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Our latest “Fundstrat inflation dashboard” is updated.

Inflation expects in swaps markets are tanking and 12M forward now +1.7% (slide 5)
this was 6% in June 2022, so forward expectations have DEFLATED
Indeed.com labs data shows job openings fall to lowest in 2022 (slide 17)
Manheim used car prices tank in August down 4% (slide 30)

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Equities were left a flaming wreck after Jackson Hole (see chart below), with S&P 500 falling ~7% in the ensuing two weeks. But have since managed to stage a bounce in the last few days.

Flaming Elmo GIFs | Tenor — Source: GIF.com

Fortunately, the technical damage could be limited, if stocks manage to sustain a bounce from here. As shown below, using “simple trendlines,” we can see that both:

S&P 500 and NASDAQ Composite both respected the trendline in place
since June 2022
in our view, June 17, 2022 was the date of fundamental capitulation
as that was the date inflationary pressures reached “maximum upside acceleration” on the heels of a strong May CPI, plus negative U Mich consumer inflation survey, plus Fed decided to move to +75bp hike
and this recent pullback touched that corresponding trendline

In fact, taking a further step back, stocks have seemed to find footing along the trendline connecting the March 2020 lows and June 2022 lows. Thus, even as challenging as the last few weeks have felt, one could suggest the uptrend/bull market remains solidly intact.

Even with bad September seasonals, a roadmap exists for positive catalysts into month-end

The August CPI released on 9/13 is particularly important for markets. And it looks like the inflation-swaps and bond markets are expecting outright deflation. We have highlighted this multiple times.

deflation month-over-month of -0.2% (August)
12m inflation forwards are now 1.7% down from 6% in June 2022
wow, inflation expectations are tanking
at a time when Fed officials are still talking tough on inflation
we think this remains a setup where downside reads in inflation means Fed has less work to do

September is seasonally the worst month of the year, and this is particularly true during mid-term election years, as discussed many times by Mark Newton, Head of Technical Strategy for Fundstrat. That has added to the pessimism about equities in general, and there are some positive events on the horizon:

today, AAII (American Association of Individual Investors) retail sentiment was released and was extreme bearish reading of -35 (% bulls less % bears) and mirrors the -38% reading on June 10th
this is a contrarian signal and extreme bearish readings bode for equity upside
on 9/13, August CPI is released and we expect CPI month-over-month to show inflation barely increased in the month. In fact, CPI month-over-month for the next 5 months expected to show sharp slowing
August CPI mom: -0.2%
Sept CPI mom: -0.1%
Oct CPI mom: +0.0%
Nov CPI mom: +0.0%
even leading indicators for core services inflation like housing are rolling over visibly
today, Redfin noted that San Francisco home prices fell 7% YoY, a sizable decline
and surely suggesting OER (owners’ equivalent rent) is set to similarly cool
On 9/14, Sept PPI released and as we noted, the plunge in ISM prices paid portends lower PPI
Gasoline is already 25% off its peak and with oil declining to low-$80s, gasoline is set to ease further
On 9/16, U Mich Consumer survey released and possibility for lower inflation expectations = key for Fed
On 9/21, September FOMC and this could be another “sell the news, buy the event”

In other words, over the course of this month, the incoming cadence of data could support the notion that the inflationary pressures in the US are past the peak. And perhaps more importantly, could be falling quickly.

Additonally, there may be a few incremental development supportive of equities:

the 10-year interest rate is possibly stalling at 3.32%, not yet managing to match the 3.5% high on 6/14
our Head of Technical Strategy, Mark Newton, believes yields could be peaking soon
similarly, the dollar index $DXY rallied 15% YTD and Newton also expects USD to be reaching a level where other currencies could start to rally (EUR oversold, etc)
falling yields and falling USD, in our view
would be supportive of further gains

Combined with the above incoming economic data and these could be supportive of equities building on strength in September.

August ISMs show “% reporting lower prices” is ABOVE long-term average = PPI set to fall

Trends in pricing were surprisingly positive in the August ISMs, both manufacturing (9/1) and services (9/6). Take a look at the specific question:

% reporting “lower” prices paid
August ISM manufacturing: 26.7%
(average since 1948: 10.5%)
August ISM services: 8.1%
(average since 1997: 7.9%)
those reporting “lower prices paid” is actually ABOVE long-term average
again, above long-term average
this tells us pricing pressures are improving rapidly

And as we highlighted a few weeks ago, we believe this bodes well for PPI to decline sharply in coming months. As the chart below illustrates, ISM prices paid leads PPI by several months.

In case you are wondering, there are visible improvements in those responding “higher prices paid” and both are well off their peaks.

in fact, for manufacturing, this is back to BELOW long-term average

HOUSING: Falling home price is overall positive as this will cool shelter inflation

Housing data continues to point to weakening prices as higher interest rates dramatically impact affordability. While there is a concern that a downturn in home prices could lead to a recession, the more important influence, in our view, is weakening home prices cools inflationary pressures:

RedFin shows today that home prices in San Francisco are down 7% YoY, an outright decline

And this is not entirely surprising given affordability nationwide is impacted by higher interest rates. The NAR Housing Affordability Index is at an all-time low.

But as Goldman Sachs notes, the combined impact of all these factors is shelter inflation is set to slow. Shelter is 33% of the CPI basket, so a slowing here goes a long way towards reducing overall inflationary pressures.

And their shelter inflation tracker, tracking alternative rent measures, already looks like it has peaked. In fact, two of these components, Zillow and Apartment list show the drop in month-over-month changes are falling like a rock.

JOB OPENINGS: Latest Indeed Labs data shows openings fall to lowest level in 2022

The latest indeed.com data shows job openings have fallen to the lowest levels in 2022.

and based on the regression by our data science team, led by tireless Ken
suggest JOLTS likely shows a sizable downside read for August JOLTS

JOBS: Employment gains in past 5 months primarily driven by part-time workers

But this weakening in job openings does fit with what appears to be more meaningful weakness in labor markets. Take a look at the comparision between the BLS establishment survey (payroll figures) versus household survey (used to calculate unemployment rate):

for the last 5 months
NFP shows +1.888 million jobs added
Household survey shows only +274k jobs
Household survey implies only 50k-55k jobs added each month
hardly a barn burner employment market

In fact, looking at the types of employment below:

in past 5 months, per household survey
full-time employment is down -383k
part-time employment is +335k
multiple job holders (in both of above) +377k

STRATEGY: 2H rally view intact

Given the list of market worries above, the natural question is how is there a positive thesis on equities into 2H2022? Here is our take:

our continuing analysis shows leading indicators point to disinflationary/deflation
US corporates remain impressively resilient, enduring the pandemic global shutdown with cost discipline
and US corporates are weathering the inflation surge impressively as well
the US economy has managed to absorb rapid Fed rate hikes so far
and US economic relative positioning far stronger in 2022
US net beneficiary of higher energy prices, absolute and relative (US exports oil)
US is on-shoring assets = future competitive advantage
US has labor issues, but this will be solved by either automation or rise in workforce participation
investor sentiment is rock bottom and worse than GFC by some metrics
fixed income markets show far less inflation in swaps, etc
and while many believe “bonds are getting it wrong” including Fed officials
the drop in energy and housing and other indicators are supportive of this lower inflation outlook
hence, Fed could do far less tightening as the market is doing Fed’s work

Bottom line. We see 2H rally thesis intact.

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

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

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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