Bond Selloff, Dollar Spike Spoil The Goldilocks Party
Bonds spoiled what should've been a rousing rally on Wall Street Thursday.
Markets were handed a Goldilocks GDP report featuring a headline beat, a "just right" personal spending print (more robust than consensus, but a sharp slowdown from Q1's unsustainable pace), a solid read on capex and cooler-than-expected price gauges.
But between the upbeat US growth assessment, another downside surprise from jobless claims, the first increase in pending home sales since February and a Nikkei report sug
Today’s data — along with steadily rising crude prices — argues for moving up the timing of the next 25bps hike, to September, and opens the door (even if only a little) to an additional 25bps increase in November. Good for retirees, savers, and institutional investors. Not so good for banks, CRE lenders, and the fast-money crowd.
Interesting to see what out/underperf’d in the pullback. QQQ SPY (growth, large) better than MDY DVY IWM (cyclical, small, income), XLC and XLK (growth) better than XLRE XLU (income).
Yeah, that’s a good point. Thursday wasn’t neat and tidy for narratives.
Market rotation – rapid and exhausting. Contrast R1000G to R2000V, these being at opposite ends of the large-small and growth-value spectrum. R2000V outperf’d Oct to Dec, R1000G outperf’d Mar to Jun, R2000V outperf’ing now . . .
No shortage of macro market narratives. For example, if you believe the near-recession is over and economy is back in expansion, then you’d favor small and cyclical (value). If you believe recession is merely delayed to 1H24, then you’d favor large and growth.
At industry level, various cyclical inflections one can point at. Semis and semicaps are reporting less-bad quarters and guiding for 2H improvement, so that cyclical trough is maybe in rearview mirror. The freight recession is in full cry, so that cyclical trough is maybe here. Banks seem to have gotten through the immediate existential risk, so maybe we’re somewhere in that cyclical troughing process. Etc etc.
At the end of the day:
The recession-bears lost, they have to find a new stance, even if only for a couple of quarters.
FOMC is fading as a market force, as long as inflation looks on a path to reach 2% sometime in 2025, that’s up to two years away so not a “high bar” right now.
Market has absorbed Treasury’s bill issuance just fine, now we see if it will absorb Treasury’s bond issuance.
Valuation on forward P/E is somewhere in the ambiguous zone – as discussed elsewhere, downcap is 14X and up-cap ex-Magnificent Seven is 17X, and for The Seven, just say “AI” seven times fast. I haven’t refreshed my index DCFs lately.
So far this 2Q reporting season, percentage of earnings beats is positive – not sure where estimate revisions are shaking out but stocks are acting like its ok.
Sure, some macro charts look pre-recessionary but most active relative managers have 5 months left to salvage 2023.
Federal debt service cost is soaring, but in the can-kicking spirit, investors seem to have agreed to not care.
Bottom-line – its not just the Fed that has gone to “data dependent” reactive behavior.
Yep. Interesting but not surprising in a way. On Wednesday night I was chattering with another older equity manager. He was lamenting how we finally were seeing small caps, industrials and such in recent weeks. (Lamenting because it was running over dome shorts he had been running.)
Suddenly it was obvious: those were the stocks that the last holdouts were buying as FOMO became overwhelming. “I gotta buy something but I’m not gonna pay up for Nvidia or even more Apple. I’ll wave in some of the laggards instead.”
It worked for a couple of weeks before the quarter end and into this month.
The problem is that those were low conviction buyers who were ready to change course at the first sign of trouble. Perhaps that explains some of the moves JL refers to?
I basically was front running that trade back from June till now. The June portfolio.-1.5% today. Still +4.5, so for the time being hold. US Economy is a rising tide. China has to piss or get off the pot.
I bought some small transportation cyclicals in mid 2022 (EXPD CHRW RUSHA), held them nervously, and cut them in 2Q when my gains became long-term, because, well, economy slowing etc. I kick myself every day now. My humility cup runneth over.
Aint that somethin? The buddy I was talking to was SHORT trucking stocks. All beyond me…
Oh, short truckers is not what you want to be now (in my opinion).
Deep cyclical stocks, turn down when things are great and turn up when things are terrible.
(Speaking as the village idiot who exited his small cap transport names way too early and thus feels your buddy’s pain.)
I did the same thing (probably much smaller $$) with individual stocks. Sold them way too soon. You can kick me too.