“To hell with circumstances; I create opportunities.”
~ Bruce Lee

Good evening:

The story of the past few weeks has been one of sideways chop: The S&P 500 is virtually unchanged from where it began April at 4,124. Over the past six months, the benchmark is up about 10%, and it’s still up nearly 8% year-to-date, despite bearish sentiment, banking woes, inflationary pressure, and recession fears. Pick a negative headline — it’s probably flashed across the news this year. But thus far, big bank earnings have been largely positive, while the Fed’s interest-rate hiking campaign continues to trickle in markets. Overall, it was another quiet week.

Unemployment remains near a record low, but the labor market has softened. Home sales in March fell 21% year-over-year amid low inventory, high mortgage rates, and buyers and sellers alike who refuse to move. More importantly, inflation is falling. Since the inflation rate peaked last June, each of the past 10 annualized inflation readings has been lower than the previous level.

“I think overall, it just shows you businesses are managing through this pretty well,” said Tom Lee, Head of Research. “I don’t think the economy is as dire as many people think it might be. So I think it’s been better than expected.”

En route back to Washington on Monday after a Congressional recess, House Speaker Kevin McCarthy opened the trading week on the NYSE with a speech in which he proposed a one-year debt-ceiling increase conditioned on spending cuts and regulatory loosening. Says Fundstrat’s Washington Policy Strategist, Tom Block, “that idea is unlikely to draw much support from the Senate or White House.”

Markets do not yet seem overly concerned with the issue, since the debt-ceiling “X date” is not expected for at least a few months. Instead, investors this week paid more attention to the latest quarterly results and the possibility of recession this year. Lee believes that although it’s still early in this earnings season, results are “better than feared.”

As for the market, Lee noted at our weekly research huddle that “the percentage of up days is starting to get to bullish levels. It’s over 60% right now, and really, once you’re above 55%, it’s more of a ‘buy the dip’ environment versus ‘sell the rip.’”

Though also bullish over the long term beyond a few weeks, Head of Technical Strategy Mark Newton sees both seasonal and breadth signs that opportunities for “BTD” might materialize soon. “April historically has been a great month, and I still think it’s right to be long,” he said. “But the cycles suggest that we probably have another one or two weeks where markets can try to rally out of this into the final week of April. I suspect that we’re going to pull back toward 4,000 and potentially 3,900 sometime in May.”

Newton also cited some recent slowdowns in breadth. “Admittedly about 80% of the stocks are above their 20-day moving average, but when it comes to the 50-day, there’s only about half of what we saw on the February peaks,” he noted. “We’re nearing an important juncture in the market where stock indices will really have to prove themselves at this point for us to think that the rally will continue uninterrupted. We really need to see Financials kick in a lot better, to see the Healthcare move really start to accelerate, and to really see Technology continue higher, uninterrupted. I’m not certain if we can do that.”

Lee sees a re-emerging pattern that could signal higher profits in the second half of the year. As our Chart of the Week shows, during the profit recessions of 2016 and 2020, three to four quarters of negative year-over-year EPS were followed by upswings. This might be happening again now: “The nadir in YoY EPS growth continues to be tracking to 2Q23 (maybe 3Q23),” Lee noted, observing that this supports his longstanding thesis that October 2022 represents the market bottom.

Added Lee: “Historically, equities bottom 11 to 12 months before EPS bottoms.”

Elsewhere

The EU approved a $47 billion equivalent to the U.S. CHIPS act, motivated by a similar desire to mitigate potential East Asian chokepoints in the semiconductor supply chain. The European Chips Act includes funding for manufacturing incentives, education and training, and research.

China’s economy beat expectations for Q1 2023, growing 4.5% YoY. The strong results were driven by increased household spending and factory activity after the country’s December 2022 emergence from its COVID lockdown.

A drop in global rice production this year will cause a deficit of 8.7 million tons, the largest shortfall since the 2003/2004 shortfall of 18.6 million tons. Production was hit by heavy rainfall and flooding in China and Pakistan in the summer of 2022, while demand for rice spiked after Russia’s 2022 invasion of Ukraine interrupted global wheat supplies.

China will soon cease to be the world’s most populous nation for the first time since at least 1950, a United Nations report concluded this week. At some point this year, India’s estimated population will reach roughly 1,428,600,000, surpassing China’s 1,425,700,000. The U.S. remains the third-most populous country, with approximately 340 million people.

And finally: Rising metals prices meant that in 2022, it cost 2.4 cents to manufacture a penny and 9.1 cents to manufacture a nickel, the U.S. Mint said in a report this week. (A dime cost 4.4 cents to produce, and it cost 9.75 cents to manufacture a quarter.) Congress is considering adopting a new metal composition of coins to lower these production costs.

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