Downgrade to Promote
I’ve been tactically positioning within the S&P 500 (SP500), and after being quick, I indicated that I coated the shorts, and advised a wait-and-see strategy with maintain initiated on October twenty seventh. Since then, the S&P 500 bounced strongly by 6.6%. I’m downgrading this name again to promote.
The current 10% correction in S&P 500 has been pushed primarily by the rise in 10Y Treasury Bond yields, because the 4% yield resistance was damaged in late July. After touching the 5% yield mark on October nineteenth, the 10Y yields have been rangebound, till final week when the yield dropped to the 4.5% degree. This has brought on the 6%+ bounce in S&P 500.
The narrative behind the bounce is 1) the Fed is finished mountain climbing rates of interest, whereas 2) the economic system remains to be rising, at a slower tempo. Collectively, this resembles a soft-landing, which is bullish for shares.
Nevertheless, at this level, after the bounce, there are good causes to promote once more.
- First, the present setting is definitely stagflatonary, which suggests the economic system is slowing in direction of a recession, whereas inflation remains to be anticipated to be sticky effectively above the two% degree. The Fed can’t reduce charges on this setting.
- Second, the earnings expectations are getting revised sharply decrease for This autumn 2023, and in addition barely decrease for 2024.
- Third, the valuations are nonetheless very costly, and additional PE contraction is probably going, particularly given the low development expectations.
This isn’t presently an setting supportive of a soft-landing. We’re in a stagflationary setting, the place inflation is “caught” at a really excessive degree, whereas development is considerably slowing.
First, based mostly on the Cleveland Fed InflationNowcast, each the core CPI inflation and the core PCE inflation are nonetheless anticipated to develop at 0.3% month-over-month. That is in keeping with an annual inflation of three.5-4%, which is double the Fed’s 2% goal. Month-to-month inflation must be in a 0.1-0.2% vary for the annual inflation to fall to the two% goal, and we’re nowhere close to that time.
Actually, the year-over-year core CPI is anticipated to be above 4% for October and November. This isn’t supportive of the Fed’s pause. The Fed would possibly shock and hike in December – that is clearly bearish for shares.
On the similar time whereas inflation is anticipated to stay sticky at double the Fed’s 2% goal, the GDP development is anticipated to considerably slowdown in This autumn to 1.2%, based mostly on the Atlanta Fed GDPNow measure.
The GDPNow mannequin estimate for actual GDP development (seasonally adjusted annual charge) within the fourth quarter of 2023 is 1.2 % on November 1, down from 2.3 % on October 27. After this morning’s development spending launch from the US Census Bureau and the Manufacturing ISM Report On Enterprise from the Institute for Provide Administration, the nowcasts of fourth-quarter actual private consumption expenditures development and fourth-quarter actual gross non-public home funding development decreased from 3.0 % and -2.2 %, respectively, to 1.5 % and -2.8 %, whereas the nowcast of the contribution of the change in actual internet exports to fourth-quarter actual GDP development elevated from 0.11 proportion factors to 0.22 proportion factors.
The financial development slowdown is led by -2.8% contraction in funding (given the credit score tightness and excessive rates of interest), and in addition an anemic 1.5% development in consumption.
Earnings development downgrade
Clearly, given the anticipated vital financial slowdown, analysts are sharply revising down the earnings expectations for This autumn 2023.
From September twenty ninth, the S&P 500 This autumn earnings development acquired downgraded from 8.4% to three.6%. On the similar time, the Q3 earnings development is upgraded from -0.7% to 1.8%, which isn’t stunning given the robust Q3 GDP development. The 2024 earnings are additionally began to get downgraded, presently to 11.4% down from 12%, and that is anticipated to speed up because the slowdown transitions to a recession.
On the similar time whereas GDP development is sharply slowing, and earnings expectations are getting revised decrease, the S&P 500 remains to be very costly. The present anticipated PE ratio for S&P 500 is at 20, and it needs to be close to 15, probably even decrease in case of a deeper recession.
Thus, essentially, the S&P 500 is dealing with a serious selloff, and the Fed won’t be capable to assist – that is the hazard of a stagflationary setting.
Technical – Tactical concerns
The ten% correction in S&P 500 brought on a serious 200dma breakdown – this signaled a deeper selloff. Nevertheless, the sharp 6%+ bounce caught shorts abruptly they usually had been doubtless pressured to cowl for loss – if shorted on the sub 200dma degree. I used to be cautious and coated the shorts earlier than the bounce, and was trying to reshort at the next degree.
The bounce reached the 50dma degree, which seems to be a major resistance, and thus, a great degree to begin constructing the quick place. The 50dma breakout may push the S&P 500 to the 100dma resistance, which if damaged may result in a “higher-high” and sign potential additional beneficial properties – thus it is a good degree for a stop-loss.
The S&P 500 (SPY) (SPX) appears to be in a downtrend since July thirty first. The current bounce doubtless stopped on the higher degree of the downtrend vary.
Essentially, the S&P 500 is dealing with a stagflationary setting, the place development is slowing, probably transitioning in direction of a recession, whereas inflation stays “sticky” at a excessive degree, which I imagine will stop the Fed from slicing rates of interest if (when) the inventory market continues to selloff.
Additional, the earnings development is getting downgraded, whereas the SP500 PE ratio remains to be very costly. This can be a prescription for a a lot deeper selloff.