“The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed.”
~ Peter Lynch
Despite the prevailingly negative sentiment about the market, we entered May with the S&P 500 almost exactly where it was one year ago: it closed April 2023 at 4,169, slightly higher from its close on April 30, 2022–4,132. You wouldn’t have known it by looking at trading activity in the first half of the week, which saw markets down on recession fears and the FOMC meeting on Wednesday.
The FOMC decision–a unanimous vote to hike rates by 25 bps–was never really in question. The Fed’s press statement and Fed Chair Jerome Powell’s press conference were the focus of attention, and based on those, Head of Research Tom Lee described the Fed action as a dovish hike. “We think the further chance of rate increases is low,” he said in our weekly research huddle. “Inflation is going to continue to fall, and the labor market is softening,” he asserted. To illustrate, he pointed out, “Tuesday’s JOLTS report (job openings) showed a steeper than expected decline for March and is only starting to reflect what we are seeing in jobless claims and in company announcements. The steepness of the three-month decline in openings is surpassed only by what we saw during the 2020 pandemic.”
Mark Newton, our Head of Technical Strategy, agreed with Lee on the low likelihood of future rate hikes, using trading in Fed Funds Futures (which shortly after the FOMC meeting estimated the chances of a June rate increase at 2%) as his barometer. “This tends to be far more accurate as to what the Fed will do than listening to economists,” he said. “So as of now, the chance of a future hike looks very slim.”
Washington Policy Strategist Tom Block, who got to know Powell in the 1990s in his previous life helping banks with their government relations, agreed. “From Powell’s press conference, I thought it was pretty clear that cuts are not on the horizon for the immediate future.”
During our huddle, Block also brought up the U.S. debt ceiling, an issue that became more pressing this week after Treasury Secretary Janet Yellen formally notified House Speaker Kevin McCarthy that the “X date”–the date when the federal government will cease being able to meet its existing financial obligations–could arrive as soon as June 1. Lee acknowledged that the issue seems to have become more concerning to some of the institutional clients he’s meeting with, perhaps more so than the debt-ceiling crises of 2011 and 2013 were.
The debt ceiling poses a particular challenge for House Speaker Kevin McCarthy. The deal that McCarthy wrangled through his own party in the House last week was a placeholder to get President Biden to come to the table–which he has. However, House Republicans include conservatives who have warned that “if any of the cuts are rolled back they are off the bill.” Meanwhile, Republican moderates who voted for McCarthy’s debt-ceiling proposal did so “with the understanding that when a compromise comes back the most draconian cuts will be restored.”
“I am growing more concerned that markets are going to have to deal with some ugly headlines in the coming weeks as DC tries to deal with the debt ceiling,” Block warned. He also reminded us that to win the Speaker position, McCarthy in December agreed to a rule change that makes his position precarious during any contentious situation: any House member can call a snap vote (simple majority) to remove him from power.
There is a possible opportunity to this crisis, however. Head of Crypto Strategy Sean Farrell observed: “If you’re trading around the X date and there’s a plausible scenario in which the US goes into technical default, I have to think Bitcoin just launches into orbit.”
In earnings, all eyes were on tech giant Apple (AAPL), the most valuable company in the world. The longtime Tom Lee Granny Shot (+368% since addition) has proven to be a pillar of strength amid the Federal Reserve’s interest rate campaign, banking woes, and recessionary fears. Through it all, Apple has chugged along to gain nearly 40% this year as it sits close to its all-time high around $180. Strong iPhone sales highlighted the Q1 earnings report, and growing sales in India offset waning demand for Macs and iPads.
Apple, which accounts for more than 7% of the S&P 500, also increased their dividend for the 11th consecutive year and announced an additional $90 billion stock buyback plan. “The iPhone is truly a global product and we’re doing well in emerging markets right now,” CFO Luca Maestri said. “That has helped us offset some macroeconomic challenges.”
iPhone sales are growing in Indonesia, the Middle East, and India. On the call with analysts, Apple CEO Tim Cook said: “What I do see in India is a lot of people entering the middle class, and I’m hopeful that we can convince some number of them to buy an iPhone.”
Leisure thrives in 2023
Amid recession alarms, leisure spend and hospitality continues to suggest the consumer is relatively healthy. Early this week, Marriott International reported a 34% annual increase in revenue to $5.6 billion. With about 30 hotel brands, Marriott controls over 5,800 properties with more than 1.5 million rooms. This summer, U.S. travel demand is expected to be strong, defying recession fears.
Arm, the British semiconductor design firm, has filed to go public on the Nasdaq sometime this year after being taken private by owner Softbank in 2016. The company’s chip-design technology is frequently licensed by other semiconductor companies for their System on a Chip (SoC) products. The British government tried hard to convince the company to list domestically, but Arm co-founder Hermann Hauser said, “The fact is that New York of course is a much deeper market than London, [and] partially because of the Brexit idiocy the image of London has suffered a lot in the international community.”
Tech CEOs visited the White House on Thursday to discuss the future of AI. In addition to Microsoft’s Satya Nadella and Alphabet’s Sundar Pichai, Open AI CEO Sam Altman and Anthropic CEO Dario Amodei also joined in a discussion with Vice President Kamala Harris, Commerce Secretary Gina Raimondo, and other senior White House officials. In the early days of social media, “there was this mantra of ‘move fast and break things’” Raimondo noted. “We cannot allow that to happen [with AI.]”
Residual resentment: The Writers Guild of America went on strike after failing to reach an agreement with the Alliance of Motion Picture and Television Producers, the first strike in 15 years. The labor dispute arises from the increasing prominence of content streaming, and disagreement about how to structure residuals (the fee a writer or creative professional is paid each time an episode or film is rebroadcast). The last writers’ strike cost an estimated $2.1 billion to the California economy. Directors’ and actors’ unions are also sure to be watching how the residuals issue resolves.
Icahn Enterprises found itself in the unusual position of taking criticism from an activist investor rather than dishing it out, as short-selling firm Hindenburg Research charged that Icahn Enterprises had a “Ponzi-like economic structure” in which cash from new investors was used to fund the conglomerate’s dividend payouts. “We obviously disagree with the inflammatory assertions in the Hindenburg report and intend to respond at length,” the firm’s founder, Carl Icahn said in response.
And finally: China’s Ding Liren has become the world chess champion. He won the title after Magnus Carlsen retired rather than defend his title for a sixth time. Ding, who had previously been ranked No. 3, is the first Chinese and only the sixth non-Russian to hold the world title in the championship’s 75-year history.
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