The Week Behind

The rally forged on as the Fed delivered the highly anticipated hawkish pause, and corporate earnings verified more AI-winners. These developments contributed to the market’s momentum and added fuel to the fear of missing out (FOMO) sentiment. Although Friday’s session was turbulent, all major indices ended the week with gains. The NASDAQ gained 3.25%; the S&P 500 increased 2.6%; the Dow, albeit lagging, still managed to move 1.25% higher.

Highlights 

• CPI met expectations with core coming in at 5.3% and headline at 4.0%.  
• The Fed maintained interest rates at their current level, but updated the dot plot to indicate 50 basis points of additional interest rate hikes should be expected in the 2H23.
• Retail sales, including and excluding autos, exceeded consensus estimates, highlighting the need to monitor goods inflation.
• Oracle and Adobe reported strong quarters, demonstrating their success as beneficiaries of Cloud 2.0 and generative AI trends. 

F**K the D*ts. I Like St*cks

Although stocks initially dropped after the FOMC as the Fed’s dot plot indicated a need for additional rate increases, stocks quickly rebounded as investors bought the dip without much hesitation. I believe this confidence stems from investors recognizing irreconcilable differences between the Fed’s words and actions.   

Cleveland Fed President Loretta Mester, a known hawk, has been reluctant to acknowledge the recent downtrend in inflation despite clear evidence from CPI, PPI, and PCE over the past three months. In an interview with CNBC after the release of April PCE data, Mester felt the metric supported her concern regarding the slow progress on inflation. This sentiment is echoed by other members of the FOMC.

While I hate to disagree with a fellow Clevelander and take the other side of the inflation debate, even I must admit that the data is inconclusive at best. However, I do take issue with holding a hawkish inflationary stance and then deciding to pause. Under no circumstances, especially when considering that this same FOMC hiked twice during the regional bank crisis, can a pause be justified if the committee views the progress on inflation as legitimately “concerning”.

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Their words do not align with their actions. 

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Investors recognize these inconsistencies and realize the hawks are losing ground on the committee. By buying the dip, investors may as well have said, “F**k the d*ts; I like st*cks.” Of course, this sentiment may change if incoming data indicates a flare-up in inflation. However, the current data does not support the hawks’ claims, and Powell has indicated that the July FOMC Meeting will be “live”. As I have mentioned in the past, I believe this situation implies economic data moving forward carries increased stakes. Investors who bought the dip are betting that the upcoming data will not warrant further action before the July Meeting.

The Week Ahead

Due to Juneteenth, markets will be closed on Monday, resulting in a shortened trading week with relatively little in terms of macroeconomic and corporate events.

The Biannual Report on U.S. Monetary Policy will take place on Wednesday and Thursday, with Powell testifying before the House and Senate. While this event does not typically generate volatility, it would be unwise to lower your guard as the Federal Reserve Chairman speaks to influential U.S. lawmakers.

Housing data via starts and existing sales will be released on Tuesday and Thursday, which could leave tea leaves on housing inflation. On Friday morning, services and manufacturing PMIs will be released and update us on economic strength.

In terms of corporate earnings, notable reports include FedEx, KB Homes, Darden Restaurants, and Carmax. FedEx’s performance offers insights into economic activity, while KB Homes contributes to the mosaic of new home prices and commodity costs. Darden’s report reflects consumer strength in the dining category as well as food inflation, while Carmax’s results shed light on used car prices that have remained stubbornly high through the lens of CPI.

IPOs Unlocked

Last week, Cava (CAVA), a Mediterranean fast-casual chain similar to Chipotle, had a highly successful IPO. The initial price range was raised from $17-19 per share to $19-20. On its first day of trading, CAVA shares opened around $40, experiencing a 117% intraday increase.

Cava’s successful IPO has sparked speculation about a revival in the IPO market. Companies like Fogo De Chao, Gen Restaurant Group, Panera, Fat Brands, and Instacart, which have been waiting on the sidelines, may now feel confident enough to proceed with their IPOs. The combination of the Fed’s temporary pause, analysts reducing recession probabilities, and the demand demonstrated by Cava’s blockbuster IPO provide ample reasons for optimism regarding the revival of the long-depressed IPO market.

While some investors may hesitate to directly participate in IPOs, there are alternative ways to invest in the emerging IPO boom. One approach is to invest in the underwriting companies that facilitate these offerings. These firms have been without high-margin IPO business for several quarters, so the return of IPO activity is expected to generate impressive earnings that surpass analysts’ forecasts. In my opinion, the primary beneficiaries of this trend will be Goldman Sachs (GS), followed closely by Morgan Stanley (MS) and J.P. Morgan (JPM).

Additionally, alternative asset managers are likely to benefit from the “second-derivative” effects of increased IPO activity. My top pick to take advantage of this opportunity is Blackstone (BX). Positive momentum has returned to the stock as headwinds subside surrounding BREIT and the tailwinds grow associated with an IPO boom, which is expected to facilitate transactions in the alternative asset space.

I am long BX. It is a long-term position in my portfolio. Consequently, while technical analysis is important, my interest stock is primarily based on fundamentals. However, if I were to view this as a trade from Friday’s close around $92, I would take profit at $110 – as significant overhead resistance appears to exist – and limit losses between $80 and $85 – as positive momentum will have likely left the stock at these levels.