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Our latest “Fundstrat inflation dashboard” is updated.
In our multiple conversations with investors this week, the main question is why should any investor expect equity prices to stage any meaningful gain from here, in the midst of a Fed tightening cycle and in the midst of great uncertainty around the Russia-Ukraine war, increasing stress in financial markets (UK issue tabled for now) and in the midst of massive gloom of CEOs and Americans and investors.
- in a way, investors broadly only see one type of capitulation ahead
- the stock market needs to “capitulate” with a VIX surge >40, or a 20% further drawdown, or a “hedge fund imploding” or some financial accident.
- mostly, investors see this as the “path of least resistance”
But this is not the only “capitulation” that could lay ahead. There are other forms of “capitulations” that could similarly boost investor confidence, in turn, fueling a firm footing for equities:
- inflation “hard data” could capitulate, syncing up with the “soft data” which have been showing growing signs of falling inflation
- There has been little breakdown in goods inflation (less inflation, but not visible disinflation) and this “payback” could weaken overall inflation
- Fed reaction function could “capitulate” and shift from banging 75bp at every strong CPI print
- Alternately, the Fed could shift to a more “inflation tolerance” view, acknowledging part of core inflation reflects supply chain tightness (transportation services) and recognizing severe lags in data such as shelter/rent CPI component
- The tight labor market could start to “capitulate” and we could see falling job openings and far less wage growth pressures. Jobless claims have been strong, so this has not been the case.
- Interest rates could stop powering higher (“capitulate on yield”) and the surge in 2Y and 10Y have been notable. The US 10Y is now 4.239% while the UK 10Y is 3.913%.
- Why is the UK yield lower than the US??
- We know sentiment has largely capitulated.
- And the BofA FMS (fund manager survey) shows that institutional investors most UW equities in more than 20 years.
- By the way, if the Fed changes its reaction function, we think investors will dramatically shift their expectations for a recession — ala “recession capitulation”
Bottom line. There are multiple pathways for markets to move higher. And while investors are mostly expecting equity markets to capitulate. There are other capitulations that could drive asset prices higher.
FED SPEAK: Fed speakers this week doesn’t dispel notion of a December “pause”
There were multiple Fed speakers this week (see below) and the good news is none of the statements by Fed members created a market tailspin. No comments seemed to scramble new eggs.
But interestingly, what caught our attention, is the fact that several Fed officials emphasized the origin story of inflation:
- Several Fed speakers this week, including Kashkari and Bostic, suggested that 2022 inflation surge is born from “supply chains, energy and commodities” and “didn’t come from the labor market”
- In our view, this is a small but notable change in Fed communication and may not represent the majority view (as previously, Fed officials including Powell, cited labor markets as the source of concern).
- As such, this does suggest that any easing of supply chains (and commodities), could be viewed by Fed as aiding the effort to fight inflation. Fed has been fighting inflation by trying to slow demand, but if supply eases, this should be a support for incoming data to improve.
- The war, by amplifying the surge in commodity prices for energy and food-related, further accelerated inflation.
One could interpret this as the Fed can start to consider easing of supply-chains and commodities and less solely on “core services” CPI
This is a subtle observation. But at a minimum, this suggests investors should also pay attention to supply-chains easing and falling commodity/goods prices. And the news on this side continues to be very encouraging.
Take a look at the supply chain measures, as highlighted by @lizannsonders, and many indicators are back to pre-pandemic levels.
- check. supply chain normalizing
Even freight rates in the US are easing. Note the comments by @craigfuller, CEO of Freight Waves.
- truckload spot rates hit a new “cycle low” in normally peak season
- check. transport costs softening
- this has a huge impact across the service and goods sector.
- read as future easing of core CPI
…Payback in goods continues. Manheim used cars -10% YoY while CPI Used Cars YoY still +7.2%
Which of these measures of used cars is correct?
- used cars is ~5% of CPI
- Manheim now shows -10.4% YoY
- CPI Used Cars shows used cars still +7.2% YoY
- Massive divergence
- Who is right?
- Good deflation underway. Check
JOLTS: JOLTS went into “deflation” last month
Don’t forget the job openings index JOLTS, went negative YoY
- -5.4% YoY
- deflation of job postings
Half of leading indicators are negative YoY
Again, half of the leading indicators for inflation are negative YoY. So the story, in our view, remains that inflation syncs up by CPI correcting downwards.
- just not clear when this happens
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:
- $AAPL in 4 of 6 portfolios
- $GOOGL $MSFT in 3 of 6 portfolios
- $AMZN $META in at least 2
- This reinforces our favorable view of FANG in 2H2022
37 Granny Shot Ideas:
Communication Services: $GOOGL, $META
Consumer Discretionary: $AMZN, $AZO, $GPC, $GRMN, $ORLY, $TSLA
Consumer Staples: $BF/B, $MNST, $PG, $PM
Energy: $CVX, $DVN, $EOG, $PSX, $XOM
Financials: $ALL, $AXP
Health Care: $AMGN, $HUM, $UNH
Information Technology: $AAPL, $AMD, $AVGO, $CSCO, $KLAC, $MSFT, $NVDA, $PYPL, $QCOM
Materials: $CF, $FCX, $LIN
Real Estate: $AMT, $CCI, $EXR