The Week Behind

After an abysmal performance last week, equities found some footing and rallied the entire week. The NASDAQ finished ~7.5% higher; the S&P added ~6.5%; the DOW tallied ~5.4%. While the backdrop featured little breaking economic news, it was doctored by Treasuries backing off their highs and commodities finding some stabilization. The former suggests comfort surrounding inflation, the latter comfort surrounding recession. 

Highlights:

• Both the S&P500 and DOW reclaimed psychological levels of 3,900 and 30,000.
• Treasuries caught a bid, suggesting temporary comfort with the state of inflation.
• Commodities stabilized, suggesting recessionary panic has temporarily waned. 
• FedEx (FDX) reported a solid quarter and raised guidance for the coming year.

FDX in Focus

FDX beat profit expectations without meeting revenue expectations. It shows that new management is already unlocking value as a topline miss and bottomline beat is only achievable via margin improvement, a hallmark of superior management. More importantly, FDX raised their full-year guidance, suggesting certain segments of the economy may be doing better than expected and better suited for the looming recession market’s are currently wrestling with.

The Week Ahead

The big report for the week is PCE: the FED’s preferred inflation indicator. Releasing Thursday at 8:30AM, it will be the primary focus of all market participants. Last month’s read was 6.3%. This year’s peak was 6.6%. Ideally, we get a reading cooler than 6.3%. 

Earnings are a little light. After the bell on Monday, Nike (NKE) reports. While the number matters, more important are any hints on the Chinese economy. Ahead of Wednesday’s open, both General Mills (GIS) and McCormick (MKC) hit the wire. The wider market will look for insight on supply chain and consumer behavior: demand, trade-down, etc… Lastly, Micron (MU) reports after the bell on Thursday. Given the immense pessimism surrounding cyclicals, semiconductors arguably facing the brunt, it will be meaningful to see how the market reacts to their print. Semiconductors tend to lead us into and out of rallies. If the rally is still alive when MU reports, a good reaction would be constructive.  

A Bear Market Bounce or Something More?

If the rally can survive PCE and close into the weekend, then there could be room to run until the next FOMC meeting. Monthly rebalancing could prove an additional tailwind. However, the market still feels fragile. Burden of proof is high for the bulls. This rally was spurred by extreme oversold conditions, not a change in the macro. 

On the other hand, this rally has characteristics similar to the first wave of a new Elliot Wave Cycle. 

I want to believe this is the start of a new bull run, but I am not convinced. If Treasuries continue to cooperate, commodities remain around current levels, and PCE doesn’t panic the market, then this rally can live to see the beginning of earnings season around the corner. However, those are big asks, and that is why I tend to believe this is nothing more than a bounce. 

Earning revisions are still looming, inflation is at historic highs, and consumers have never been more pissed. It is bad, but it doesn’t mean we need to trade down in a straight-line. Equities can, and just did, rally for a couple days. We might see a risk-off day on Wednesday ahead of PCE similar to CPI earlier in the month – active market participants taking profits ahead of PCE with the risk-reward skewed to the downside – but if there isn’t follow through on that selling, then the bounce is intact. Lastly, if the macro does change during the bounce – inflation appears to have peaked (again), Russia-Ukraine resolves, Chinese economy reopens, earnings revisions aren’t bad, consumer sentiment shifts, etc… – then the macro will have changed at the perfect time. We could find ourselves in more comfortable waters and navigate out of this bear market before long. Be mindful, none of those things have happened: the macro is still bleak; nothing has changed but the price.