“Spring is sooner recognized by plants than by men.” ∼ Chinese Proverb
Head of Research Tom Lee believes that global central banks, led by the Federal Reserve, might soon halt interest-rate hikes, setting the stage for rate cuts by the end of the year. You can see it in inflation, which remains stubborn, but has been falling, especially in the leading indicators we track. You see it in the jobs data, which shows signs of cooling recently. And you see it after the banking industry’s woes.
Recall that we entered this year on the heels of a tech selloff, an ambitious hiking cycle to ease sky-high inflation, and widespread bearishness. It was the worst year for investors since 2008. But stocks tend to bottom before fundamentals, as Lee says, and the market has been in an uptrend since last October. The last three months have been a story of resurgence, particularly for the previously beaten-down mega-cap technology companies.
Before the holidays, Lee shared his 2023 Outlook and bullish S&P 500 price target of 4,750 this year. The benchmark closed Thursday above 4,100, well on its way toward Lee’s target. Technology, his top pick for the year, has led the way.
Many of our clients still dismiss the strong start for markets. But Lee has shown through his evidence-based research that the banking crisis has proven not to be as detrimental as some might think. Lee believes the Fed has done much work that’s not yet baked in; seasons favor April gains; investor positioning points to continued gains; and, over the last 50 years, two straight positive quarters have never been seen in a “bear market.”
Supporting Lee’s view that much of the Fed’s work is already done: slowing job growth. ADP data this week showed expansion in private payrolls was well below expectations in March, and the number of available positions fell below 10 million in February, a first in almost two years. Job cuts have soared nearly fivefold this year from a year ago.
Lee acknowledges that there are still risks, citing ongoing ripples from the bank crisis and the surprise production cut by OPEC this week that sent WTI to ~$80 on Monday. But as Lee notes, this is still within the range of prices since 2022 (oil spent a lot of time around $80 last year) and this production cut price rise is different than the surge last year on the heels of the Russian invasion of Ukraine. So it does not signal another inflation surge.
As he said in a recent note: “Bottom line: We are six months into a bull market.”
Mark Newton: Some turbulence could be in store
Highlights from Newton’s comments during our Thursday meeting:
- After technology’s strong start, there’s been a shift into more defensive groups for the first time this year. Utilities, Staples, and Healthcare are starting to move.
- We’ve seen cyclicals like Industrials, Materials, and Discretionary start to roll over this week, and this could be a concern if it starts to become more prevalent.
- Newton says a move for the S&P 500 over 4,200 would be “very bullish.”
- Outside of Tech, many stocks have been largely rangebound since last fall.
- Newton believes we’re seeing signs that the Fed is largely done because of the banking crisis and continued economic slowdown.
- Apple, which is up more than 31% YTD, might peak next week and have some weakness into May, according to its cycle composite.
- If the S&P 500 falls below 3,800 in the coming months, that could lead to a “big breakdown, a pullback that could test below” the fall 2022 low.
You might recall that, at the start of 2022, Newton, Head of Technical Strategy, warned of a 15-20% drop into the middle of the year. That was dead on. This year, Newton has said stocks bottomed in October. This view brought puzzled looks on the major TV networks, yet it proved accurate through the first quarter. He reiterated the call even during February’s pullback. Ongoing resilience in Technology stocks, combined with some stabilization in the banking sector, has buoyed U.S. equities. Breadth has ratcheted up, too. Although Technology could stall out soon after such a strong run, Newton expects other sectors to pick up the slack, such as Healthcare and Financials. They represent nearly 25% of the S&P 500.
Further, Newton correctly pointed out late last year that the most seasonally bullish time for U.S. equities has been from the midterm election (November) to June 30 of the following year. Newton has noted that there has never been a negative return from the midterm election date through the first half of the pre-election year, which is this year.
An update on Granny Shots
Our Granny Shots stock list, which has consistently outperformed the benchmark S&P 500 index since its inception in 2019, continues to perform well thus far in 2023. Granny Shots is up nearly 10% year-to-date, better than the index, thanks to substantial gains from Big Tech. Entering 2023, Technology was Lee’s top sector:
- Nvidia, a long-time Granny Shot, up nearly 90% YTD
- Apple, 32%
- Microsoft, 22%
- Amazon, 19%
Investors looking at Granny Shots for investment ideas should note that it’s designed for longer-term horizons. The portfolio contains stocks satisfying the criteria of at least two of six investment strategies: three tactical, and three longer-term. The tactical approaches are expected to capture exposure to the investment themes we favor for the next six to 12 months, while the longer-term strategies are designed to capture the exposure for three to five years. Drawdowns of more than 20% are not unexpected for some of the list’s top technology stocks, but they have performed well over three- and five-year periods.
French protesters opposed to President Macron’s pension reforms breached and briefly occupied the Parisian offices of Blackrock, apparently due to the company’s management of several private pension funds in France. Blackrock, which played no role in Macron’s efforts to change the French retirement system, declined to comment.
In his annual letter to shareholders, JPMorgan chief executive Jamie Dimon said the effects of the banking crisis will be felt “for years to come.” He noted regulations were partly to blame for the turmoil, though the economy remained in “pretty good” shape.
Officials in Germany, France, and Ireland are also considering blocking ChatGPT, following the lead of Italian regulators last week. Italy’s privacy watchdog had expressed concerns about how the company scrapes and uses personal data, including from social media, to train its chatbot.
Two key technologies celebrated 50th anniversaries this week. Monday, April 3 marked the 50th anniversary of the first phone call made from a mobile phone, made by Motorola engineer Martin Cooper on Sixth Avenue in Manhattan between 53rd and 54th Street to his rival at the legendary Bell Labs, Joel Engel. The bar code–at least the industry standard that came to be universally adopted–also turned 50 on Monday. It went into circulation the following year, with the first scan involving the sale of a 10-pack of chewing gum ($1.39.)
The wealthiest man and woman in the world are both French and deal in luxury goods. Forbes lists Bernard Arnault, CEO of luxury retail conglomerate LVMH, as the wealthiest man in the world, with a net worth of $211 billion. At the same time, Francoise Bettencourt-Myers, granddaughter of the L’Oreal founder, commands a net worth of $80 billion stemming from a cosmetics empire that includes brands like Kiehl’s, Viktor & Rolfe, and Lancôme.
Reminder: U.S. markets will be closed on Friday, April 7 in observance of Good Friday, and so will Fundstrat offices. There will be no publications that day. Also, due to Easter Sunday, the next Flash will be published on April 11.
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