“In the stock market, the most important organ is the stomach.” — Peter Lynch
After opening the week with what our Head of Technical Strategy, Mark Newton, called a “sideways grind,” markets turned upwards on Wednesday, with all 11 sectors of the SPX rising. Newton noted that “463 names within SPX rallied on Wednesday out of 500, constituting a ‘90% Up Day.’” The trend continued for the rest of the week, propelling markets to a winning week, month, and quarter.
At Fundstrat, there are expectations for more of the same in April, a historically positive month. “Technically speaking, markets certainly seem better as March has come to a close than they appeared at the end of February,” Newton said.
Lee believes the seasonality effect could be further boosted by investors who are currently bearishly positioned. “The key will be whether inflation is falling faster than expected,” he explained.
With the February PCE coming in today (Friday) at 0.3%, below expectations of 0.4%, that might indeed be the case. Lee also views it as significant and positive that the U. Mich. March final one-year inflation expectations came in at 3.6%, down from 3.8% two weeks ago and 4.1% in February.
“For most of the last 30 years, consumers consistently viewed inflation as higher than official CPI data,” Lee noted. “The average spread was greater than 100 bp – consumers consistently saw inflation 1pp above CPI. But this has reversed recently. The takeaway is the CPI may not be the best way for the Fed to judge inflation, particularly if consumers see it as being lower. As a result, the Fed could have a reason to tolerate slower progress on inflation.”
Much of the recent positivity in markets has been driven by strength in Technology, and Newton believes the sector could continue to show strength. “Technology is showing itself as an area for further outperformance into early to mid-April. It’s a must to stick with Technology, even though Technology has gotten overbought. Additional gains are possible.”
Former laggards in the Semiconductor space did well this week, Newton noted. He joined Head of Global Portfolio Strategy Brian Rauscher in singling out $INTC. Newton pointed out that $INTC made a meaningful consolidation breakout above the 31 level this week, while Rauscher described the chip giant as “one that investors should not miss.”
Lee continues to also be optimistic on Technology, though for different reasons. “The cost of funding for investment grade Technology is now 4.98%, which is 63 bp below that of banks,” he observed.
As for the banking sector, Lee argued that although the ripple effects from the failure of SVB are widening, investors have stopped panicking. Going into April, the VIX has returned to pre-March levels, falling to 19 after rising as high as 30 during the height of the turmoil sparked by SVB. As Lee noted, “This normalization of spread is often a sign investors see the worst of the crisis behind.” Lee was also positive about the fact that the inversion of the Vix term structure (4M VIX was less than 1M VIX between March 10 and March 15) had righted itself. “This normalization has historically been a good sign,” he said.
That is not to say that the banking turmoil is necessarily over. “It does not look like this is a full-blown crisis, but we are in the middle of it so one cannot necessarily have high conviction in either direction. But our case remains that the outcome ultimately favors staying long equities into the end of April,” he said.
Eurozone inflation fell significantly in March to 6.9%, down from 8.5% in February. Much of the decline was attributed to a drop in energy prices, as core inflation rose slightly to 5.7%, up from 5.6%.
In an echo of Cold War-era tactics, Russia has detained a U.S. journalist on accusations of espionage. Russia’s Federal Security Service (FSB) claimed veteran Wall Street Journal reporter Evan Gershkovich tried to “obtain secret information” related to the “Russian military-industrial complex” on behalf of unspecified U.S. government entities. The Journal issued a statement vehemently denying the allegations.
Prominent scientists and tech luminaries including Elon Musk, Steve Wozniak have signed an open letter calling for a universal six-month pause on the training and development of AI systems more powerful than the recently released GPT-4, so that “a set of shared safety protocols for advanced AI design and development” can be jointly developed and implemented. The signatories argued that “AI systems with human-competitive intelligence can pose profound risks to society and humanity” and thus require a “level of planning and management [that] is not happening.”
Meanwhile, Italy has blocked Chat GPT pending an investigation into alleged violations of privacy laws. Officials there claim that the AI chatbot violates the EU’s GDPR through “the mass collection and storage of personal data” and also faulted the Open AI for allegedly failing to implement an age-verification system to protect minors from accessing “unsuitable answers.”
And finally: Finland will become a part of NATO after a unanimous vote by Turkiye’s parliament to ratify the Scandinavian country’s bid to join the alliance. Sweden’s application remained pending as of this writing.
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