Steep recovery in equities post-CPI/FOMC minutes sell-off shows “bears are trapped.” S&P 500 has never made new lows when it recovers above 200-week moving average >15 weeks (this cycle 25 weeks and counting).

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On the heels of the post-CPI/post-FOMC minutes equity sell-off Wednesday, the bearish narrative took a momentary victory dance (Fed Barkin said more to do and FOMC minutes showed staffers expect a recession). But by Thursday’s close (4/13), post-soft PPI, equities pushed to one-month highs and put S&P 500 4,200 back into play near term.

• The bearish thesis is largely anchored on the view a US hard landing is inevitable, following rapid Fed hikes, further solidified by the festering regional bank crisis. And this is why markets fell hard post-March FOMC minutes release which showed Fed staffers base case is now a “mild recession.”
• While not overlooking the hard-nosed analysis by Fed staffers, recall, this is the same team that seemingly made some forecast errors in late 2022 as their models were impacted by the Haver Analytics hack (did not update). Moreover, their conclusion of a mild recession is hardly revelatory given the widely held consensus belief in this and given the extreme cautiousness of even CEOs, who became cautious early 2022. The issue is this has become the most widely anticipated recession ever, which raises the question whether a “rolling recession” has already passed.
• Relative to this bearish consensus view (the parade of negative commentary yesterday affirms this is the case), the upside case for stocks rests on these elements
• First, inflation is falling faster than consensus expects. Foremost, the March CPI and PPI show that “higher for longer inflation” narrative is sort of dead. In fact, the primary reason core CPI has remained high is the “shelter” component (+8.1% YoY) while core CPI ex-shelter 3M SAAR is 2.6%, which is within Fed target of ~2%.
• Penn State researchers developed an ACY Marginal Rent Index (link), which measures the real-time cost of rents, rather than BLS’s lagged “shelter” measurement. Using this index, Core CPI MoM is currently NEGATIVE and 3M SAAR is -7% and -0.8% YoY. See the point? Using non-lagged measures of inflation and we can see the Fed might be doing too much monetary tightening. Looking at their white paper, this alternative measurement of rents looks far more useful (see below).
• Second, Fed could thus be done raising rates sooner than many expect. FYI, one last hike is also bullish as this, by construct, means the Fed will soon tolerate easing financial conditions. This should drive lower bond (MOVE Index) and equity volatilities ($VIX). The MOVE has fallen sharply and at 119, backed way off 180 a few weeks ago. VIX now has a 17 handle (17.8). Can we name a bear market where the VIX was below 20 for a sustained period?
• Third, equity market and even bond market, to an extent, are arguing the opposite of a recession. The S&P 500 has now spent >25 weeks above its 200 week moving average. Since 1950, there are zero instances of the S&P 500 making a new low once it has recovered above the 200-week mavg and spent at least 15 weeks there. In fact, once passing this milestone (>25 weeks), the 1M, 3M, 6M and 12M return have been positive every single instance (n=12).
• By the way, we have written multiple times about why Oct 12, 2022 is the low for this cycle. And this view was strengthened by the “rule of 1st 5 days” which shows when stocks >1.4% in 1st 5 days, post a negative year, stocks gain double-digits every time with median gain 26%. And recall, since 1950, there is no instance of S&P 500 posting 2 consecutive quarterly gains in a bear market. S&P 500 posted gains in 4Q22 and 1Q23. This means we are 6 months into a bull market.
• As for the festering bank crisis, it seems to be cooling. The most recent Fed Balance sheet (H.4 link) shows total borrowings by banks is down -$11.4b, including the newly created BTFP facility (-$7.2b). So public panic about banks is stabilizing and hopefully fading (MOVE index down below 125 is a good sign).

BOTTOM LINE: Equities are in a bull market, even if consensus is “trapped bears”
Bottom line, the S&P 500 is up >8% YTD led by
– Technology +20%
– FAANG +36%
– Discretionary +18%
– Bitcoin +83%
– Ethereum +120%

Yet, consensus continues to argue stocks are “mispriced” and will soon fall on the next downside catalyst. Many negative catalysts have emerged in 2023 and the Fed FOMC members keep talking tough on rates.

• But the message on stocks is far different and we believe if inflation falls as quickly as we expect, the Fed will tolerate easing financial conditions
• Hence, bears are trapped, in our view.
• We see S&P 500 reaching >4,750 by year end.

Post-CPI/Post-FOMC minutes, the takes by pundits was mostly negative as shown below.

And now S&P 500 has made a nice upside breakout. This is another sign of “bears are trapped”

ECONOMIC CALENDAR: Key is inflation, and April so far is “tame”

With the exception of the Atlanta Fed wage tracker, incoming data for inflation in April (March data) has been tame).

Key incoming data April

• 4/3 10am ISM Manufacturing Employment/Prices Paid March Tame
• 4/4 10am ET JOLTS Job Openings (Feb) Tame
• 4/7 8:30am ET March employment report Tame
• 4/12 8:30am ET CPI March Tame
• 4/12 2pm ET March FOMC Minutes Tame
• 4/13 8:30am ET PPI March Tame
• 4/14 7am ET 1Q 2023 Earnings Season Begins
• 4/14 Atlanta Fed Wage Tracker March Semi-strong
• 4/14 10am ET U. Mich. March prelim 1-yr inflation
• 4/19 2:30pm ET Fed releases Beige Book
• 4/28 8:30am ET PCE March

Core CPI, ex-shelter, is running near Fed target of ~2% (3M saar). And this really highlights that shelter/housing is causing core CPI to run >5%.

And as we mentioned, the Penn State ACY Index captures a more real-time view of shelter. And as shown below, recalculating core CPI using this index shows:

• inflation has hit a brick wall
• and is falling like a rock
• I mean look at the difference, its shocking

As these researchers note, the difference between their calculation and CPI is sizable. The list is extensive and shown below.

PPI also showed tame inflation as well.

In fact, incoming data on inflation has been soft since the start of March (the start Feb data) and supports the idea that the “hot” inflation readings in Jan (reported in Feb) was the anamoly.

Key incoming data for March 2023

• 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 DOVISH
• 3/31 8:30am ET Core PCE deflator Feb Tame
• 3/31 10am ET U Mich. March final 1-yr inflation Tame

STRATEGY: Staying above 200 week moving average = good

The S&P 500 has been above its 200 week moving average for 25 weeks now as shown below. On Oct 12, 2022, the S&P 500 touched this level and has since moved higher.

In fact, as the table below shows, in the 12 instances of crossing above 200 week moving average and staying there for 25 weeks:

• S&P 500 higher in 12 of 12 instances
• for all periods, 1M, 3M, 6M and 12M
• doesn’t this sound like a bull market?

We arrived at “25 weeks” based upon the table below.

• since 1957, there have been multiple crosses above 200 week
• but many failed and led to new lows
• the longest of these “fake recoveries” is 13 weeks
• thus, we looked at 15 weeks as the threshold

STRATEGY: Cyclicals outperforming more than Defensives

We have highlighted the 2-yr relative performance of the major groups below and as shown, the leadership is more cyclical.

• Leading are Tech/FAANG, Energy, some Industrials, Materials and Staples.
• The drags on S&P 500 performance have been Utilities, Financials, Telecoms and Healthcare.
• In other words, the drags have been largely Defensives.
• This is counter to those saying this rally in 2023 is Defensive stocks.

And our base case for April remains a strong >4% rally, following the pattern of “Rule of 1st 5 days.” The Rule of 1st 5 days looks at years when S&P 500 gains >1.4% in 1st 5 days and is negative the prior year.

• This has happened 7 times since 1950: 1958, 1963, 1967, 1975, 2003, 2012 and 2019.
• Based upon those 7 years, April implied gain is +4.2% and was positive 6 of 7 times (only 2012, -0.7%). This implies +175 points, or S&P 500 >4,275 by the end of April.

A gain of 4%, or +172 points would put S&P 500 >4,250 by the end of the month. And we think this would ultimately force a bear capitulation.

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