The S&P 500 ended a tough week, last week, down 1%. Markets don’t like unknowns, and therefore can never properly discount the binary outcome of a debt ceiling/default. As Tom Block, Head of Policy Strategy at FundStrat research notes, “Getting a deal has many challenges and with a fast approaching “x date” (when funds depleted), financial markets are nervous.” As would be expected, when markets are difficult as a result of a major policy unknown, institutions tend to sit on the sidelines. To cap this off, last weekend was a holiday weekend, a weekend that tends to be the starting gun for the summer season.
One of my very favorite analysts, Ari Wald eloquently put it out there over this past weekend. His quote was, “(Still) Stuck Between a Bull and a Bear.” He went on to say, “We think lagging areas are prone to continue to underperform on a market slide, or said differently, a bullish catch-up trade is likely a catalyst for the next meaningful market rotation.” Basically, the strong should stay strong, and once the Debt Ceiling noise and the Fed meeting of early June are out of the way, there could very well be some green shoots arising from some great quiet companies moving forward. His US Presidential Cycle Chart pretty much sums up where we are currently:
To say that the markets are frustrating currently is a gross understatement. The internal measures of market strength or weakness seem to be continuing to lean to the negative side. One of the clearest measures of this is market breadth. Market breadth (Number of advancing issues compared to a number of declining issues) has not been great YTD as the bulk of gains in the S&P 500 have been driven by a small handful of stocks namely, FAANG and Technology. The boil down of breadth in the S&P 500 is not as terrible as many pundits say though. Consider that YTD, 142 stocks or 28% of the S&P 500 have returns >8% and are beating the S&P 500. The worst market breadth and Defensives have been particularly Utilities (0% beating), Staples (22%), and Healthcare (28%). Many publicly quoted strategists are becoming incrementally more constructive, but this is a “relative term.” More than 16 of the 24 of these strategists, tracked by Bloomberg, still see the S&P 500 falling into year-end. 6 strategists have made adjustments to their price targets since the start of 2023.
- 2-of-6 downgraded YE 2023 price targets:
– 1/5 from 4,225 to 3,900
– 2/17 from 4,100 to 3,500 - 4-of-6 upgraded:
– 1/20 from 3,650 to 3,800
– 4/19 from 3,900 to 4,000
– 5/8 from 4,200 to 4,400
– 5/22 from 4,000 to 4,300
Notably, in looking at the individual analyst targets, only 2 of the revised price targets have any upside for the remainder of 2023. In other words, the price target changes are either changes to reflect increased bearishness or just “chase the market higher” price estimations. This matches their initial thoughts of a bad market for the year 2023 as a continuation of the negativity that the market experienced in 2022. Yet, as is normally the case, Mr. Market tends to do not what is expected, but rather what is not expected. I bring this up to show how truly frustrated most analysts seem to truly be.
I still believe equity markets will resolve higher once the debt issue is resolved, but as party lines are drawn around the debt ceiling this could mean a short-term event supplants that longer-term view. In other words, my full-year view on equity markets remains constructive but we also should recognize that stocks in the near term are governed by a binary event that is an almost immeasurable unknown that needs to come to a close before "normal" market analysis can get back on track. A little over a week ago, Paul Tudor Jones (a legendary market strategist and famous commodity pool manager) said he believes the Fed is done hiking and expects stocks to be higher by year-end. Paul Tudor Jones, on a financial news station last Monday suggested “Fed is done raising rates.” I bring this up because Jones is the first major macro investor, I believe, to have shifted to a more constructive view on inflation/rates. He also noted he expects stocks to “finish the year higher from here." Granted, in his interview, he also noted that higher interest rates are like “chemo” to the economy and thus, a recession is still quite possibly on the horizon. But the key is he believes the Fed is done raising rates, and this means the inflation concerns should be fading.
In looking at the stock market in general, due to a record-breaking earnings report from a major semiconductor company last week, It’s a tale of two markets, and right now, Technology trumps all. It seems that if a company is at all involved with Chat GPT or AI (as it is commonly known) it seems to be getting sucked up in the vacuum. Since this week is a four-day week without a lot of economic reports to be digested, the Debt Ceiling should rest front and center in the media. If the outcome is less contentious, then the markets should show less seesaw action. If the two parties find it to be a time to really stir things up, there could be fairly aggressive cross currents.
This seems to be a time that precedes the "summer doldrums" and therefore is a great time to get together with friends and family and remember those that have fallen in this Memorial Day week. Please feel free to reach out should you have any individual questions.
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