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Main U.S. equity indexes now just slightly red; Nasdaq off
~0.2%
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Comm svcs weakest S&P 500 sector; real estate leads
gainers
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Dollar up; gold, crude, bitcoin decline
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U.S. 10-Year Treasury yield rises to ~3.59%
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CAN STOCKS BOTTOM AHEAD OF A RECESSION? (1330 EDT/1730 GMT)
Many U.S. equity investors wonder if the stock market has
ever bottomed before a recession actually got underway.
Lori Calvasina, head of U.S. equity strategy at RBC Capital
Markets, has been highlighting the belief that the S&P 500
priced in a recession at its October 2022 low, down roughly 25%
from its record high.
According to Calvasina, there actually is one period in
history when the stock market appeared to ignore a recession –
1945. This was the recession that occurred as World War 2 came
to an end.
"It was brief, lasting from February 1945 to October of
1945, and was driven by the pivot from a wartime economy to a
peacetime economy in which government spending dried up quickly.
Unemployment remained low despite the fact that soldiers
returning home were competing with civilians for jobs," writes
Calvasina in a note.
She adds that stock market conditions were volatile before
the recession of 1945.
While there are clear differences between 1945 and today,
Calvasina believes that one thing that both have in common is
that "unprecedented historical events caused dramatic shifts in
the economy that required a tough transition back to more normal
conditions."
In the case of 1945, this resulted in a technical recession that the stock market was able to endure, perhaps due to all the pain it had already taken.
"Time will tell whether the stock market can look past any
recession that occurs in 2023-2024 as the US economy completes
its transition into the post-COVID era. It’s worth keeping in
mind that while this would be rare, it wouldn’t be entirely
unprecedented."
(Terence Gabriel)
*****
TAKING STOCK OF SOME RARE BULLISH TRIGGERS (1222 EDT/1622 GMT) Stocks have staged an impressive rally off their mid-March lows, so much so that, Ryan Detrick, chief market strategist at The Carson Group, says he sees multiple rare and potentially bullish signals. Detrick notes that the S&P 500 had its best first quarter since 2019, up 7.0%, which came on the heels of 7.1% gain the prior quarter.
What happened after previous big first quarters? Detrick says that there were 16 other first quarters that gained at least 5% and the final three quarters of the year finished higher 15 times. Next, Detrick addresses the breadth issue, that only a few stocks are leading the overall market higher. Detrick cites a recent sign of extreme buying pressure across many sectors and stocks. Using data from Ned Davis Research, Detrick says that more than 93% of the stocks in the NDR universe were recently above their 10-day moving average.
"All you need to know here is this is a rare sign of
broad-based strength and a year later stocks were higher 23 out
of 24 times with some very solid returns along the way," Detrick
writes.
Lastly, Detrick points to a recent rare trigger of the Zweig
Breadth Thrust (ZBT) indicator, which was developed by legendary
trader Marty Zweig. The signal looks at all the stocks on the
NYSE and it looks for periods of extreme oversold readings
moving to periods of extremely overbought conditions in a short
timeframe. In other words, a quick transition from washout to
heavy buying.
According to Detrick, with the previous 14 ZBTs, the S&P 500
was higher a year later every single time (14 out of 14 times
and up 23.3% on average).
"It would be quite rare for this signal to trigger and for
stocks to simply drop right back to new lows. In fact, usually
it happens ahead of periods of strength."
(Terence Gabriel)
*****
IT'S TIME FOR DIVIDENDS RULE (1112 EDT/1512 GMT) Corporate America is possibly going to keep a tight lid on costs amid a high interest rate environment, likely higher lending standards and slowing growth, with last month's turmoil in the banking sector adding to caution. The outlook of buybacks is less favorable in such times, while dividends have room to growth further, Goldman Sachs noted in its Weekly Kickstart note. As earnings reports pour in, latest results show first quarter S&P 500 dividend-per-share growth has already registered 8% growth year-over-year, with strategists expecting further growth in 2023, GS said. Meanwhile, S&P 500 buyback executions fell by 11% in Q3 2022 from a year ago and 21% in 4Q 2022 and data suggests YTD activity could slow further in Q1, GS added. Indeed, Charles Schwab on Monday said it would pause its share repurchase program in light of recent uncertainty in the U.S. banking sector and the resulting concerns around new regulations. "Current cash spending outlook is supportive for stocks paying dividends over those focusing on repurchasing shares," GS strategist David Kostin said in a note late on Friday. The S&P 500 Buyback index , which measures the performance of the top 100 stocks in the index with the highest buyback ratios has edged up 2% this year. In comparison, the S&P 500 Dividends Aristrocrats index , which measures the performance of S&P 500 companies that have increased dividends every year for the last 25 straight years, has eked out a 1% gain in 2023. Separately, Bank of America strategists noted on Monday that JPMorgan and Wells Fargo bought back stock in Q1 and expect to continue to do so in 2023, a rare positive at a time of potentially slowing buybacks in general. Dividends are not completely out of the woods though. If lending stress increases substantially and leads to a broader downturn, GS strategists expect regional banks to suspend dividends and REITs to reduce dividends.
(Medha Singh)
*****
TURN THAT FROWN UPSIDE-DOWNISH: EMPIRE STATE, NAHB (1049 EDT/1449 GMT) Data released on Monday suggested the economic skies are a tad less cloudy this month.
Factory activity in the Northeast bounced back to expansion this month. The New York Fed's Empire State index delivered a big upside surprise in April, landing at 10.8, having spent the previous four months in contraction (an Empire State number above zero signifies monthly expansion). Analysts expected a reading of -18.
The turnaround was driven by robust bounce-back in new orders - to 25.1 from March's -21.7 print. The index, which aggregates results from a survey sent to 200 manufacturing executives in New York State at the first of the month, also showed a cool-down in the inflation-related prices paid element, while the employment number remained in contraction. The manufacturing sector - accounting for about 11% of the U.S. economy - has been contending with higher input costs, a demand shift from goods to services and a worker shortage. But the sector's most formidable current bogeyman is tighter credit conditions - as the Fed continues to tighten the screws and regional banks confront a liquidity crunch. "On the face of it, this report suggests that the re-opening rebound in China’s manufacturing sector is providing a significant boost to activity in the U.S., offsetting any drag from tighter credit conditions," writes Kieran Clancy, senior U.S. economist at Pantheon Macroeconomics.
"(But) capital spending is the lifeblood of U.S. manufacturing activity, and it is set to take an enormous hit as credit conditions tighten," Clancy adds. On Thursday, the Philly Fed will round out the Atlantic region manufacturing picture:
Separately, the mood in the home construction market is a bit less gloomy in April, according to the National Association of Home Builders (NAHB). While NAHB's Housing Market index inched up to 45 from 44 - consensus saw it staying put - it marks its ninth straight month below 50, the line of demarcation between pessimism and optimism. Even so, the report also shows its fourth consecutive monthly improvement. "Currently, one-third of housing inventory is new construction, compared to historical norms of a little more than 10%," says Robert Dietz, NAHB's chief economist, who also notes that "there is not significant evidence thus far" that tighter lending conditions amid regional banking turmoil are hitting builders and developers.
"Builders note that additional declines in mortgage rates, to below 6%, will price-in further demand for housing," adds NAHB chair Alicia Huey. Indeed, traffic of would-be buyers, encouraged by recent down-tick in mortgage rates, appears to be on its way to recovery.
Later in the week, housing starts/building permits, mortgage demand and existing home sales data will give housing market geeks more to chew on.
(Stephen Culp)
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U.S. STOCKS STEP GINGERLY IN EARLY TRADE (1015 EDT/1415 GMT) The main U.S. indexes are all roughly flat in early trade on Monday as investors await more bank earnings and views from Federal Reserve policymakers that could shape expectations around when the central bank would pause its monetary policy tightening. A majority of S&P 500 are in positive territory, with real estate posting the biggest rise. Communication services is down more than 1.5%, making it the only one of the 11 sectors with an absolute change of more than 1%.
Here is an early trade snapshot:
(Terence Gabriel)
*****
WEDBUSH BELIEVES INDIA IS APPLE'S NEXT MARKET TO CONQUER (0925 EDT/1325 GMT)
Wedbush believes Apple Inc's move to open its first retail store in India kicks off an aggressive push that could ramp up annual India revenue to $20 billion by 2025. This compares with Apple's revenues from the country touching $6 billion in the year through March 2023. "Apple, with price points across the board, plan to take a page out of their historically successful China strategy in penetrating India over the coming years and unseating traditional competitors," says Wedbush analyst Dan Ives.
Apple is looking at India from both a production and a retail expansion point of view over the coming years - a strategic "poker move," says Ives.
Market share gains are on the horizon as it opens in major cities and attempts to attract more Indian consumers into the Apple ecosystem.
(Subhadeep Chakravarty)
*****
GREENER PASTURES AHEAD FOR EUROPE'S ESG (0904 EDT/1304 GMT) After a rough 2022, it looks like sustainable investing is back in vogue. Environmental, social and governance (ESG) equity funds ended the first quarter of this year with net inflows, even after the March withdrawals sparked by the banking crisis, beating non-ESG equity funds, which lost money.
Citi Research's equity strategy team said there are three main reasons to re-engage with ESG stocks this year -
1. ESG earnings have been resilient to past profit recessions 2. Real rates are stabilizing and ESG is a "growth trade" so subsiding valuation pressures should help these stocks 3. Structural pro-ESG trends like the U.S. Inflation Reduction Act Stocks in Europe that could benefit from these trends, according to Citi, include luxury firms such as Richemont , and Kering and pharmaceutical firms like Novo Nordisk . Citi's list of resilient ESG stocks have gained 14% on average so far this year, outpacing the 10% gain in 2023 by the broader STOXX 600 index . Here's a full list of European ESG stocks, recommended by Citi with resilient EPS: RIC Name
YTD% Eiffage 11.782 Kone B 2.9814 Intertek Group 1.8344 Teleperformance -3.8616 Amadeus It Group 27.1267 Compass Group 8.2138 Whitbread 21.1284 Nestle 4.6722 London Stock Exchange 10.6222 Worldline 8.4588 Danone 20.8816 Prudential 2.0399 Kering 20.0631 Richemont N 22.769 Air Liquide 20.6193 Smith (DS) 1.1527 Publicis Groupe 25.143 WPP 16.435 Lonza Group 30.5231 Novo Nordisk 'B' 23.9232 Inditex 26.1569 Ahold Delhaize 15.7601 DSV 17.5559 EDP Renovaveis 1.0204
(Bansari Mayur Kamdar)
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S&P 500 INDEX: ABOUT TO BE A BREAK IN CLOUDS? (0900 EDT/1300 GMT) The S&P 500 index ended last week flirting some major chart barriers. Thus, bulls may soon learn whether their worries are just like passing clouds, or if instead, another storm may be brewing. The SPX hit a high on Friday of 4,163.19 before closing out the week at 4,137.64. Thus, the benchmark index flirted with the upper edge of the weekly Ichimoku cloud, which resides around 4,155. Ichimoku cloud is technical indicator which displays support and resistance, identifies trends, and measures momentum. Utilizing midpoints of ranges, a number of lines are generated. Two of these lines are used to create cloud boundaries. The entire cloud is shifted forward in time in order to provide a glimpse of future support and resistance:
Once the SPX broke below the cloud in May of last year, it has failed to thrust back above it on a weekly closing basis. Indeed, rallies failed in early-June, mid-August, mid-December, and in early-February of 2023. Thus, the 4,155 level presents an important hurdle. Add in additional resistance at the early-February high at 4,195.44, the 23.6% Fibonacci retracement of the March 2020-January 2022 advance at 4,198.70, the Fed-Chair Powell August-26 Jackson Hole speech high at 4,203.04, and the 100-week moving average, which ended Friday at 4,203.49, and bulls may have their heads in the clouds if they expect the SPX will be able to continue to advance. That said, clearing these barriers will have the potential to add credence to the view that the SPX saw a major low in October, and suggest that its trend inflection is only strengthening.
(Terence Gabriel)
*****
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(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)
