The Week Behind

Markets showed signs of life last week. 

• Monday: Jaime Diamond breathed life into the banking sector, touting prospects for main street banks and a return of M&A. 
• Tuesday: SNAP challenged the optimism and announced the company would miss the bottom end of their conservative guidance provided a little over a month ago citing a “rapidly deteriorating macro”. However, by midday the indices recovered to close about where they opened. The DOW managed to finish in the green. 
• Wednesday: While we traded evenly into the minutes, following the release the 10-year yield stabilized, suggesting the bond market is more comfortable with the state of inflation, and the major indices traded up into the close. FOMC minutes revealed no additional fuel for bears, and bulls began to look for discounts.
• Thursday: Solid day of follow through with the DOW, S&P, and NASDAQ finishing 1.61%, 1.99%, and 2.68% in the green.
• Friday: PCE was lower month-over-month with respect to core and headline. While the argument surrounding the endurance of elevated inflation is still up for debate, the market appears to have taken this print as a sign of peak inflation as all major indices opened higher and maintained gains into the close. 

Why The Reversal?

Around 12 PM on Tuesday, it appeared as though the market may collapse on itself, digesting the implications of SNAP’s “rapidly deteriorating macro”, which echoed WMT and TGT messaging surrounding the quarter’s undoing in April. The consumer was finally crumbling under inflationary pressure; demand destruction was here, and it was time to sell ahead of further guidance cuts. However, Dick’s Sporting Goods (DKS), Best Buy (BBY), and some other select retailers provided evidence that consumers were still spending with the caveat of being more selective with respect to both where they shop and the particular mix of goods. 

Demand hasn’t been destroyed, yet… but it has shifted. This argument is far from over as persistent energy and food inflation keep pressure on consumer balance sheets and spending habits. 

Signs of A Bottom: Trading Up On Bad News

Aside from multiple days of the major indices closing above 1% on good volume, both individual stocks and the broader indices have finally stopped trading down on bad news. On Tuesday, we saw this phenomenon in the major indices following the SNAP announcement: the major indices opened and traded down before reversing to close about even.

Similar behavior was witnessed in DKS, BBY, NVDA, and SNOW. While the topline and bottomline performance varied with respect to expectations, all issued downward full-year guidance. Each stock sank after hours. The next session, each rallied back to at or above the closing level ahead of their report. To summarize, the companies’ earnings reports showed these companies were in a better place than the market was pricing in. The emotional selling is through, and, for now, we can focus more on fundamentals.

NVDA was perhaps the most important as semiconductors have been leading indicators over the past 18 months: the first to start the sell-off and the first to participate in the upside.

In my view, these companies, and those in similar positions, have made a tradeable bottom and are forming bases for the next run. The question remains whether the next run is simply a bear market bounce that should be traded or a more durable bull run that could last into next year. While the reopening of the Chinese economy and resolution in Eastern Europe – issues that once depressed the market – could now serve as major upside catalysts, actual quantitative tightening (QT) from the FED remains reason for concern. I know FED tightening seems relatively small in the face of Chinese lockdowns and a European land-war, but if you have any questions about how powerful QT can be, look no further than the market’s reaction in 2018. QT is scheduled to start in June, which begins tomorrow.

The Week Ahead

On the macro front, the FED’s Beige Book release is on Wednesday. In the latter half of the shortened week, we’ll get insight on the labor market via ADP Employment on Thursday followed by payrolls, unemployment, and labor participation on Friday. This data provides context for how the FED will act moving forward, thus ought to be on your radar. However, I expect a little more market stability given the FED seems satisfied with consecutive 50 bps hikes at the next two meetings unless something materially changes. 

Earnings are pretty light, but I will be looking for Salesforce (CRM) to provide more constructive evidence that quality, high-growth equities have formed a tradeable bottom. Ideally, we see activity very similar to NVDA. A decent quarter with downward guidance. The stock declines after hours, the next day opens low, and then ends the day above the prior close. CRM reports after the bell Tuesday (today).