Investors remain broadly cautious on equities. This is completely understandable given the carnage in markets this year, along with the great uncertainties associated with the trifecta of rising inflation, Russia-Ukraine war and “negative shocks” delivered by Fed hawkish policy. But as a counterpoint, one can be constructive if one believes some combination of below:

inflation proves to be less “sticky”
economic resilience is better than feared (“growth scare” not recession)
US economic dominance gained in 2022
bad news is baked into equity valuations
cash is on the sidelines

We have maintained a “2H rally” perspective as we basically believe all 5 of the above are true. And this is the central reason we remain positive on stocks, despite the Fed continuing to talk tough on inflation and the fact that Fed might be raising rates for an additional 6 months:

Fed raising rates is not a binary impact on markets that stocks have to fall
the key is whether Fed will negatively “shock” markets
In 2021, bond markets were ahead of Fed in anticipating “rapid rate hikes”
Since June 2022, bond markets are ahead of Fed in anticipating “getting to Neutral” far sooner
10-year at 2.7% is a 37X P/E for bonds, so should equity P/E really need to fall to 15?

Market internals suggest a “buy the dip” regime is back in force

One internal market measure often cited by Mark Newton, Head of Technical Strategy for Fundstrat, is the % stocks >20% off the 52-week highs:

this measures what % of stocks are in a bear market (20% decline)
this figure surged to 73% on 6/17

and has since fallen to 52%, a big recovery
at 52%, half of stocks are still in a bear market
this is the worst figure since the March 2020 lows

In past 27 years, only 3 other times stocks this oversold

Since 1995, there are only 3 times stocks were ever this oversold as shown below.

March 2003 lows
March 2009 lows
March 2020 lows

Hmmm… so it is evident that 73% is an extreme reading. That is, a lot of bad news is priced in.

BUY THE DIP: Any reading over 54% is the single best to “buy the dip”

Here is the reality. Whenever this figure is below 54%, this is the single best time to “buy the dip”

bottom decile is when % stocks >20% off highs exceeds 53.9%
Median forward 3M, 6M and 12M returns are 7.6%, 11.3% and 20%
As above chart shows, this is the single best “decile” for forward returns
read this as best time to employ “BUY THE DIP” regime

TECHNICALS: But stocks don’t go straight up, as Mark Newton sees S&P 500 4,200 as near-term top

But in the near term, buy the dip doesn’t mean stocks keep going up every day. As noted by Mark Newton, Head of Technical Strategy for Fundstrat, he sees stocks topping near S&P 500 4,200 before a retrace:

generally, he sees first part of August weaker
followed by a rally into mid-September
near-term 4,200 (S&P 500)
some sort of pullback above 3,850-3,875
rally towards 4,400 by mid-September
Reaching either 4,200 or 4,400 or would be a “shock” to investors

COUNTERTRADE: If S&P 500 reaches 4,200, sellside strategists might “lose their minds”

FYI, if S&P 500 reaches 4,200 and 4,400 in mid-September, the sellside might be scrambling.

60% of sellside strategists see S&P 500 ending at 4,300 or lower
so you can see how risk/reward is dynamically becoming more attractive
as interest rates stabilize, oil falls, stocks hold steady and economic data is supportive of falling inflation

JULY PAYROLLS: Could be stronger than consensus but driven by restaurants

Deep Macro, the macro independent research firm using alternative data, is calling for ~325k jobs compared to consensus estimates of 250k.

the upside driver, in this work
is restaurants which should show solid gains
as proxies such as OpenTable data shows demand rose in July

Question:

if upside in jobs is from restaurants
will markets see this as so inflationary that Fed needs to be more “hawkish”?
this is where the market’s reaction function could be changing
while jobs could be seen as strong

we know that wage pressures are easing and even job openings are slowing
so merely looking at payrolls alone is misleading

And as noted by this chart by the FT shared by @carlquintanilla, consumption towards dining out has recovered sharply.

Figure: Fundstrat Portfolio Strategy Summary – Relative to S&P 500