HI Market View Commentary 05-08-2023
Let’s look into the future:
What Happens on Tuesday?
Debt Ceiling meeting between Biden and Kevin McCarthy
Biden = Raise debt ceiling with a clean bill= No concessions
McCarthy = Budget Cut
Yellen = Out of Money June 1
Last Minute May 31st roughly midnight Eastern Standard Time
What will happen between now and then?= Volatility = lower stock market based 100% on fear
PE Ratio (TTM) for the S&P 500 : 23.94 (As of 2023-05-05)
PE Ratio (TTM) for the S&P 500 was 23.94 as of 2023-05-05, according to GuruFocus. Historically, PE Ratio (TTM) for the S&P 500 reached a record high of 131.39 and a record low of 5.31, the median value is 17.83. Typical value range is from 18.94 to 27.76. The Year-Over-Year growth is 13.19%. GuruFocus provides the current actual value, an historical data chart and related indicators for PE Ratio (TTM) for the S&P 500 – last updated from the United States Federal Reserve on 2023-05-05.
The trailing 12 month price-earnings ratio of the Standard & Poor’s 500 index
SPX median value PE is 17.83.
SPX as of 23.94 but since WWII 19.3 is more realistic
SPX earnings are roughly $200 instead of $217-$222.50,
What if you get the double impact of lower earnings and lower PE?= Institutional, AI and Program Trading
Just going from $217 at 19.3 =4188.10
to $200 at 17.83 = 3566
leaves a 16.4% decline in the S&P average.
It would not take much for this to happen.
Recession is coming, earnings are headed down, PE ratios will decline.
This is why you protect!!!!
When we come to these type of situation where stock fall much faster than they rise, who wants to be protected?
I know we are waiting on BAC = 45%, BIDU = 70%, DIS = 50%, F = 200%, UAA = 250%, V = 10%, DG = 15%GOOGL = 35%, JPM = 20%, Meta = 85% MU = 85%, SQ = 90%,
BIDU – 5/24
DIS – 5/10 AMC
UAA – 5/09 BMO
Where will our markets end this week?
DJIA – Bullish
COMP – Bullish
Where Will the SPX end May 2023?
Mon: DISH, DDD, DVN, SWKS
Tues: DUK, EA, GPRO, TWLO, WYNN, UAA
Wed: WEN, BYND, GPRO, PRPL, HOOD, DIS
Thur: DDS, JD, TPR
Mon: Wholesale Inventories
Wed: MBA, CPI, Core CPI
Thur: Initial Claims, Continuing Claims, PPI, Core PPI
Fri: Import, Export, Michigan Sentiment
How am I looking to trade?
www.myhurleyinvestment.com = Blogsite
email@example.com = Email
Meta hires AI chip team, moves to divest Kustomer
Meta Platforms (NASDAQ:META) is making more AI moves, reportedly hiring a Norwegian team that had been working on building artificial intelligence networking tech.
The company confirmed hiring 10 people whose resumes included work as recently as January at British chip unicorn Graphcore, Reuters reported.
“We recently welcomed a number of highly-specialized engineers in Oslo to our infrastructure team at Meta. They bring deep expertise in the design and development of supercomputing systems to support AI and machine learning at scale in Meta’s data centers,” a spokesperson told the news service.
Graphcore had been seen as a promising potential challenger to Nvidia in the race for AI chip systems. The company shut down its Oslo office as part of a broader restructuring announced in October.
Meanwhile, Meta is following through on a plan to divest itself of business-software provider Kustomer.
It has a deal to trade its ownership for a passive minority stake, with no guaranteed payment in return, The Wall Street Journal reported. A transaction set to close May 15 would give Redpoint Ventures, Battery Ventures and Boldstart Ventures stakes in the newly independent Kustomer, in exchange for funding continued operations with a combined $60M in capital, according to the report.
Meta would remain the single largest stakeholder in Kustomer, valued at $250M, but won’t have a seat on the board, the WSJ said.
What Does a Fed Pause Mean for Investors?
Head of iShares Investment Strategy Americas at BlackRock
- We believe this latest Fed hike may be the last hike of the current cycle.
- A slowing economy, moderating inflation and stress in the banking system support a Fed pause. But we expect the Fed to keep rates at current levels for an extended period as inflation remains well above its 2% target.
- History suggests investors may be rewarded when stepping out of cash and moving into investment grade fixed income and equity exposures when the fed stops raising rates.
As broadly expected, the Federal Reserve raised the policy rate by 25 basis points (0.25%) at its May 3 meeting. While the Fed did not commit to a pause, markets are overwhelmingly convinced — barring a dramatic change in the economic data or an exogenous shock – that this latest hike was the last hike of the cycle. From the statement, we now know the Committee no longer sees that “some additional policy firming” is needed. This is not the first time that the market has concluded that the Fed was set to ease and up until this point we have stubbornly argued the notion that the Fed had would keep hiking to counter high and persistent inflation. This time, however, we find ourselves broadly in agreement that the time for the pause has finally arrived.
3 REASONS THE FED IS LIKELY TO PAUSE
Here are three reasons we think this time is different, and the Fed will pause its tightening cycle:
- Recent data suggest growth has slowed and inflation has moderated. While price pressures have not eased enough to justify rate cuts, a pause at current levels no longer seems unreasonable;
- Policy rates have finally risen to levels consistent with Federal Reserve guidance. A 25 basis point hike at the May FOMC brings the policy rate range to 5.00–5.25%, squarely in line with the median 2023 “dot plot” in the FOMC’s latest Summary of Economic Projections; and
- Banking system stress has tightened financial conditions. Tighter bank lending standards can obviate the need for further policy rate hikes.
Importantly, a Fed Pause is not the same as a Fed Pivot.
A pause is a period where the Fed keeps rates “higher” and monitors the development of the economy and inflation. In the five previous hiking cycles since 1990, the Fed paused an average of 10 months between its last hike and its first cut (Figure 1). Even though this hiking cycle was incredibly fast relative to history, we expect the pause to be more in line with historic averages.
So policy is tight. And you see that in interest sensitive activities. And you also begin to see it more and more in other activities. And if you put the — you put the credit tightening on top of that and the QT that’s ongoing, I think you feel like, you know, we’re — we may not be far off. Possibly even at that level.
We’re trying to reach and then stay at a — for an extended period — a level of policy, a policy stance that sufficiently restrictive to bring inflation down 2% over time… And we thought that this rate hike along with the meaningful change in our policy statement was the right way to balance that.
Federal Reserve Chair Jerome Powell
WHAT A FED PAUSE MAY MEAN FOR PORTFOLIOS
With attractive money market and ultra-short term bond yields, investors have been finding shelter in cash and cash alternatives in the past 12 months, especially around the regional bank volatility in March.1 However, as we reach the potential end of the Fed hiking cycle, it’s important to remember that sitting on too much cash, even in an ultra-short duration fund, can be costly; while investors can help avoid large market drawdowns with large cash allocations, investors on the sidelines have the potential to miss market swings to the upside.
Low risk solutions such as money market funds and short-duration Treasury ETFs can offer potentially attractive income, but historical data shows that cash exposures return less on average than core bond and short-term bond exposures when the Fed stops hiking interest rates2 (Figure 1). On average, between 1990 and February 2023 core bond exposures performed 4% better than cash alternatives when the Fed held or dropped rates. Similarly, investment grade short-term bonds performed 1.9% better than cash in the same environment.3
Figure 1: Bloomberg US Aggregate vs. cash-alternative total returns after the last rate hike
Source: BlackRock, Bloomberg. Chart by iShares Investment Strategy. Bloomberg US Agg return as represented by Bloomberg US Aggregate Index, cash-alternative as represented Bloomberg US Treasury Bill 1–3M. Returns rebased to 0 on the day of the last hike for each cycle. ‘3m return’ in reference to 3 months following the last hike, ’12m return’ in reference to 12 months following the last hike. ‘1995 cycle’ in reference to the Fed’s final hike of the 1995 cycle on February 1, 1995, ‘1997 cycle’ in reference to the Fed’s final hike of the 1997 cycle on March 25, 1997, ‘2000 cycle’ in reference to the Fed’s final hike of the 2000 cycle on May 16, 2000, ‘2006 cycle’ in reference to the Fed’s final hike of the 2006 cycle on June 29, 2006, ‘2018 cycle’ in reference to the Fed’s final hike of the 2018 cycle on December 19, 2018. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
Chart description: Bar chart depicting the total return (%) for the Bloomberg US Agg and cash-alternatives in the past five rate hiking cycles (1995, 1997, 2000, 2006, and 2018). The chart shows 3 month returns, and 12 month returns. For each cycle, the Bloomberg US Agg had higher total returns in both timeframes.
As data begins to show slowing activity in the U.S. economy, we also think it’s important to think about where investors might add ballast in their portfolio. We believe investors may want to consider stepping into high-quality medium-term fixed income — bonds maturing between 3–7 years — through exposure to the broader U.S. bond market. Not only can investors seek ballast, current Bloomberg US Aggregate Index (Agg) yields provide potential cushion where investors can still see positive returns even if bond yields rise, driving bond prices lower. Currently, the yield for U.S. 10-Year Treasuries could rise about 72 basis points (0.72%) before total return on the Agg turns negative.4
With persistently high inflation pressure, we continue to emphasize quality in stock portfolios, as rates could remain relatively firm during the pause period. Growth companies with a strong quality tilt — characterized by high returns on capital, margin stability and solid balance sheets with reasonable valuations — have tended to outperform in a late cycle environment with tight financial conditions.5 Investors may look into both U.S. quality factor and international quality factor exposures to add quality into their portfolios.
Given the positive performance of the equity markets this year, despite slowing earnings growth and possibility of a recession, we believe markets will remain range bound and upside from today’s valuations may be limited. Investors can potentially weather the storm by staying allocated to defensive strategies such as minimum volatility. Min vol has historically lowered risk in portfolios. In fact, MSCI USA Minimum Volatility Index has had ~18% less volatility than the S&P 500 Index since inception.6 Investors can use minimum volatility strategies to provide ballast in their portfolios and allow them to stay invested during periods of market turmoil.
Past performance is no guarantee of future results, of course, but historically both domestic equity and fixed income markets have posted higher returns three months after the Fed’s last rate hike. And alternatively, investors may consider alternative assets like gold. Although gold is a non-yielding asset, a tactical allocation may make sense for some investors in an environment of falling real rates, a weaker dollar and as a hedge against potential shocks.
Originally Posted May 4, 2023 – What does a Fed pause mean for investors?
|Critical information for the U.S. trading day
Stock futures on Friday point to Wall Street snapping a four-day losing streak, helped by strength in Apple shares after the tech giant’s results — though doubtless the nonfarm payrolls report will have something to say about this.
Bulls will be hoping that calmer conditions in the banking sector, easing debt ceiling tensions and acceptance that the Federal Reserve is not now on a preset hiking trajectory, can finally in coming sessions push the S&P 500 (SPX) above the top of the 3,800 to 4,200 channel it has held for about six months.
However, Goldman Sachs reckons the U.S. market — and many of its international peers — will remain in what it terms the ‘Flat and Fat’ range for some time.
True, there are reasons to be positive, says the Goldman portfolio strategy research team led by Peter Oppenheimer. The bank’s economists see developed economies growing at a below-trend pace, but avoiding recession as low unemployment supports consumption. In the U.S., the ISM manufacturing index increased above consensus expectations in April, for example.
Yet, the banking sector ructions are tightening credit conditions and will weaken economic growth much more in the second half of the year, says Goldman.
And the bank then lists six factors that may keep the lid on any market gains.
First, inflation remains sticky. “The tightness of the labor market continues to be a double-edged sword, supporting consumption on the one hand, but contributing to a higher-for-longer risk of inflation on the other.”
Yes, U.S. interest rates may have peaked at the 5%-5.25% range, but contrary to market hopes of imminent cuts, Goldman reckons they will stay there until the second quarter of 2024.
Second, investors are “pricing in the best of all worlds”, where inflation moderates and rates fall but there is no recession.
“One risk is that there is a recession -– or at least the market prices a higher probability of one -– perhaps if unemployment starts to rise because of bank lending tightening. Our U.S. strategists expect that under these conditions, S&P 500 earnings per share would fall to $200 and the S&P 500 would decline to 3150,” says Goldman.
Next, such scenarios could cause problems because equity valuations remain high. “At 18.8x [price-to-earnings], the U.S. equity market trades well above its 20-year median (a period during which low interest rates led to quite high valuations),” the Goldman team write.
“Furthermore, high cash returns mean that there are now reasonable alternatives (TARA) and that provides a very high bar for equities. Equity risk premiums have fallen sharply over the past year, implying relatively low prospective returns compared with risk free assets,” they add.
Fourth, equity volatility, as measured by the CBOE VIX index (VIX), remains too low and implies a reasonable degree of complacency, particularly surprising given chances of the debt ceiling being breached by the start of June, Goldman notes.
Fifth, the recent better-than-expected results season is priced in and earnings growth will not be great in coming quarters.
“Our forecasts remain at roughly flat earnings growth in most regions this year and 5% in 2
024 for the U.S. and Europe, 6% for Japan and 17% for Asia. With high valuations, the combination does not offer much return for the risk in the face of 5% risk free U.S. dollar cash return.”
Finally, market concentration is a problem. The largest 15 companies have generated 90% of the S&P 500’s rally for 2023 so far, Goldman notes.
“Our U.S. strategy team finds that market breadth has fallen to one standard deviation below average for the first time since 2020. The problem is that when returns get very narrow it is not a good sign. Following 9 sharp declines in market breadth since 1980 (similar to recent experience) the S&P 500 then went on to post below-average returns and larger peak-to-trough drawdowns,” the Goldman team conclude.