The Perfect Start For A New Bull Market

Market Insights

We are grinding towards a “Post-Fed” Market.

Let’s start this week’s insights with a simplified Storyline of the last 18 months in the stock market:

• Episode #1 — January to June 2022: Inflation is increasing rapidly and investors worried the Fed might not have the intellectual ability, tools or political conviction to bring it down.

  Market Reaction: S&P DOWN 24.1% to 3667

• Episode #2 — June to October 2022: Well… The Fed seems to have the tools, abilities and convictions, but inflation is still a problem and aggressive monetary policy will put the US economy into a deep recession (to solve the inflation).

  Market Reaction: S&P DOWN another 11.8% to break 3600

• Episode #3 — October 2022 to May 2023: Alright, chill… Seems there is no recession in 2023… Maybe it will come in 2024?! I am not sure… In the meantime, corporate earnings seem fine. Let’s stop arguing with the Bears and buy some SPY calls

  Market Reaction: S&P UP 19.7% to 4282

• Episode #4 — May 2023 to Now: Ok, forget about a 2024 recession. Inflation is under control, the US economy is holding up pretty well, companies will find a way to increase profits by improving productivity and the coming Q2 earnings season should surprise the Street positively. Let’s slaughter the Bears and price in all that.

  Market Reaction: S&P UP another 7.8% to break 4500

This storyline is certainly giving us the evidence to force us as to think: Are we now in a Post-Fed Market?

For the past 18 months, monetary policy and its potential effect on the US economy have been the determine force in setting stock prices. (Bears’ famous argument - “We need a deep recession to solve the inflation!”) That narrative, however, has just run its course.

Here are some other market signals and metrics pointing to the same conclusion:

• S&P 500 sector correlations are running below 5-Year averages, which says investors are comfortable taking more specific single stock or single sector bets rather than trading on macro concerns

• VIX (current: 13.3) is running well below its long run average (19.9), something that typically only happens in bull markets

• In Q2, we saw the stock market’s rally was broadening out to more than just the tech stocks

• 2-Year Yields recently retested the 5.05% key level and failed again. This is a bullish sign because it shows that the market believes there won’t be any significant further Fed tightening needed

• June CPI data was a “lovely positive surprise”. 0.2 vs 0.35 (street consensus). More on this later.

In fact, this is what JP Morgan told their institutional clients right after the June CPI report this week:

• Expect July rate hike will end Fed hiking cycle

• Remain bullish on both US economy and equities

• Market should grind higher in July

• Coming Q2 earnings season, Tech earnings will give insights into whether market grinds or gaps higher

This is exactly what Wall Street would send to their “insider clients” when they believe the Market is detaching from the Fed, aka the “Post-Fed” Market.

There has been 3 major “Post-Fed” Markets since 1990, and every single one of them glommed onto some positive catalyst as the “engine” for further rally:

• In the late 1990s, it was the Internet / Web 1.0

• In the mid-2000s, it was the Housing-related economic activities and Financialization

• In the 2010s, it was the Big Tech powered by advanced Web Applications / Web 2.0 and Smart Phone + Mobile Applications at global scale

Right now, the buzz around AI certainly fits the “next big thing” catalyst if it can start delivering some tangible results that can be reflected through corporate earnings soon.

Chart of the Week

This week’s focus was the June CPI data:

The June CPI report was definitely a good news to the Bulls.

Not only were June CPI numbers were much lower than expected, but they also show a marked cooling compared to the last few months, aka “The inflation is trending down, and trend is always our friend!”

A lot of Bears worried that we will enter the 1970s-style inflationary spiral and the only cure is the “R word”. However, the recent trend shows that we are not gonna head back to the 70s.

J Powell and other FOMC officials often cite the 1970s as a case study in bad monetary policy decisions. They will therefore be careful not to proclaim “mission accomplished” just yet, but this week’s CPI data confirmed that the Fed is certainly on the right track.

Key Data to Watch (July)

✅ July 3, June ISM Manufacturing — BULLISH

✅ July 6, June ISM Services — BULLISH

✅ July 6, May JOLTS — BULLISH

✅ July 6, June ADP Employment — BEARISH

✅ July 7, June Jobs Report — NEUTRAL

✅ July 10, June Manheim Used Vehicle Value Index — BULLISH

✅ July 12, June CPI — BULLISH

✅ July 13, June Fed Wage Tracker — BULLISH

👀 July 25, May S&P CoreLogic CS Home Price

👀 July 25, July Conference Board Consumer Confidence

👀 July 26, July FOMC Meeting Rate Decision

👀 July 28, June PCE

👀 July 28, July Final Michigan 1-Year Inflation Expectations

Final Thoughts

Next week we will enter the Q2 earnings season, which is probably one of the most important earnings season in S&P history.

In fact, on Friday (July 14th), major Banks reported their earnings. Although the earnings were impressive, the price actions before the closing bell were raising some concerns.

This memo was from Goldman Sachs to its clients after Banks Q2 earnings:

Right now, investors are looking for signs to “Pick the Top”.

Such sentiment could lead to a sell-off next week, especially after Banks Q2 guidances (on Fri) showing investors some cautionary signals.

It’s still too early to tell what will happen during Q2 earnings season. But just be careful out there as the volatility could spike up any day over the next couple of weeks.

I will definitely keep you guys updated.

That’s it for today.

See you next week!

Vic