Major market events 7th – 11th November.
The Bull strikes back?
#US Mid-Term #Elections, #US #China #Inflation data
Highlights of the Week
Mon 7th: UK Halifax House Prices
Tue 8th: Election Day Mid-Term Elections
Wed 9th: China CPI/PPI
Thur 10th: US CPI, Inflation Reports
Earnings Calendar Highlights
We have the pleasure to have this week as a host Giorgio “Joe” Vintani, who is sharing with us his precious insights on equity markets. We count on him to appear regularly on our Blog! Welcome, Giorgio! He will be a great addition to our Blog with his macro perspective and actionable investment ideas on global stocks!
Let’s start with a quick recap of what happened last week in the Equity World!
It was a week with two sides in the global equity markets: in the US it was dominated by the hopes of a Fed Pivot, which were once again denied by Governor Jay Powell. Particularly ominous was his warning that rates are not yet at a restrictive level and may have to increase more than the market is expecting (beyond 5%?). As a result, the US markets were again in the red, while Europe fared better, and Japan eked out a gain for the week.
The reaction to the failed Fed pivot was remarkable and tangible for the US equity markets, with an intraday swing of more than 3%. As a result, the S&P 500 suffered its worst ‘Fed Day’ since January 2021. The dovish statement was quickly tempered by Governor Powell’s hawkish press conference, and the rout hit particularly hard the Nasdaq, already suffering by mediocre earnings reports of some of its bellwethers (Meta Platform). Until we get a clearer picture of rates, value (Dow Jones, Europe, and Japan) will likely trump growth. There was a silver lining in the important October Non-Farm Payroll report, as the unemployment rate ticked higher at 3.7% vs forecasts of 3.5%. The tide might be about to turn, even though it will need further confirmation from the upcoming CPI and PPI, bearing in mind that the US Rates Policy operates with a lag.
So far 85% of the companies in the S&P 500 have reported earnings for Q3 2022. Of these, 70% have reported EPS above estimates, which is below the 5-year average of 77% and below the 10-year average of 73%. While companies find it harder to beat estimates in the face of rising rates and a slowing economy, they still managed to do so. Clearly, value sectors such as Health Care and Energy led the positive results, while Communication Services and Consumer Discretionary as well as some tech fared worse, even though for every Meta Platform (negative surprise) there is an Apple (positive surprise). Given that rates are nearing the peak in many years and we’d have to go back to 2007 (beyond 10 years from the present day) to find similar levels, these results are par for the course. The biggest questions for the equity markets are 1) when will we reach peak inflation and hence peak rates and 2) whether the world economies will face a recession and if so, for how long.
The earnings season continues, and highlights this week include Palantir, Biontech, Berkshire Hathaway, DuPont, and Disney.
Source: Earnings Whispers
What has been so far the impact on the market of positive/negative earnings surprises? I find two charts particularly helpful in this regard. The first chart plots the average price change (from 2-day before to 2-day after the report) for different buckets of % earnings surprises.
The second chart, instead, plots the average price change around the report date differentiating between companies reporting positive EPS surprises and those reporting negative surprises. The data for the current quarter is plotted against the average price change % of the last 5 years.
To date, the market is rewarding positive earnings surprises less than average and punishing negative earnings surprises more than average. We are facing further multiple compression even if the results are good, which reflects the macro-overhang equities are facing. Furthermore, this is somewhat surprising given the market positioning, which is, according to various surveys, supposed to be very light/short.
Consensus expectations point to a faster 0.7% month-on-month (MoM) increase for headline CPI while core CPI growth may slow to 0.5% MoM. That’s pretty much in line with Cleveland’s FED Inflation Nowcasting.
Source: Cleveland FED
The market is expecting now inflation to come in hot and we are also coming from a very long streak of positive surprises.
US CPI will be of key interest for the market that remains caught between elevated price pressures and tighter monetary conditions. A negative US CPI surprise, together with a split Congress / Senate would be the best case scenario for Bulls.
Market Sentiment / Positioning
AAII Sentiment Survey
*A big drop in pessimism; the lowest level of bearish sentiment since March
*Neutral sentiment jumps to the highest level since April
*Bullish sentiment improves but is still below avg.
AAII Asset Allocation Survey
*Highest Exposure to Cash since March 2020
*Lowest Equity Exposure since May 2020
* Overall Stock Allocations above the historical average of 61.5% for the 29th consecutive month.
The key takeaways for me are that sentiment is certainly improving, but the market is still sitting on a big pile of cash. The cash allocation according to AAII is now about 24%. Barring very negative headlines, that will be ultimately deployed into year-end, after the mid-term elections.
Short-dated S&P 500 options volume has been extreme, exacerbating market volatility.
There is a lot of short gamma in the market. That’s something to watch out for when defining entry/exit levels for tactical trades this week.
Market Conclusions, Ceterum Censeo
Our key conviction is to go tactically long US/Growth.
We can summarize the key elements of this investment thesis as follows:
We do not see the market pricing of the terminal rate of the FED moving significantly higher
Attractive Entry Levels
The S&P500 Growth also already significantly underperformed S&P500 Value.
Forward Earnings for Growth Stocks already downgraded
Most of the recent earnings downgrades have been in growth stocks.
In addition strong seasonalities (mid-term elections and year-end), buybacks, and very light/short positioning could be very supportive.
We, therefore, like to take a contrarian view. We are keen to allocate to this theme 1/3 of the equity risk budget with a stop loss of 5% ahead of Thursday, Nov 10th CPI. If the CPI is good and matches or is lower than expectations, we would add on to the position to reach 1/2; if it doesn’t, the above 5% stop loss (at the Index level) still stands. The European markets are also suffering from multiple compression, even though there are many companies – especially amid the small caps – that are performing ahead of their business plan and raising estimates. When the rates overhang will soften, there are plenty of opportunities there at very good multiples.
POLL 1: Equity Performance
POLL 2: FED Terminal Rate
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