Believe It or Not

By Crest Capital Advisors on June 9, 2023

Dow: 0.34% to 33,876.78
S&P 500: 0.39% to 4,298.86
Nasdaq: 0.14% to 13,259.14
Russell 2000: 1.90% to 1,865.71
10-Year Yield: 3.74%
Outperformers: Consumer Discretionary 2.44%, Utilities 1.91%
Underperformers: Technology (0.66%), Consumer Staples (0.53%)

US equities were higher for the week. The S&P 500 logged its fourth straight weekly gain, cresting the 4,300 mark at one point and finishing more than 20% above its 52-week low (more on this below). The Nasdaq Composite notched its seventh consecutive weekly rise, tying its longest streak since October – November of 2019!). Small caps had another good week after lagging for much of the spring and are now up a more respectable 5.93% on the year. Market leadership finally managed to broaden beyond Big Tech, with autos, airlines, energy, machinery, building products, and even banks outperforming.

Overall, it was an extremely quiet week, with the market’s attention gazing ahead to next week’s May CPI report on Tuesday and the June FOMC meeting decision on Wednesday. May’s headline CPI is expected to soften to a 0.2% m/m rise from April’s 0.4%, with energy prices, lower food inflation, and seasonal factors among the drags. In terms of the Fed, market pricing currently reflects forecasts for the FOMC to hold rates at the 5.00-5.25% level; effectively hitting “pause”.

Today’s title not only pays homage to the classic 1980’s TV show, The Greatest American Hero, but it also describes the rampant skepticism around the market’s achievement of the technical definition of a new bull market. Once a market rallies 20% off the lows (a condition that was met this week from the October 2022 S&P 500 low), then it’s officially a bull market! We don’t make the rules, we simply report them. And, as of this week, it is official. The S&P 500’s longest bear market since the 1940s has come to an end. The benchmark index closed up 0.6% to 4,294 on Thursday, vaulting it back into bull territory with a 20% advance from its October low.

Going into the year, recession talk had been everywhere, though much of the hard landing fears have failed (so far) to materialize. The economy may be cooling down just enough, and despite the uncertainty out there, inflation remains far from its peak last summer and jobs numbers continuously surprise to the upside. A debt ceiling showdown has also been moved off the table, while things are looking brighter at the Federal Reserve in terms of less-restrictive monetary policy ahead. Growth stocks are re-asserting leadership and investors are once again re-focused on the major technological disruptions that are poised to drive productivity (and therefore corporate profitability) in the years ahead.

The Magnificent Seven

We know we keep harping on this topic…BUT…This. Is. Crazy!

The new ‘magnificent seven’ in the stock market, comprised of Facebook/Meta, Amazon, Apple, Microsoft, Alphabet, Tesla, and Nvidia have seen their collective stock prices increase by a whopping 54% on a YTD basis through earlier this week (see graphic below).

And because these 7 names comprise collectively nearly 30% of the entire S&P index itself, they have propelled the index to YTD gains in excess of 12%! (So much for those advocating to sit in 5% T-bills and ‘wait it out’.)

BUT, if we isolate the remaining 493 companies that comprise the S&P index, we see they are only up ~2% collectively. The vast majority of the market is being left behind. Mega cap technology stocks are once again back in vogue after having been taken out back and beaten over the course of 2022.

The chart below shows another way to look at the heavy dispersion within the stock market. Here we have the S&P 500 index (a cap-weighted index as alluded to above, where the biggest companies contribute the most to the overall index performance) which as we said is up substantially on a YTD basis. But if we look at the equal-weighted index, where every company is just 1/500 of the index, we see the stock market was actually negative on the year!

As it stands now, the equal-weighted S&P 500 is lagging the market cap weighted Index by the greatest degree than at any time since 1990 over any five-month period. But the narrowness of the market doesn’t show up on the scorecard for the institutional investor benchmarked to the Index. As Strategas Research Partners Technical Analyst Chris Verrone has suggested, “this is either the weakest start to a new bull market or the longest bear market rally in history.” The continued underperformance of the Financials sector is an unwelcome sign for bulls.

Having said all of that, we believe it will be difficult to fade what is likely to be a land grab among stocks associated with artificial intelligence. The so-called Magnificent Seven have a story that is impossible with which to argue – a new technology that promises to transform business controlled by companies that, by and large, hold tons of cash and are in no way capital constrained. It is likely to take years to fully determine whether artificial intelligence is revolutionary or evolutionary, but in the absence of significantly higher long-term interest rates it may not make much of a difference to the likes of Microsoft, Apple, Google, Amazon, and Facebook. They have the time and the capital to get the benefit of the doubt.

Additional takeaways are as follows:

If you listened to the Wall Street pundits last year and you don’t own the Magnificent Seven in a meaningful way, you are probably woefully underperforming the headline indices.

Next, we note how closely the cap-weighted and equal-weighted S&P 500 indices were tracking with one another up through about March of this year. What happened in March of this year? Well, that’s the onset of the current community/regional banking crisis. This catalyzed a rotation out of anything perceived to be cyclical or reliant upon borrowing to fund expansion (and certainly caused an exodus from the financial sector itself), into the safe haven status of mega cap tech. Then, the Artificial Intelligence mania went mainstream and exacerbated the trend of money rotation back into tech and growth stocks!

Looking forward, we do prefer to see the market broaden out with more stocks appreciating to reflect improved conditions and outlook. Its’ a condition we will monitor closely. With that in mind, we were encouraged to see some of this year’s laggards play catch up this week, while the headline averages managed to maintain their general levels.

Next Week’s WORDL

In honor of the FOMC Meeting…Any result other than this will be a problem and prove (to us at least) the Fed doesn’t know what it is doing.

Just What Is True Inflation?

We’ve pointed out in the past (Insert Link to 5/8/2023 CMD) how the official government calculations for inflation (CPI) are flawed in that they lag terribly and don’t necessarily reflect real-time conditions on the ground. By way of example, we once again cite the housing segment of CPI…where shelter makes up ~44% of the Core CPI reading. This extremely heavy weighted, combined with the lag in the data-set gives off the impression that Core CPI is stubbornly too high. And yet, real-time rental data is in serious decline even though the government’s calculations continue to show housing inflation growing at 8-9% per year as of the most recent report. (See chart below) This stale data aspect is what gives economists cover to complain about inflation remaining “sticky”, even though what they really mean is “delayed”…

So, what’s the solution?

Well, according to their website (www.truflation.com ), Truflation offers a more reliable view of inflation, contrasting with government metrics that have outdated methodologies and limited transparency. With over 10 million data points, it updates daily and has a dynamic and transparent methodology that responds to global market conditions. In a world that is quickly being transformed by the harvesting of data and computer analysis in real-time, it’s probably about time the Fed updates its methodologies as well.

So what is the dynamic and modern view of measuring inflation say about the current state of affairs? Well, here is a screenshot of today’s CPI data by Truflation. We’re almost back to the Fed’s target of 2% and the trend is demonstrably down!

Economic Funnies

Probably about as accurate as all of the Fed outlook pieces being drafted by Wall Street economists…

Crazy Stat(s) of the Week

Here is this week(s) crazy stats!

Nvidia currently has only $26 billion in sales versus $208-525 billion for the Big 4 (Microsoft, Apple, Google and Amazon). Just how high are these expectations? Nvidia now trades at over 38x sales and over 200x earnings. We’ve never seen a price to sales ratio that high for a company of its size.

The % of Bulls in the latest AAII Sentiment Survey has jumped to the highest since November 2021 (blue line in the chart below). The weekly change was the largest since November 2020 (bottom panel in Orange) when the Covid 19 vaccines were announced.

Quote of the Week

“Don’t confuse schooling with education. I didn’t go to Harvard but the people that work for me did.”

– Elon Musk

Calendar of Events to Watch for the Week of June 12th

Next week will be filled with important data points on inflation via the May CPI and PPI reports on Tuesday/Wednesday, followed up by the conclusion of the next Federal Reserve Open Market Committee (FOMC) meeting on Wednesday afternoon! Markets are expecting a “pause” (as are we), but the press conference tone will also be critical. (On this note, we point out that Chair Powell has a horrible track record of soothing volatile markets) We’ll also get another ‘dot plot’ release at the conclusion of this meeting showing the various member’s expectations for future rate hikes. (Expect them to think they can move rates even higher despite the obvious headwinds that suggest otherwise)

The tail end of the week will be filled with more data on the overall health of the US economy including May Retail Sales, Export/Import Prices, Industrial Production, and the weekly Jobless Claims data. This will be a heavy, heavy macro driven week with data and outcomes that will either reinforce the current market trend (up) towards a soft-landing scenario, or vindicate the bears, thus casting doubt on that outcome.
Monday 6/12 – No major US economic reports due today. Markets will likely be in a holding pattern waiting for the big news on Tuesday – Thursday of this week.

Tuesday 6/13 – The highly anticipated May Consumer Price Index (CPI) report is expected to show a headline rate of 4.1%, down from 4.9% last month and a 0.2% month-over-month increase. The more stubborn Core (ex-Food/Energy) is expected to remain elevated due to the housing component at 5.2%, but still down from 5.5% last month.

Wednesday 6/14 – Prior to the market open, we’ll get the release of May Producer Prices (PPI) which is expected to drop again to just 1.5% at the headline rate, down from 2.3% last month. The Core (ex-Food/Energy & Trade) is expected to come in at 2.9%, down from 3.2% last month. We’ve argued that Producer Prices lead Consumer Prices so the continued downtrend in this data-set bodes well for the rest of 2023. Then, later in the trading day, we’ll get the announcement of the latest decision of the Fed with respect to interest rate policy. Markets are expecting a June pause as the Fed finally takes a step back to evaluate the lagged impact of past policy decisions.

Thursday 6/15 – A plethora of economic data is on tap today. Starting with weekly jobless claims data, we’ll then get a look at Export/Import prices for May (economists are expecting contractions of about -0.5% on these datasets), May Retail Sales (economists are expecting a 0.0% month-over-month increase), and May Industrial Production (expected to come in at an anemic 0.1%). We’ll also get Regional Fed diffusion indexes via the Empire State Index (expected to contract by -15.2) and the Philly Fed Index (Also expected to contract by -14.3).

Friday 6/16 – The preliminary June Consumer Sentiment data from the University of Michigan is expected to show a modest uptick to 60.3, up from 59.2 last month.

Source: FactSet