Will the Q1 Pain Trade Persist in 2023 and Claim More Bears?

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Brian Evans and Hakyung Kim of CNBC report stocks close higher Friday, Nasdaq notches best quarter since 2020: 

Stocks rose Friday as Wall Street wrapped up a volatile, but winning quarter that saw more Federal Reserve rate tightening and a mini-financial panic spurred on by the collapse of Silicon Valley Bank.

The S&P 500 added 1.44% to close at 4,109.31, while the Nasdaq Composite advanced 1.74% to end at 12,221.91. The Dow Jones Industrial Average gained 415.12 points, or 1.26%, closing at 33,274.15.

The market got a boost Friday after the Fed’s preferred inflation gauge showed a cooler-than-expected increase in prices. The core Personal Consumption Expenditures index, which excludes energy and food costs, rose 0.3% in February, less than the 0.4% expected by economists polled by Dow Jones.

The S&P 500 and Nasdaq were up 7.03% and 16.77%, respectively, for the first quarter. It was the best quarter since 2020 for the tech-heavy Nasdaq. The Dow ended the period with a 0.38% increase.

For the month, the S&P 500 and Nasdaq have gained 3.51% and 6.69%, respectively. The Dow, meanwhile, advanced 1.89% to end March.

But it hasn’t been a smooth ride. Stocks mounted a comeback in the latter part of March after the month began with the failure of two regional banks, a forced-takeover of Credit Suisse and a flight of deposits from smaller institutions. The government’s backstop of the deposits of SVB, as well as Signature Bank, and the setup of a special lending facility for other banks, helped stem the crisis.

Primary credit lending totaled $88.2 billion while banks took out $64.4 billion through the Fed’s new Bank Term Funding Program, according to Fed data released Thursday that covered the period from March 22-29. That total of $152.6 billion was down slightly from $164 billion the week before and a further sign the crisis was stabilizing as the month comes to an end.

The SPDR Regional Banking ETF (KRE) closed about 1% higher on Friday, continuing its comeback from the contagion lows.

Tech stocks were the big winner this month as investors rotated out of financials. The Technology Select SPDR ETF (XLK) added roughly 10% in March.

The recent rally is “helping to confirm the market’s perception that the problems that brought the market to a crisis of confidence could very well be contained,” said Quincy Krosby, chief global strategist for LPL Financial. 

“The semiconductors, [which] have come to be viewed as an important bellwether for global growth, delivered a strong performance,” she added.

Isabelle Lee and Peyton Forte of Bloomberg also report that US stocks extend rally as traders eye peak rates:

Technology shares extended the week’s US stocks rally after a key measure of inflation cooled last month, suggesting the Federal Reserve may be close to ending its rate-hiking campaign. Treasuries rose.

Excluding food and energy, the Fed’s preferred inflation gauge — the personal consumption expenditures price index — rose 0.3% in February, slightly below the median estimate. Meanwhile, the PCE price index was up 5% from a year earlier, a deceleration from January but far higher than the Fed’s 2% goal.

The S&P 500 rose 1.4% — bringing its weekly gains to 3.5%, the most since November — while the tech-heavy Nasdaq 100 gained 1.7%, helping it to notch its biggest quarterly gain since June 2020.

“Overall, it was a round of data consistent with the peak inflation narrative but also with the Fed’s insistence that there remains work to be done to re-establish price stability,” Ian Lyngen of BMO Capital Markets wrote in a note.

Treasuries also ended the quarter of wild swings higher on Friday as investors struggled to adjust for recent bank failures and the shifting outlook for interest rates. The two-year yield fell to around 4.05% Friday while the 10-year maturity dipped to 3.48%. The dollar strengthened against major peers.

“The S&P 500 has done well to recover from banking sector concerns over the past few weeks,” wrote Michael Gibbs, director of equity portfolio and technical strategy at Raymond James. “However, the rally has been a bit more uneven beneath the surface, reflecting the confusion inherent within the current backdrop.”

While technology stocks have risen to the highest since August 2022 — propelling gains in the broader market — the percentage of stocks above their 50-day moving average has contracted, Gibbs said. Only a small number of shares actually account for the US rally.

“Extremely narrow rallies are not healthy ones at all, so it is going to be essential for the bulls to see more groups participate in the rally going forward,” Matt Maley, chief market strategist at Miller Tabak + Co., wrote. “If they don’t, it will only be a matter of time before a correction in the big-cap tech names turns this nice rally into an ugly decline.”

Citigroup Inc. strategists said the focus among investors is set to shift from worries about high interest rates to the risks of a recession, and as that happens, US stocks look more attractive than those in Europe.

A Citi team led by Beata Manthey upgraded US stocks to overweight from underweight on Friday as they “perform more defensively than other markets” during earnings recessions. They expect global earnings-per-share to contract 5% in 2023 and say that analysts are likely to slash profit estimates even further.

Elsewhere in markets, oil traded in New York saw a weekly gain of 9% amid ongoing disruption to Iraqi exports. Bitcoin notched its best quarter since March 2021 with a gain of about 70%. And Digital World Acquisition Corp., the blank-check firm taking Donald Trump’s media company public, rallied after he became the first former president to be indicted.

Some of the main moves in markets:

Stocks

  • The S&P 500 rose 1.4% as of 4:04 p.m. New York time

  • The Nasdaq 100 rose 1.7%

  • The Dow Jones Industrial Average rose 1.3%

  • The MSCI World index rose 0.7%

Currencies

  • The Bloomberg Dollar Spot Index rose 0.2%

  • The euro fell 0.6% to $1.0844

  • The British pound fell 0.4% to $1.2334

  • The Japanese yen was little changed at 132.76 per dollar

Cryptocurrencies

  • Bitcoin rose 0.9% to $28,416.49

  • Ether rose 1.7% to $1,826.2

Bonds

  • The yield on 10-year Treasuries declined eight basis points to 3.47%

  • Germany’s 10-year yield declined eight basis points to 2.29%

  • Britain’s 10-year yield declined three basis points to 3.49%

Commodities

  • West Texas Intermediate crude rose 1.6% to $75.56 a barrel

  • Gold futures fell 0.5% to $1,987.50 an ounce

Alright, it's Friday and it was a monster quarter for tech stocks led by a handful of names: Apple, Microsoft, Nvidia and Meta Platforms:

Whenever you sees such narrow price action, one of two things can happen:

  1. Either the rest of the market catches a bid and breadth improves in a Risk On market
  2. If there is an earnings recession and Risk Off markets take hold, these stocks which acted as a refuge will see intense selling pressure, bringing the market to new lows.

There is this notion that as Q1 performance goes, so does the rest of the year, and this may prove to be the case once again as tech shares had a stellar Q1 performance, but I don't see this being the case.

In fact, after listening to Francois Trahan's conference call Thursday morning, I'm more confident than ever that a nasty earnings recession lies straight ahead in Q2 and Q3:




I'm just providing you with a glimpse, there were a lot more great charts and Francois covered a lot of material which is why I keep telling my institutional readers to subscribe to Trahan Macro Research (most top funds do).

When earnings decline, it's called a profits recession. And those are nasty ones because companies shed costs (ie. fire people) to make up for lost profits but it becomes a vicious cycle.

Anyway, one thing is clear, we are heading into a recession and the US leading economic indicator is confirming this:

In other words, a hard landing awaits us and my fear is it will be a deep and prolonged recession unlike anything we have seen since the 1970s.

There are too many elephants in the room:

What  is going on in Japan is particularly concerning because if Japanese rates start moving up, more institutional investors there will sell Treasurys to buy JGBs.

It is worth monitoring developments there because if the rise in Japanese long bond yields pick up steam, it could be the exogenous shock that rattles global bond markets.

Regardless, the US economy is slowing and that means stock correlations are rising, so security selection becomes a lot harder:

As far as the Fed is concerned, I agree with those who see more hikes coming, not with those who think the Fed needs to ease off here:

What does all this mean for stocks? Well, for one, all this bearish sentiment has given stocks room to run further:

And the monster rally in tech stocks in Q1 has roasted many shorts, including the Big Short's Dr. Michael Burry:

But not all shorts are throwing in the towel here:

This is what I believe is going to happen, we are entering earnings season on April 14.

A lot of hedge funds that were buying tech stocks in Q1 are going to start unwinding, slowly at first but it will gather steam once ugly earnings appear.

A lot of Q1's high-flyers will see losses in Q2 & Q3 as Risk-Off markets come back:

Again, this will not happen overnight and there will be catalysts along the way, like the March US CPI report scheduled to be released on April 12 at 8:30:

And don't kid yourselves, while M2 is plunging, core inflation pressures remain sticky and goods inflation might bounce back here:

I still maintain the big pain trade in 2023 won't be FOMO and missing our tech rally 3.0, it will be a nasty and prolonged earnings recession which leads to a nasty and prolonged economic recession.

No doubt, Q1's tech rally was impressive but it was very narrow and you need perspective:

Alright, let me wrap it up with some Friday humor:

Have a nice glass of wine this weekend, relax, the market looks great so far but don't get carried away thinking this is a new bull market led by tech shares, a brutal earnings reality is about to slice a lot of stocks in half and more.

I remain convinced that Q2 & Q3 will bring a lot more pain to bulls than bears.

Dr. Burry wasn't wrong, his timing was way off. Keep your eyes on VIX as it climbs above 20 and on high yield bond yields.

Below, Gradient Investments’ Mike Binger and Circle Wealth’s Maria Chin, join 'Power Lunch' to offer the bull fight for stocks and bonds. 

I think stocks and bonds are going to get hard in short term but bonds will become very attractive once the 10-year Treasury yield crosses above 5%.

Second, Dan Niles, The Satori Fund founder and portfolio manager, joins ‘Squawk on the Street’ to discuss how investors should position their portfolio as the Nasdaq and S&P are closing out this quarter led by technology, why it's time to buy some names like Meta and Nvidia, and more.

Niles is bang on, he explains a lot here and I will add, the Fed also added fuel to the tech fire in last few weeks:

With QE fading here, it will impact growth stocks. Niles is targeting banks but I personally believe when the earnings a recession starts, all sectors will get hit.

As he says, "earnings matter", you're going to have two weeks where sentiment still can influence short term moves but once earnings come in, stocks will get hit.

Third, Gina Sanchez of Chantico Global says there's enough tightening in financial and credit conditions to more than make up for any further tightening the Fed could do.

Fourth, Jeffrey Gundlach, DoubleLine Capital CEO, joins CNBC's "Closing Bell" to discuss the ongoing banking crisis and his forecasts for the economy and stock market.

Lastly, Calamos and Giannis Antetokounmpo ring The Closing Bell® at the NYSE on Friday, March 31. Go Team Giannis!!

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