In the first three weeks of April, the S&P 500 stayed within a 100-point trading range (i.e., 4,050 to 4,150), which caused choppiness and a sideways market. The number of conflicting data points, adjustments in earnings guidance, and Federal Reserve talking points has only increased. That elevates the notion that we’re at a fork in the road, with the market needing to break one way or the other at some point.
Even this past week, we saw the recent mighty technology trade become notably cautious as investors wait on earnings reports to see if the market might reward all the cost cutting and belt tightening by tech firms (so far, it has). There’s also the continued debate over inflation, which doesn't look like it will be settled anytime soon, especially after the recent Purchasing Managers’ Index (PMI) reports came in hotter than forecasted.
For example, the Flash U.S. Composite PMI was surprisingly strong. The services sector posted a 12-month high of 53.7, which was more than the 51.5 expected. And the manufacturing sector, which had been mired in a multi-month contraction, rebounded sharply to 50.4, which was well above the forecast of 49.0. Keep in mind, values greater than 50 indicate growth, while those less than 50 indicate contraction.
This data seemed to bring more confusion than clarity, especially after the release of the initial and continued unemployment claims a week before the PMI reports. Those reports showed a slowing labor market.
To many folks, it just doesn't make sense.
Before the Federal Reserve meets this week, it will have the benefit of digesting even more data before making any decisions. That includes the S&P/Case-Shiller home price index, consumer confidence data, durable goods orders, unemployment claims, March inflation data and more.
Collectively, this information will be important. But at the end of the day, inflation is still higher than the Fed would like:
As such, last week’s PMI reports pretty much locked in a tenth consecutive interest rate hike. They also probably induced discussion of another hike in June, unfortunately.
The strong PMI readings seemingly triggered a shift in the news narrative back to the “sticky inflation” and “higher rates for longer” tales we’ve heard a million times over by now. This contributed to the sloppy and choppy price action we’ve seen in equities markets.
But if investors were truly worried about big lags in stock performance, why is the CBOE Volatility Index, which is commonly known as the VIX and referred to as a “fear gauge,” trading at a new 52-week low?
That seems awfully complacent. Still, sometimes it’s okay to calmly admit you just don’t know.
But we think the prospect of being in an earnings trough is valid and that the economy is learning to live with the price increases it has had to absorb. And as we spoke about last week, analysts are still looking for a second half rebound in earnings:
That makes sense when looking at history. When exiting the Great Recession, companies posted record profits on lower sales growth due to broad cost cutting measures and efficiency efforts. Plus, it’s becoming increasingly clear that an effect of the current slowdown is the creation of leaner and meaner corporations, where earnings growth will recover after the Fed pauses and the aggressive rate hikes fully work their way through the system.
But What Does the Data Say Now?
When somebody asks where the market is headed or if we’re tumbling into a recession, we think a perfectly fine answer is to request that they ask again in two weeks. Kidding aside, our readers know we are data dependent. As such, we’ve identified six data-driven points that can help inform where things are now and where we may be headed down the road.
Markets Should Rise, At Least For A Little While
The trusty Big Money Index (BMI) from our friends at MAPsignals, which shows a 25-day moving average of buys versus sells from “big money” professional investors, is on the rise since the end of March. That said, there have been brief breathers along the way. Still, it’s not yet hit oversold territory:
Selling Has Continued to Evaporate
The continued dwindling of “big money” selling from mid-March lows has kept markets relatively steady. The potentially positive upswing is that a lack of selling opens the door for any meaningful increase in buying to take full control of the market, as was the case in November 2022 and early February of this year:
Sector Leaders Show Strength
The leading sectors within the market continue to be cyclical growth sectors. This is especially true within technology and consumer discretionary, which sport strong fundamentals:
Previously weaker areas where selling ran rampant in March are beginning to turn around. A few examples include industrials, materials, and health care (see below). This is crucial because if we want a broad new bull market, there must be strength in more than just two sectors.
Headlines are Misleading
The macro situation may not be as bad as the news narrative over the recent past suggests. Most interesting is that the federal funds effective rate is nearly at parity with inflation, which last happened about three years ago (which probably means the Fed should stop tightening!):
Earnings Contain Positive Surprises
We’ve mentioned how earnings season is upon us. Early indications are that earnings aren’t as bad as feared (at the very least). FactSet data through April 21, 2023, shows 76% of companies have reported actual earnings per share above consensus estimates, which is greater than the 10-year average of 73%:
Additionally, and maybe more importantly, the earnings beat rate has rebounded significantly from the previous few quarters and is currently running at a higher percentage beat than the Pre-Covid average:
All in all, the short story here is that if you ignore the “ad sellers” (i.e., the media), there are plenty of positive datapoints circulating right now. Plus, as earnings continue to emerge and inflation keeps declining, there should be more upside in the second half the year, as we’ve been saying all along.
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