Weekly Market Review N°10
30/05/2022
by Alessandro Gherzi
As with everything else in life things can’t perpetually move in one direction, over time the good or the bad tends to mean revert and converge to some steady state. Equities are no different and after one of the longest weekly losing streaks on record, market participants were hoping for a change of fortunes this week. Few were willing to bet on a sustained bounce however as we are firmly in the grips of a bear market with the Dow Jones down for 8 straight weeks, the longest losing streak since 1923, the Nasdaq well into negative territory and the S&P500 briefly falling below the -20% threshold delineating a bear market. This year we can count plenty of dead felines on the battlefield as market relief rallies have been just that, dead cat bounces that reeled in primarily retail traders in the hope of a trend reversal, only to be left at the very best licking their wounds or at the worst dead. Interestingly retail is proving to be incredibly obtuse, with flows not abating with seemingly good money being thrown after bad, and we know how the buying the dip mentality fared this year, good money became bad over and over again, with this strategy proving nothing short of suicidal. We are not sure what is spurring retail to keep on persevering, perhaps there are strong elements of revenge trading as the damage has been so severe that folk are trying to recoup losses in a hurry by doubling down on their convictions. Catchy acronyms like TINA (there is no alternative) or BTD (buy the dip) and drilled in punchlines of the sort of “The stock market is a device for transferring money from the impatient to the patient.” or “Time is the friend of the wonderful business, the enemy of the mediocre.” propagated in rosier times by Warren Buffet did little to deter retail from going head-in and all-in on markets. The mentality of, if you liked it at 100, you should love it at 10 and adore it at 1, has been pervasive however offers no guarantee that you could end up hating it at 0.1 or lower.
This year we can count plenty of dead felines on the battlefield as market relief rallies have been just that, dead cat bounces that reeled in primarily retail traders in the hope of a trend reversal, only to be left at the very best licking their wounds or at the worst dead.
Most certainly, after a lackluster trading session on Monday, tech aficionados that have so valiantly endured a world of pain over the last few months must have felt the urge to finally throw in the towel. Retail is usually the last investor type to capitulate and when it does it usually coincides with a market reversal. Monday evening felt indeed like one of those pivotal moments when the pain reached its zenith and hordes of critically injured walking dead cats screamed “no mas”. Enough was enough, how could, in the grand scheme of things, a relatively unimportant tech family composite like Snapchat have such a devastating and far reaching effect on markets? But it did, as Snap’s bleak warning report after market close on Monday evening spread to other tech names like wildfire, with the Nasdaq dropping close to 2.5%. Shares of tech companies led the day’s losses as investors feared a slowdown in digital advertising following a warning from the social media company. Snap’s shares plummeted 43% after the company said it’s bracing to miss earnings and revenue targets in the current quarter and warned of a downturn in hiring. The fear stemmed from the fact that advertising is indeed cyclical and that albeit a very small canary in a deep and mostly forgotten coal mine, it’s swan song could be heard loud and clear by major online advertising platforms that would also be considerably impacted by a significant consumer pullback. Meta Platforms followed Snap lower, falling 7.6%, Google dropped nearly 5% and Amazon ended the day down 3.2%, with both entities hitting a new 52-week low. Some were incredulous that a relatively small and perennially unprofitable ephemeral social media firm could take down the whole tape, but given how sensitive this tape is, in today’s brittle market, Snap was able to punch above its weight. The woeful news didn’t stop with technology stocks however, as the market had at least one ear on the ground for Abercrombie & Fitch’s earnings, as any clues relating to the state of the consumer and inflationary pressures were eagerly awaited. Well investors got more of the same as A&F reported considerably higher freight and production costs that they couldn’t effectively pass on to consumers hence taking a hit on the top line for the fiscal first quarter. Shares crumbled nearly 30% reminiscent of the total annihilation of major retailers like WallMart and Target the week prior.
Monday evening felt indeed like one of those pivotal moments when the pain reached its zenith and hordes of critically injured walking dead cats screamed “no mas”.
Come Wednesday it was already an action packed week that left markets reeling. Many felt that it could only get worse and mid week few would have bet against another negative record setting week in markets. With Fed minutes due to be released on Wednesday it smelled of napalm all over, markets were surely about to get nuked. Perhaps most don’t remember but the real onslaught in markets, that started pretty much as the cork departed the champagne bottle marking the end of 2021, coincided with the release of the first Fed minutes of the year. Those minutes were amongst the worst in recent memory and indicated a great desire of policy makers to be unforgiving in terms of tighter monetary policy, we have been suffering the consequences of that release ever since, hence it was unsurprising that expectations hit rock bottom this time around. Lo and behold the minutes of the Federal Reserve’s May policy meeting showed that the central bank is prepared to raise rates further than the market had anticipated. “Most participants judged that 50 basis point increases in the target range would likely be appropriate at the next couple of meetings,” the minutes stated, in addition, Federal Open Market Committee members indicated that “a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook.” This sounded far from reassuring and all things considered anyone reading the report wouldn’t have bet a penny on a positive market reaction. However the market bounced and with a vengeance! Markets didn’t want to hear anything more hawkish than the hawkishness the Fed already laid out, and it seemed to be simply a case of “things can only get better” to cite D:Ream’s classic 1990’s song. When matters are bad enough and seemingly scraping the barrel, it takes something spectacularly bad to inflict further pain. If Fed minutes are any indication of things to come, and perhaps markets are now so oversold and in such a bad state, that kicking a dead corpse would have little to no effect however even a glimmer of decent news could resurrect the dead.
Some were incredulous that a relatively small and perennially unprofitable ephemeral social media firm could take down the whole tape, but given how sensitive this tape is, in today’s brittle market, Snap was able to punch above its weight.
That’s how the rest of the week panned out fireflies here and there, nothing major, but little pockets of feeble light that gives hope for a brighter and better future. As reiterated numerous times in our writing, the state of the US consumer is perhaps what is still holding things together, hence after the disastrous earning reports and forecasts of major retailers last week markets did pay attention to a slew of outings of smaller retailers. This week, various retailers started to balance the macro narrative, with the demise of the consumer now appearing to have been greatly exaggerated. Between Wednesday and Thursday many retailers took center stage, with Nordstrom beating sales expectations and raising its full-year outlook, Dick’s Sporting Goods topping earnings and revenue estimates for its fiscal first quarter, Best Buy despite cutting its yearly outlook not disappointing and Ralph Lauren beating on its top and bottom lines. This was followed by a batch of strong earnings from the retail sector that boosted market sentiment on Thursday, with the SPDR S&P Retail ETF gaining more than an eye popping 4%. Macy’s, Williams-Sonoma, Dollar Tree and Dollar General led the pack. Retailers have been on an earnings spree since last week that has held the attention of investors anxious to see how companies are managing sky-high inflation. Investors and analysts have pointed out that what had appeared to be a retail wreck reflects a shift in consumers’ demand for services rather than goods, and some have suggested stocks may be getting overly punished for their results. Sure over-punishment both on the policy and earnings fronts seem to be le mot du jour however as we have seen there are objectively silver linings appearing with the Fed showing timid signs of appeasement and the consumer still punching above its weight.
Markets didn’t want to hear anything more hawkish than the hawkishness the Fed already laid out, and it seemed to be simply a case of “things can only get better” to cite D:Ream’s classic 1990’s song.
The week ended on a positive note with the theme of “any news not being horrible news, are good news” persevering. The Commerce Department reported on Friday an increase of 4.9% in the core personal consumption expenditures (PCE) price index, in line with expectations and reflecting a slowing pace from the 5.2% reported in March. Being the Federal Reserve’s preferred inflation gauge and although at still elevated levels, it is nonetheless positive that price pressures could be finally easing and will hopefully placate the Fed’s insatiable desire to flex its tightening muscles. Including food and energy, headline PCE increased 6.3% in April from a year ago. That also was a deceleration from the 6.6% pace in the previous month, however the monthly change showed a more marked pullback, with an increase of just 0.2% compared with the 0.9% surge in March. It seems that consumers remained undaunted by inflation, strongly increasing spending and changing their mix to more services, however this was fueled in part by higher wages, and also by Americans drawing more money out of savings, which is a giant stockpile of at least $2 trillion. Wages are not growing in lockstep with inflation and savings will sooner or later dry up, further consumer sentiment declined to a 10 year low in May according to a report released this week, hence the Fed is weary of slamming the breaks too hard and is praying for a slowdown in inflation so it doesn’t have to consciously pivot the economy into a recession. Whether that’s already too late we will soon find out, however we continue keeping a close eye on the 10-year Treasury yield that made a considerable move lower lately as investors fearing a recession crowd into bonds and are also perhaps starting to factor in a less aggressive Fed as the economy slows. Should inflation show a change in trend then it is likely that Fed’s policy will follow with a reversal towards more accommodative measures, in the meantime this week markets took a welcomed breather stopping the bleeding that lasted for way too long.
That’s how the rest of the week panned out fireflies here and there, nothing major, but little pockets of feeble light that gives hope for a brighter and better future.
Whilst the jury is still out on the sustainability of this week’s rally, and whether it’s merely a relief bounce or marks the bottom of this year’s long sell-off, crypto on the other hand seems to be enjoying the pain and has observed the equities party from the sidelines. There is good and bad in this as Bitcoin has never been this tied to technology stocks, with this correlation touching an all time high 0.8 ratio last week. In our view cryptocurrencies should be trading on their own merits and although frustrating that this week they haven’t followed in the footsteps of buoyant equity markets, however have eagerly joined the recent downtrend, longer term this decoupling would be positive. Die hard cryptocurrency skeptics JPMorgan seem to bet on a change of trend, as following Bitcoin’s recent slide, have identified in a research note significant upside in BTC, turning heads as their positive outlook is notable due to CEO Jamie Dimon’s longtime criticism of crypto, with him quoted saying that Bitcoin is worthless. Luckily his analysts and clients don’t share the same views and so doesn’t US Senator Cynthia Lummis that has published a draft copy of a crypto regulation bill that will be formally released on June 7th. Lummis is one of the most vocal supporters of crypto in the US government and has spent months teasing details of a comprehensive bill that addresses crypto regulation. The scope and impact of the bill, that is unlikely to be approved in its current form, will be far reaching and will initiate a very healthy and much needed debate amongst policymakers and regulators alike.
Sure over-punishment both on the policy and earnings fronts seem to be le mot du jour however as we have seen there are objectively silver linings appearing with the Fed showing timid signs of appeasement and the consumer still punching above its weight.
On a lighter note crypto-related technology companies were out in force at the annual World Economic Forum in Davos this week. From what we have read in the media as well as reports on the ground suggest that the Promenade, a main strip where companies and governments take over shops and bars during the week of the forum, were dominated by crypto companies. Rumor has it, that Tether set up a stand giving away free pizza on the Promenade for Bitcoin Pizza Day, that commemorates the day back in May 2010, when a programmer bought pizza using Bitcoin and would have he desisted and used cash instead, with those Bitcoins he could have probably bought Pizza Hut today. Although anecdotal, this shows how far have cryptocurrencies progressed in just over a decade and how bright the future of this sector could be if tribalism was set aside and the whole crypto community would work in unison.
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Alessandro Gherzi | CFO STIMA
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