Morning Roundup

By Mark Masterson on March 30, 2023

Good morning,

Below are the news items moving markets today:

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Executive Summary:

Futures point to another higher open with banks leading the way.  Clearly the massive liquidity backstop from the Fed, combined with the endless promises to take “necessary measures” to protect all deposits is hitting the mark.  In the charts below, I show how liquidity leads market rallies and declines.

In economic data – Q4 GDP’s final reading was modestly lower than previous reports…..

• U.S. Q4 GDP FINAL READING: +2.6%, EST. +2.7%; PREV. +3.2%

At the same time, jobless claims remain subdued…..

• US CONTINUED JOBLESS CLAIMS ACTUAL 1.689M (FORECAST 1.7M, PREVIOUS 1.694M)

As you can see, jobless claims remains pretty hot.  As per Richard Bernstein, today’s labor market increasingly looks like the tight one prior to the 1970s wage price spiral. 

RBA 3 30 23

Its not just jobs.  The Fed’s favorite measure of inflation remains VERY elevated. 

With the PCE this high, the Fed will likely be forced to hike again, and absent an economic melt-down, I don’t see the Fed cutting rates anytime soon.

RBA 3 30 23

Overnight headlines highlight how the Nasdaq is now in a bull market. 

• Nasdaq enters bull market for first time in almost three years as drop in yields spurs rush into tech stocks (Bloomberg)

The Nasdaq is being called a bull market because it is up 20% off the lows.  Just remember, after 2000, it did this 7 times on its way to an 80% decline.  It had 11 rallies of more than 10%. 

Hedgeye 3 23 23

That’s not to say the market can’t rally through April.  In fact, April has been known to be a good month for markets.

• Yes, the S&P 500 has been green in April 17 out of the past 18 times since 1950. The only time it was red was in 1987.

I highlighted yesterday how Jeremy Grantham noted from his extensive research of market returns during Presidential cycles that the best window for markets is the 7months from October-April of the third year of a Presidents term.  That window remains open until the end of April.

But, but, but…..

I know, there is always a but.

Look at how narrow this market is.  I have shown you many times how concentrated the returns have been.  History suggests that a concentrated market is not healthy.  It tends to signal a top as investors just keep plowing into the same names, the only names, rising.

Those names consist of just 5 names this year.

Don’t believe me?  Look at the chart below from Goldman Sachs.

The 5 names are up almost 20%.

The market – including those 5 names is up 3-4% year to date.

The other 495 names have 0% return.

S&P 5 vs. S&P 495 this quarter? (GS)

Goldman Sachs 3 30 23

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Articles of Interest:

• Banking:
  • Facing almost $23B in costs from recent bank failures, FDIC weighs shifting burden onto the biggest banks (Bloomberg, Bloomberg)
  • Fed’s Barr says bank management, supervisors, regulators all failed in SVB collapse (Bloomberg)
• Markets:
  • Stocks and bonds moving more closely since the 70s, posing headache for investors seeking to spread risk (Bloomberg)
  • With the easy-cash era coming to an end, markets feeling pinch from sharp spike in rates (Reuters)
  • Companies with riskiest credit outperform as credit market stresses begin to ease (Bloomberg)
• Economy:
  • Mortgage refinancings at highest level since September with 30-year rates at six-week lows (Reuters)
• Corporate:
  • Apple to hold its annual developers’ conference from June 5-9 (CNBC)
  • Google says Microsoft cloud practices are anti-competitive (Reuters)

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Charts of the day:

As mentioned above, the Nasdaq heads for one of its best quarters in a decade, up 17% in Q1.  Second only to 2022’s Q2 30% rally on the monumental monetary easing during Covid.

Both times, the Fed’s balance sheet expanded. Latest 10% leg up on the Nasdaq coincided with Fed’s balance sheet adding $400bn.

About the Fed…..

The market does tend to follow the Fed Net Liquidity in both directions.

If it holds – the recent spike in the Fed’s balance sheet (if it indeed increases net liquidity) could be a tailwind for equities

Steve Donze 3 29 23

Here is another view of the same…..

Bloomberg 3 30 23

I suppose the question is – will this liquidity stay in the system like it does through Quantative Easing – or will it leave once these loans are paid off?

Remember, in QE – the Fed creates money, buys bonds, and puts the newly created money in the banks to be used as desired.  That added liquidity then makes its way into the economy and markets.

We are being told that this program is not QE.  It is loans.  It will be paid back and will not be circulated into the economy and markets.  If that is true, it should not have the same impact as QE and any gains from the impression it is QE should be reversed.

Thus the question…..how long will these loans remain outstanding?

One of my favorite charts to show why real assets should outperform in the next 10 years…..

It shows the commodity index vs the S&P 500 ratio.

Remember, when it is falling, stocks are outperforming commodities.

But- when it is rising, commodities are outperforming stocks.

What would you predict comes next?

Katusa Research 3 30 23

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Quote of the day:

The cautious seldom err

Confucius