“Amateurs sit and wait for inspiration, the rest of us just get up and go to work.” – Stephen King
Good evening:
Bears received just about every headline they could have hoped for in recent weeks, from bank turmoil to continued interest-rate hikes and sticky inflation. Yet stocks, particularly technology, have held steady as we approach the end of the first quarter. This week, the Federal Reserve raised interest rates by a quarter-point, the ninth increase in a year, as it balances the long-running fight against inflation with the sudden tumult in banking. The Fed is in a tricky spot, but inflation is expected to fall, and big stocks like Apple and Microsoft continue to perform well.
Tom Lee: Technology’s strength is a signal
Tom Lee, Head of Research, said this week’s Federal Reserve meeting was dovish for two reasons:
- Jerome Powell said financial conditions are tighter than they appear
- The Fed likely will either stop hiking or cut rates
Lee noted this week that investors remain cautious, and financial conditions are tight. But Lee says, “For the Fed, it’s not about how much they raise, but it’s their desire for financial conditions to not get worse. I think that’s why stocks actually could rally.”
Leadership in 2023 has been almost entirely technology, particularly Granny Shots such as Apple, Microsoft, and Nvidia. In December, Lee forecasted that big tech would rise 40% in 2023, and so far those stocks have risen nearly 30%. “That’s a pretty big signal to us,” Lee says, noting that these stocks tend to perform well when the market believes interest rates will decline this year, which is our view. More important, technology was the first group to drop sharply in 2022 as inflation was running hotter than expected. Now, technology is leading again, this time to the upside.
“I think the inflation story has kind of legged lower,” Lee says. “That’s why Fed futures have broken, it’s not just the credit is tightening – I think inflation psychology has broken. There aren’t as many stories about inflation in the (news). I think that means fewer people are going to be asking for raises and the Fed will start to get some cover from weaker job creation, too.”
Lee continued: “Structurally, the market bottomed. By the way, this was the pattern in 2008. Tech began to lead as early as November 2008, and that signaled that the internal bottom was in.”
The Fed’s latest moves
All eyes were on the Fed this week, still, in one of the most closely watched decisions in years. The Fed lifted rates to a range of 4.75 to 5%. Chair Jerome Powell said the Fed “considered” pausing interest rates because of the banking problems, but he said the economic data had been strong, underscoring the tough spot the central bank is in. In its latest economic projections, Fed officials expect economic growth to be slightly slower this year.
Powell said “a pathway still exists” to a soft landing in which the Fed cools the economy without tipping it into a recession, and “we’re trying to find it.” While Powell said the American banking system is safe, he acknowledged: “It is clear we do need to strengthen the supervision and regulation” of banks. He said they will undergo a “thorough review” of the entire banking system.
Asked about the possibility of unemployment spiraling upward due to rate increases, Powell said recessions are difficult to model and lowering inflation is his top priority, despite the risk. Long economic expansions with low-interest rates are “very good for people,” he said. “It’s just a place that we should try to get back to.” Powell made an interesting nod toward the role of social media in the speed of the deposit flight from Silicon Valley Bank, noting that the bank run was different from what the Fed had previously seen. He suggests the Fed must update regulations and supervision to keep pace.
On inflation, Powell is focused on robust activity in the services sector, noting there has been little to no cooling in industries like healthcare and hospitality despite declining prices of goods and housing. “That’s something that will have to come through softening demand,” he said, as well as in labor markets.
Technicals and seasonality
Mark Newton, Head of Technical Strategy, maintains his bullish forecast for this year, but says the banking sector must stabilize first. The Fed’s nearly $300 billion balance-sheet raise, combined with recent interest-rate hikes, has “screamed of hysteria,” Newton says. “Bottom line, though, is when we see some stabilization in banking, we expect things will be in pretty good shape.”
Newton notes:
- Cash levels have risen to more than $5 trillion. Retail is sitting on more cash now than at the height of the pandemic. Newton points out that the last two surges (2008 and 2020) coincided with sizable Fed cuts:
- Gold’s strength is encouraging. “I think we’re going to see much, much higher prices in gold and silver in the next 12 months.”
- Sentiment is very negative, which “is a big positive during a seasonally bullish term.”
- Technology is “working phenomenally. There is no evidence of that rolling over.”
- We are entering the most bullish month of the year, April. Combine that seasonality with negative sentiment, and you have reason to believe markets move higher into May.
- A pullback down to 3800 next week is possible, Newton says, but the longer-term trajectory remains positive. “You rally into the spring, you have a correction in the second or third quarter, and then you rally toward year-end. This playbook is happening all over again.”
Elsewhere
Amazon laid off 9,000 workers, the second-largest round of layoffs in the company’s history. The cuts follow an earlier round of layoffs that began in November and extended into January, which affected more than 18,000 staffers. The latest round impacts Amazon’s cloud computing, advertising, human resources, and Twitch units.
Microsoft co-founder Bill Gates wrote this week that “entire industries” will revolve around artificial intelligence. Gates, who propelled the personal computer revolution by founding Microsoft in 1975, wrote on his blog that AI is the most revolutionary technology in decades, likely to solve healthcare issues, inequality, and general worker productivity. “Businesses will distinguish themselves by how well they use it,” he wrote.
Apple and Microsoft have emerged as havens amid banking turmoil. Their weights in the S&P 500 have risen to about 7% and 6%, respectively. Not since IBM and AT&T in 1978 have two stocks made up a greater share of the benchmark.
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