AlphaBetaStock’s Report (Premium Edition) 05-23-2022

MACRO MARKET TRENDS

Tip: Use this as a quick guide on the short-term direction (1-2 weeks) and long-term (1.5-5 years) of key markets. It is not a signal to buy or sell, just to show the trend. This is a quick cheat sheet to know the trend and help understand what is happening with the markets in the short term. I started making this section years ago because once had a client that would call me nearly every day asking the direction of the markets.

S&P 500 SECTOR TRENDS

Tip: Use this section to know various sectors’ performance, and weight portfolios, or look for trades. Modern portfolio theory stresses the importance of diversification, but recently several sectors like technology have outperformed others like utilities. This is also a way to narrow the sectors to find investment opportunities.

Truflation – Real Inflation Data

We are adding in a snapshot of inflation from Trueflation.com (We don’t have any association with the firm and were not given monetary compensation) There are many reasons to expect that the supply situation will worsen next year and boost inflation. The sad reality is that the real inflation number is much much higher.

Decentralized finance (DeFi) firm Truflation is based on the same calculation method as the CPI but is different in that it uses real “price data” versus the government’s survey data. It uses current real-market prices data from Zillow, Penn State, and Nielsen to measure and report inflation changes each day.

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KEY DRIVERS 5-23-22

TIP – This is a brief bullet-point summary. It is a tool that gives investors and financial advisors a fast and simple list of what to news and market data watch that may move the markets.

  • Ukraine Conflict (Movement Possible if Peace Agreement Reached)
  • Rising Inflation & Recession Fears
  • Chinese Lockdowns Causing Shortages
  • Company Earnings
  • Tuesday, May 24 – New Home Sales (April)
  • Wednesday, May 25 – FOMC Meeting Minutes
  • Wednesday, May 25 – Preliminary Core Capital Goods Orders for April (8:30 a.m.)
  • Wednesday, May 25 – Preliminary Durable Orders, Shipments for April 

Next Tuesday’s release of May PMI activity indicators is scheduled. This indicator will help gauge whether the current turmoil has impacted business sentiment in the economy. Durable goods orders, new estimates of Q1 GDP, and PCE inflation on Friday. On Wednesday, the minutes from the last Fed meeting are expected to be published which may move the markets if there is something dovish in it.

WEEKLY REPORT: Recession Fears & Dead Cat Bounce

Wall Street has been hit hard by inflation fears and the potential impact on global economic growth. Traders tried to bargain buy on Friday. They welcomed the Chinese People’s Bank’s new support measures, which saw its prime lending rate drop five years earlier than anticipated.

The market is full of Fed hawks as the central banks of the West seem prepared to do anything to reduce inflation, and markets fear that this could lead to a recession. Although the latest statistics remain relatively solid, some countries with high incomes may struggle to withstand a sharp downturn. Uncertainty remains about the effects rate hikes will have on the economy, housing, and speculative corporate bond markets.

Recession Fears Now Reality For Banks?

Numerous financial institutions including Morgan Stanley, Goldman Sachs, and Credit Suisse have issued new warnings about a recession. The Fed and other financial institutions made it clear this week that they will likely increase the rate of recession to crush demand and control inflation.

Goldman Sachs stated in a note to clients that the base-case end-of-year S&P500 forecast is 4,300. According to Goldman Sachs, the worst-case scenario, which would see stocks drop 10%, is 4,300 for the S&P500. Jan Hatzius and other Goldman executives have been revising growth forecasts throughout this year. 

Hatzius predicts that the US will experience 2.4% growth this year, a decrease of 2.6% in previous years and that 2023 will see a growth of only 1.6%. Hatzius and her colleagues also expect that the unemployment rate may rise slightly, “especially since job openings rates typically fall when there is an unemployment spike in recessions.” Hatzius’ team predicts that unemployment will reach 3.5% by 2022 and 3.7% by 2023.

Morgan Stanley projects that the S&P 500 Composite will finish the 12-month period at a bullish level of 4,450, a bearish 3350, or a base (and expected) level of 3,900. Katy Huberty from Morgan Stanley’s Equities Research for the Americas predicts that the base for the S&P index will be closer to 3,400-3,500 in June next year. This means that she expects a recession to occur during Q2 2023. Morgan Stanley is in agreement with Credit Suisse that volatile markets will continue without “leadership” (referring to the industry moving the market in one direction or another). 

Morgan Stanley believes that we may see a recession in 2023 due to a lack of consumer confidence and “sticky input/labor cost inflation” which could lead to negative earnings. Morgan Stanley points out that the recession is not in its base case forecast, but it also divulges that its equity risk premium is too low and stocks are still too expensive in its view. Led by tech stocks that have been overvalued despite recent falls.

Rebound or Dead Cat Bounce Possible?

I am not sure we have seen true support yet in the markets. Financial markets are still in a fog, and nervousness persists. When pessimism has reached its peak, it is often at these times that we see a bearish rally in the market.

However, we could likely see something like that this week or a “dead cat bounce” because prices seem to have been incorporated into future monetary tightening and the reduction in the Fed’s balance sheets. No one seems to be surprised by inflation. This means investors could reach regain confidence and jump into the market causing it to jump up, only to crash soon after. Personally, I am waiting to see more support as I think the effects of inflation are just started to be felt by consumers.

BONDS

Bond yields have slowed down despite the offensive speeches by central bankers. Ninety-three percent of investors think that the Fed will increase rates by half a percentage at its June 15 meeting and then again at the same rate on July 27. The US 10-year yield is currently at 2.84% (2.92%), the German Bund at 995 (0.92%), and the French OAT (1.47% (1.43%).

CRYPTO

Bitcoin is trading at around $30,000 as of this writing and is almost even. This is the seventh consecutive week with historical declines. Crypto investors may feel the pinch for a while, as no fundamental bullish catalysts exist. As seen in the chart, the current trend is BEARish. That being said, I have personally in the $30k and sold around $45K. So there could be trade there.

OIL

The steady bullish trend continued for Oil this week. WTI and Brent were at USD 105 and USD 115, respectively, and WTI rose to Brent’s level for a few days. Despite this week’s pause, there are still upside risks due to China’s reopening of its ports and the EU’s ongoing efforts to embargo Russian oil.

PRECIOUS METALS

Gold recovered slightly and some think is about to make a move up. Looking at the trend, I would agree. We have not seen gold perform as expected with rising inflation. However, gold is sitting at big support levels and the shiny metal is trading below the 200-day moving average. Due to the weakening of China’s industry, we are not seeing the increases in precious metals prices that many projected.

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