Summary: The market is rotating out of hot sectors to new areas of strength. Everyone is getting a too giddy about tech. Financials are leading. This is healthy. Powell will speak…it won’t matter. Putin is trigger happy and may blow wheat higher.
Sector Rotations
The market and I are in midlife. Everything has cycles. Our lives, the economy, and even bull markets.
Last week we got a taste of sector rotation sprouting up (another good link here). Markets are still going up or at least not going down. But new parts of the market are outperforming.
Sector rotation is just that. Some sectors take a break and new sectors drive the market higher. Over time trends wash over the whole economy like a wave.
The graphic below captures the general pattern. But the exact order of sectors changes over time.
It’s normal. It’s natural. So if we tech slowing down, it does not mean the end of the upsloping market.
When I say tech, I really the Magnificent 7. The who you ask?! Wall Street loves finding heroes for every market. Right now we have the the Magnificent 7 (Apple, MSFT, Alphabet, Amazon, Nvidia, Tesla and Meta).
Major Indices
Let’s start by looking at the major indices. For a change, the Nasdaq went down. And the Dow Jones went up. I am still waiting for the Russell (small cap) to rise more but it is finally outperforming the Nasdaq.
Earnings - Giants Gap + Financials Fly
Consumer discretionary giants fell. I am talking about Tesla and Netflix.
Tesla has to keep discounting its electric cars and business margins are shrinking. because of low margins and missing forecasts respectively. Elon, as cool as ever, isn’t bothered and said this all part of the long term plan.
Netflix was a good example of “buy the rumor, sell the news” as the password crackdown and ad-tiers are not generating enough revenue for investors’ liking.
Banks and financial stocks on the other hand saw large inflows and price increases. Banks can do no wrong right now.
Charles Schwab is losing fewer customers and less deposits than feared and as a result the stock jumped.
Morgan Stanley reported worse than expected numbers but reported the worst is over and the stock jumped.
Bank of America blew past estimates after a surprise gain from its fixed-income and equity traders.
Goldman Sachs was not outstanding by any measure but it rose in sympathy with the rest of the financial group.
Social Media That Should Give You Pause (In Short Term)
I think social media is a more timely indicator of trends than regular media.
I see headlines like this and I think in the short term, the hotter sections of the market are going to cool down for a bit.
This tweet is making its rounds on Twitter. Graham Stephan is a popular retail financial YouTuber with 4.4 million followers!
One reason for his popularity is that he has very good hooks (YouTube video tiles and titles) that resonant with his audience. And another is that he knows his audience.
These hooks are in tune with what his audience wants to hear – the content matters less. It reflects what the crowd is thinking.
Looking at these tiles, the beginning of the year was an incoming disaster and now we are going to get rich off of this market. This makes me cautious about how much upside is left in high flying names (like tech).
Debt Drag (Long Term)
Overleveraged consumers are starting to pop-up in earnings reports. This is manageable for now. Investors are curious how this spreads through the economy. But for now…
Debt be damned, Americans will travel!
These two data points caught my immigrant debt-averse eye last week.
American Express dropped. The consumer debt story caught my eye. Consumers are splurging on travel, dining, and entertainment with money they do not have. Earnings topped estimates but the firm raised credit loss provisions by 300% versus last year’s $410 million.
AutoZone has increased discounts to spur demand and expect margins to stay constrained. In other words, people are buying cars that they don’t need but want with money they don’t have. This is artificial demand that AutoZone is pumping. Additionally, people are keeping the cars they have for longer as after-sales revenue like repairs and maintenance services increased. When do consumers decide they have invested enough in transportation?
This Week - Purchases, Powell, and Putin
Earnings - Purchases and More Rotation?
On the earnings front we want to see what Visa and Mastercard share about consumer purchases and debt.
Google, Microsoft, and Meta report this week. Do they follow Tesla’s slide after such a huge run-up (especially Meta)? They already started turning down last week.
The Fed - Powell Snoozefest
The biggest non-event this week is the Fed announcement. They are expected to raise rates by 25 bps and hold off the rest of the year. A negative surprise would be additional rate hikes beyond this.
Mohamed El-Erian, chief economic adviser at Allianz SE, is publicly questioning why the Fed would need to get a 2% inflation target so quickly. Rich Clarida, ex vice chair of the Fed, thinks that the central bank could be content with 2-something inflation as opposed to going down to 2%.
Larry Summers, as recently as last year, said recently, to get to 2%, the unemployment rate might need to rise to ~10%. Really Larry?! We need to kick everyone out to the streets for the goal financial discipline?
The market’s reaction to Fed announcements has dwindled through the last few months. Everyone knows what Powell is going to say. He has little incentive to crash this economy. Plus a win for Powell is a soft landing.
I expect nothing of importance from the Fed.
Putin’s Shenanigans
Global geopolitics are a still a wild card! And in my opinion will be for the rest of the decade. 🃏
Putin has restarted bombing Ukrainian ports after the grain deal was cancelled last week. Wheat is a major export for Ukraine.
Putin knows this and intends to inflict maximum. He is pissed! And maybe a little scared given his Vietnam.
The markets have noticed. Rockets blasted not just physical wheat but wheat prices as well. The green arrow below points out the Usain Bolt move in wheat.
The world has stockpiled wheat now just in case this happened again. And it has happened again. Preparation may prevent the dramatic moves we paid for last year at the checkout.
But anything can happen!
If you have any questions, leave a comment. Thanks for reading Embrace the Chaos! Sharing perspective that makes sense.
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- Vikas Kalra, CFA