning. For those who say stocks are expensive, recall S&P 500 P/E ex-FAANG is 14.1X 2024 EPS. This is hardly demanding.

Bottom line: Is +25bp bullish or bearish? Both, but stocks might rally anyways

Our takeaway is that consensus dismisses stocks relative strength as signs that stocks are only held by “oblivious investors” unaware that EPS downgrades will hurt stocks. But perhaps the 5 points above suggest stocks are leading indicators.

equity sentiment is terrible, valuations are low
crisis might be ebbing
Fed path of hikes is lower

Doesn’t this sound like stocks could rally on either a +25bp or no hike? Either way?

Watch these 4 signs to see first signs the crisis ebbing

As we have mentioned recently, we get the sense that investors are being patient. They want to see how markets react to these multiple actions and how the Fed responds to the market turmoil. This means stocks are buffetted by these aftershocks.

The natural question is what are the signs this crisis might be ebbing?
– MOVE Index (bond volatility) below 150 (162 now) and hopefully settles below 125
– VIX Index falls below 20
– First Republic ($FRC) comes to a resolution
– Regional bank deposits stabilize (Tables 9 and 10 of Fed’s H8).

First Republic still remains unresolved as evidenced by the volatility in the equity and bond prices. The best case scenario is for $FRC to remain independent.

the actions by the rating agencies last week and Sunday to downgrade seem so backwards looking and essentially impeded FRC’s ability to fund cost effectively
a “white knight” might still emerge

As for sentiment, this remains so bad that the BofA FMS shows allocation to US equities is at the lowest level in 20 years. Wow.

that is a sign of terrible sentiment

RESILIENCE: S&P 500 back above 20D and 200D

The recovery in stocks has been impressive and now the S&P 500 closed at 4,003, above both the 200D and 20D moving averages:

this is considered technically positive as it suggests the stock market remains in a bullish trend
the turmoil last week caused disruption but the uptrend looks intact

SECTORS: Technology / FAANG lead, similar to lows post-GFC

Take a look at sector performance YTD or even since the Oct 2022 lows:

leadership has been clear
Bitcoin, Technology and FAANG
These were the groups hardest hit since 2021/2022 highs
and in our view, signal the bottoming process underway

This looks an awful lot like the bottoming in 2008. From Nov 2008 structural lows to the March 2009 lows, only 2 sectors were positive:

Tech ex-FAANG
FAANG

We view Oct 2022 as the final low. And thus, we continue to see Technology as our #1 sector idea. This is also positive for Bitcoin and digital assets.

CALENDAR: Key incoming data starting March 19

The big event this week is FOMC. That is the only real macro data point:

~~3/7 10 am ET Powell testifies Senate~~ Hawkish
~~3/8 10am ET Powell testifies House~~ Neutral
~~3/8 10am ET JOLTS Job Openings (Jan)~~ Semi-strong
~~3/8 2pm ET Fed releases Beige Book~~ Soft
~~3/10 8:30am ET Feb employment report~~ Soft
~~3/13 Feb NY Fed survey inflation exp.~~ Soft
~~3/14 6am ET NFIB Feb small biz survey~~ Soft

~~3/14 8:30am ET CPI Feb~~ Tame
~~3/15 8:30am ET PPI Feb~~ Tame
~~3/17 10am ET U. Mich. March prelim 1-yr inflation~~ BIG DROP
3/22 2pm ET March FOMC rate decision
3/31 8:30am ET PCE Feb

37 GRANNY SHOTS: Updated list is below:

The revised 37 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. The list of tickers and their respective themes is shown below.

Communication Services: $GOOGL, $META, $OMC

Consumer Discretionary: $AMZN, $GRMN, $TSLA

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

Energy: $DVN, $EOG, $MRO, $OXY, $PSX, $VLO, $XOM

Financials: $AXP, $JPM

Health Care: $AMGN, $HUM, $ISRG, $MRK, $UNH

Industrials: $GD, $JCI

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

Materials: $NUE

Real Estate: $AMT