by Bryan Perry
June 13, 2023
The stock market is finally starting to broaden out from the AI-related Magnificent 7 (or Elite 8) mega-cap tech stocks that have hoarded most of the fund flows in the 2023 rally that has led the S&P 500 to its next resistance level at 4,300. Even though roughly one-third of the S&P 500 companies trade below their 50-day moving average, there is improvement in the NYSE Advance/Decline Line in the past two weeks.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
To be quite frank, there isn’t much keeping the S&P 500 from challenging 4,500 (4.7% higher) or Nasdaq trading up to 14,000 (5.5% higher) by Labor Day – if a couple more hurdles are cleared. They include this week’s May inflation data (CPI and PPI) coming in at or below forecast, followed by the Fed pausing their rate increases at this week’s FOMC meeting. Currently, about 70% of those surveyed are forecasting the Fed will keep the Fed Funds rate at 5.00%-5.25%. The Fed will have the luxury of getting both inflation reports before they issue their rate decision tomorrow at 2:00 pm Eastern time.
The business of forecasting much further in this current economic backdrop is a major challenge, given the wide-ranging set of data points showing pockets of real strength (home construction, technology, healthcare, infrastructure) and real deterioration (manufacturing, commercial real estate, retail sales). Retail sales are not adjusted for inflation, so the key takeaway from the 0.2% bump in the April report is that total retail sales were up primarily due to price increases, and not due much to increased demand.
I am more encouraged by forward-looking charts that bode well for the economy in 2024 – namely the forecast for inflation and product shortages showing marked improvement by later this year. A recent Q2 Global Economic Outlook report by Capital Economics assumes that tightening credit criteria will rein in lending, thereby adversely impacting companies and households and raise our cost of living.
A May 31 Reuters report lent credibility to this forecast: “U.S. domestic banks reported a widespread tightening of lending standards by the end of the first quarter of 2023 – even before the full impact of the regional banking crisis had been felt. Stricter lending criteria are likely to slow the flow of credit to small businesses and households – amplifying the impact of interest rate increases by the Federal Reserve over the last year. The net percentage of domestic banks tightening standards for commercial and industrial loans to small businesses with annual sales below $50 million hit +47% at the end of the first quarter.”
China’s reopening boost is now largely over with their recovery being weaker than anticipated and there haven’t been any new major stimulus plans announced, which some cite as a major reason why oil prices failed to get a boost from the latest OPEC+ production cut of one million barrels per day, and news of the U.S. intending to restock the Strategic Petroleum Reserve. Although crude oil still trades around $70 per barrel, it is starting to look like the predictions of $100 per barrel this summer may not be realized.
And yet energy companies will still produce plenty of profits if crude stays above $65, while cheaper oil and gas prices have a healing influence on the rate of inflation, as well as the normalization of global supply chains affecting the cost of goods and commodities. Both lower energy prices and the alleviation of product supply shortages should contribute to lowering inflation.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Hopefully, the May inflation data this week will reflect these key price inputs and the Fed can take a breather. Suffice it to say that only about 50% of the rate hikes have worked their way through the system, so it is a good time to see just what kind of impact tighter lending standards on banks will have on consumer spending and capital expenditures for small-to-medium-sized businesses.
The recent banking crisis just might have done the rest of the heavy lifting for the Fed, and that will all come in the May and June data. Additionally, end-of-quarter window dressing begins this week with a war chest of cash on the sidelines. According to Investment Company Institute (ICI), as of June 8, 2023, the total money market fund assets increased by $36.63 billion to $5.46 trillion for the week ended Wednesday, June 7. Among taxable money market funds, government funds increased by $18.01 billion and prime funds increased by $15.78 billion. Tax-exempt money market funds increased by $2.84 billion.
Professional fund managers holding huge cash weightings are likely spending more time in the restroom biting their fists as the “pain trade” takes the market higher as the quarter comes to a close, with second-quarter earnings season just ahead. These fund managers must be the 30% that believe the Fed will hike again and hopefully let some air out of the current rally. That, and being a bystander as the Russell 2000 has rallied by 6% since June 1 – while keeping a lot of cash – is keeping cash-rich investors up at night.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Is the rally in the risk-on Russell stocks just another false breakout – like the last three attempts going back to July 2022? That’s hard to say, but it is safe to say, we won’t have to wait too long to find out.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Small Caps and Energy Stocks Still Look Good
Income Mail by Bryan Perry
Investors Taking a Year-End View Should Be Well Rewarded
Growth Mail by Gary Alexander
As Adam Smith Turns 300 (With Marx at 205 & Keynes 140), Who’s Winning?
Global Mail by Ivan Martchev
Watch Jobless Claims – and Beware Bitcoin
Sector Spotlight by Jason Bodner
Are You Still Waiting for the “Next Shoe to Drop?”
View Full Archive
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Bryan Perry
SENIOR DIRECTOR
Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
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