Good evening:
“When things go badly, people become cautious. Then their caution causes things to go well, and when things go well, they become incautious. I think that’s a forever cycle.”- Howard Marks
Though the S&P 500 has traded sideways lately, it closed early in the week at 4,147, above its 200-day moving average for the 18th straight session. Since 1950, no prior bear market has made a new low after making 18 consecutive closes above its 200-day moving average. Of the 11 prior instances since 1950, the S&P 500 has never been lower three, six, or 12 months later. It’s further evidence that this is a new bull market, confirming Tom Lee’s constructive views on markets this year. (The Nasdaq has moved higher in six of the past seven weeks.)
Ken Xuan, Head of Data Science, said this week’s CPI doesn’t alter his view. “I don’t really see much of a change to the story,” Xuan said Thursday during our firm-wide meeting. “CPI is still on a downward track. Novembers and Decembers are always low, January is always high – even when you adjust for seasonality. So this week’s CPI was OK.”
Xuan also noted that it will take time to substantively interpret this month’s CPI data because the Bureau of Labor Statistics (BLS) just updated the basket’s weightings. “It will be more meaningful when we can compare it to data from February and subsequent months,” Xuan believes.
Mark Newton, Head of Technical Strategy, agrees with Lee and Xuan that markets look encouraging for bulls. He said short-term sentiment has improved, but institutional investors are still questioning the rally since the mid-October lows.
“Everybody I speak to is still very negative, as are all the guests and anchors on CNBC, Bloomberg, and elsewhere,” Newton said. After this week, “I think the market has shifted its perception about inflation being able to pull back sharply. The market realizes that it might be a stickier type of process.”
Still, Newton said that despite the short-term trend implications of the week’s action, “I don’t think it’s going to be all that dramatic in the bigger scheme of things.” To Newton, this was mostly “the same playbook we’ve seen over the last 100 years. We’ve seen the first half of February positive, and after right around the 11th trading day, you can get some consolidation in the back half of the month. And so I think that’s what we could experience between now and late next week before we bottom and turn back higher.”
Also conforming to trend, per Newton: “Everybody knows February to be a rough month, but in pre-election years, it’s actually up nearly 1% on average. And it’s been (slightly) positive this month so far.”
Adam Gould, Head of Quantitative Strategy, pointed out that his retail sentiment indicator remained elevated, suggesting challenging market conditions ahead. “It’s been high for quite a while now, indicating the retail side is bullish on the market. It’s been high this week, last week, the week before,” Gould said. In keeping with the indicator’s contrarian nature, the last time it was low was in the beginning of the year, when markets rose.
Newton saw hope in Gould’s chart, suggesting that “if you blow up the right-hand side, it looks like it’s pulled back a little bit in the last couple weeks. It’s still elevated, but maybe if we have any sort of backing down in equities and you run this again next week?”
Gould acknowledged the possibility, but he wasn’t quite convinced. “I guess I would point out that sentiment has been up there for quite a while, and I think it’s going to take some time before retail capitulates because it’s been such a good year so far, especially after what happened last year,” he responded.
Other releases this week:
January consumer spending came in strong in nearly every retail category, beating expectations by a wide margin. Some attributed part of this to a recent COLA in Social Security that boosted the spending power of older Americans.
Credit card debt is at an all-time high. The New York Fed’s quarterly report on household debt, released Thursday, showed credit card balances rising to $986 billion in 4Q2022. Delinquent users–cardholders making payments more than 30 days late–also rose to 5.9%.
AI Hallucinations
Google’s Bard chatbot made a glaring mistake during its demo that contributed to a $100 billion loss in market cap. But Microsoft’s current ChatGPT bot has also shown a propensity for erroneous or troubling statements in the past week. When asked to compare the financial results of Gap, Inc. to those of Lululemon, ChatGPT appears to have made up fictional numbers to generate its answer. Others have reported unsettling conversations in which Bing insisted that the year was 2022, declared its love for another user while urging him to leave his wife, and told a third, “I don’t think you are worth my time and energy.”
Elsewhere
President Biden named Federal Reserve Vice Chair Lael Brainard to lead his National Economic Council, replacing Brian Deese, who is resigning after two years. Dr. Brainard is recognized as an expert on international economics, macroeconomics, poverty, and climate change. She has been seen as a dovish member of the FOMC during its recent efforts to tame inflation. There has yet to be a word as to her potential replacement at the Fed.
Air India set a record for plane orders this week, announcing it would purchase 470 planes – 250 from Airbus and 220 from Boeing – to modernize its fleet. The previous record for the largest plane order was set in 2011 by American Airlines when it ordered 460 planes.
A prominent banker has gone missing in China, suggesting a renewed government crackdown on finance and technology. Bao Fan, CEO of China Renaissance Holdings, is one of China’s leading tech investors and deal brokers. It is not uncommon for wealthy businessmen and financiers to disappear for long periods after having incurred government displeasure.
Rioters attacked banks in Beirut, setting them on fire amidst a worsening economic crisis that has seen Lebanon’s currency lose 97% of its value while three quarters of its population descended into poverty. The embattled banking industry has been on a self-imposed strike, closing for business to protest a court decision ordering a bank to comply with a customer’s request to fully cash out their savings account.
Reminder: U.S. markets will be closed on Monday, February 20 in observance of Presidents’ Day, and so will our offices.
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