Will The Market Keep Grinding Up or Implode as Recession Takes Hold?

Nicholas Jasinski of Barron's reports that everyone expects the stock market to tumble but what if it goes up instead:

It isn’t time to get bullish just yet, but darn, we’re getting close.

For now, the market appears to be holding its breath. The Dow Jones Industrial Average slid 1.11% this past week, the Nasdaq Composite ticked up 0.40%, and the S&P 500 index slipped 0.29%, its sixth-straight week of moves that were less than 1% in either direction. It’s as if investors are waiting for something to break one way or the other.

And it may break higher. Consider this past week’s inflation data. On Tuesday, the April consumer price index showed its 10th straight month of decelerating inflation, and Wednesday’s producer price equivalent had the number two in front of it—rising at the slowest annual pace since early 2021. 

That’s not just good news for the Federal Reserve, which is trying to wrestle prices lower, but for the stock market, too. When the annual CPI rate has declined by at least five percentage points over the previous year, the S&P 500 has put up a median return of 14.9% over the following 12 months. according to data from Bespoke Investment Group.

Slowing inflation also points to the possibility of a Fed pause coming at next month’s Federal Open Market Committee meeting. Futures-market pricing implies a greater than 90% likelihood of the Fed holding the federal-funds rate steady in June at a target range of 5.00% to 5.25%. There’s still time for that to change, especially with May’s employment and inflation figures due before the meeting. Stocks have historically done well during a Fed pause, writes Jonathan Golub, chief U.S. equity strategist at Credit Suisse, who notes that the S&P 500 has returned 16.9% on average in the 12 months following the last interest-rate hike of a cycle, while losing 1% on average in the year after the first rate cut.

Investors aren’t positioned for a rally. Systematic trend-following funds have been raising their equity exposure lately to slightly above neutral for the first time since late 2021, according to Deutsche Bank’s Parag Thatte. But discretionary investors are heavily underweight the market: Equity exposure is at its lowest level in a year and at only the ninth percentile historically. Many investors are waiting for the market to drop before putting cash to work. But if it breaks higher, they might have to start buying.

There is still a lot that can go wrong. First and foremost, there’s the debt-ceiling fight and all of the worst-case scenarios that would result from a U.S. default. Banks could still pull back on lending enough to cause a credit crunch. There’s also little confidence in the earnings outlook for the second half of the year, and recession signals, outside of the jobs market, continue to flash red.

That’s a wall of worry, but one that the stock market appears ready to climb. The balance of evidence is leaning in a more bullish direction. Investors waiting for the next drop to buy in might not get that chance. 

It's Saturday, I wasn't in the mood to write about the stock market yesterday as I was looking forward to watching the Leafs vs Panthers and Lakers vs Warriors.

Also, truth be told, LTK Capital Management had another great week and is up huge this year by taking very few positions shorting Tesla (via TSLQ) and regional banks (KRE) and  hitting homeruns on some biotechs (TGTX, MRTX and FULC).

And let me remind all of you, you do not pay me enough to write these amazing comments so get to it and use the PayPal options on top left-hand side under my picture to pay me for the service I provide all of you. I do not like chasing after institutional investors to remind them this isn't a hobby or charity, I provide serious analysis you can't and will not find elsewhere.

Money motivates you? You love receiving million dollar bonuses working at Canada's Maple Eight?

Great, money motivates me too, so please pay up and do not make me chase you (the few who I need to chase after, most are nice and value the service)

Anyway, back to stock market.

Why is the market climbing the proverbial wall of worry?

Remember what the late great George Carlin always said: "It's all bullshit and it's bad for you!"

This market is being manipulated by the big index providers to make you think everything is hunky-dory but you look closely, things are a lot worse than they appear:

I know the FAANG+ stocks are doing well, Meta is up 100% from its lows, Google, Amazon, Apple, Microsoft and Netflix are surging over last three months.

Let me let you in on a little secret: this is typical herding behavior led by the big indexers (BlackRock, Vanguard and Fidelity) who are petrified about what's going to happen next.

They control the market, hedge funds just go along for the ride and exacerbate this nonsense.

Yes, you can argue that positioning is way too bearish and earnings have been a positive surprise but that's about to change:

I've been warning you from the start of the year to prepare for a nasty and prolonged global recession/ depression. The earnings recession is only getting started and it's unavoidable.

The fallout from regional banks which I discussed last week is getting worse.

I have no idea what will stop the hemorrhaging but US officials better figure out something fast or else the entire US regional banking system which employs hundreds of thousands of people is in danger of extinction.

I'm not sure we are going to test pandemic lows on these regional banks but it sure looks that way.

Madame Yellen has basically given hedge funds a green light to short them at will and as their share price tanks, depositors flee and their future remains in jeopardy.

Banking is all about confidence, even the mighty JPMorgan cannot survive if their depositors flee in droves!

Speaking of JPMorgan, I don't know what Jamie Dimon was thinking claiming a ban on bank short selling would solve the problem:

If this isn't the pot calling the kettle black, I don't know what is!

Also, as Vestcor CIO Jon Spinney reminded me this week, banning short-selling on banks didn't resolve the GFC, "it was forcing financial institutions to accept TARP money that bolstered confidence in the banking system."

Maybe they will do the same thing with US regional banks and we will see another major squeeze but so far, officials remain quiet which makes me wonder whether their plan is to let them go by the wayside and concentrate more power in the hands of big banks and their big private equity clients.

Stay tuned on that front but this remains the chart of the week:

One thing is for sure, a major recession is headed our way, and I'm not talking about next year, I'm talking about the second half of the year:

Why am I so sure of it?

Because every major central bank all over the world has raised rates significantly over the last year -- taking their cue from the Fed -- and all those interest rate hikes take on average 12 to 18 months to 24 months to fully work their way into the real economy.

There is NO escaping a hard landing scenario, any economist who tells you otherwise never worked in markets and doesn't have a clue of what they're talking about. Period.

So, yes, I agree with Bank of America's Michael Hartnett (who takes his cues from Francois Trahan), there's a recession headed our way which will spoil the tech stock party:

A prolonged period of economic decline in the US will roil technology stocks at a time when they are attracting a weight of investor money, according to Bank of America Corp. strategists.

A team led by Michael Hartnett expects a recession “to crack credit and tech” just as it did in 2008, they wrote in a note on Friday.

Investors poured $3.8 billion into technology stocks in the week through May 10, the largest inflow since December 2021, BofA said, citing EPFR Global data. On the flip side, $2.1 billion was pulled from financial equities, the biggest redemption since May 2022, amid turmoil among regional banks in the US.

The tech-heavy Nasdaq 100 has soared 22% this year as investors anticipate the Federal Reserve will soon start easing monetary policy, relieving pressure on the rate-sensitive sector. And while the sector’s earnings are set to extend a drop from last year, traders are already anticipating a recovery in 2024.

Hartnett, who correctly predicted last year that recession fears would fuel a stock exodus, warned that the US central bank is unlikely to pause hiking amid high inflation as well as low unemployment and presidential approval rates. That’s similar to Bloomberg Intelligence strategists, who see room for a bubble in tech, media and telecommunication stocks to deflate as they “face the reality of higher-for-longer interest rates and a tempered earnings outlook.”

To be sure, Hartnett said a negative payrolls print would be buy signal for cyclical stocks tied to the economy — like technology stocks — in 2023. The labor market has been resilient in the US, with hiring and workers’ pay gains accelerating in April.

Among other notable flows in the latest week, the pace of inflows into cash is slowing, with $13.8 billion going into the asset class. Meanwhile, Treasuries saw the largest inflow in six weeks at $6.3 billion. US and European equity funds each had redemptions at $2.7 billion and $2.2 billion, respectively.

Where I disagree with Hartnett is that negative payrolls print would be buy signal for cyclical stocks tied to the economy — like technology stocks — in 2023.

Really? Good luck with that strategy, I would stay the hell away from cyclicals and tech stocks whose outperformance has been driven by a handful of names riding the AI hype (and it's  A LOT of hype).

Now, notice how the XLK Technology ETF is doing very well this year? That's because three stocks - Apple, Microsoft and Nvidia -- make up 55% of this ETF.

When you look at the Nasdaq Composite index, it doesn't look as strong but it's still bullish:

This is why Fundstrat's Tom Lee thinks FAANG stocks could soar 50% this year thanks to long-term demand for tech goods and no new competition:

  • FAANG stocks have room to advance further, likely rising as much as 50% this year, according to Fundstrat's Tom Lee. 
  • "You can't really say that you're going to have diminished demand for these products," he told CNBC.
  • Big Tech stocks such as Meta and Alphabet have enjoyed a scorching rally in 2023 following last year's selloff.

Respectfully, I think Tom Lee is way out to lunch. Francois Trahan respects him a lot and I do not know the guy but just like other permabulls (Ed Yardeni), I don't know what he's smoking but there is a major global recession on its way, rates are high and will likely go higher as core inflation remains sticky all over the world and wage inflation is picking up, and tech stocks including mega cap juggernauts have yet to really have their day of reckoning (they will).

I know Apple is a cash cow, Buffett loves the company, Microsoft, Nividia, blah, blah , blah, I'm telling you, when the Big Kahuna strikes, they are all toast!

Capiche? Don't question me on this! LTK Capital Management is in BEAST MODE this year and you are all lucky I'm spending my Saturday morning writing all this!

What else? The US debt ceiling Gong Show continues but I'm not particularly worried and ignore most of the nonsense out there:

Then again, leave it up to the politicians in Washington to bungle things up, which wil only ensure an even more severe recession ahead:

What worries me more now is the ongoing commercial real estate collpase in the US and Europe:

On that cheery note, I'm off to enjoy this beautiful Saturday in Montreal!

Just remember, Pension Pulse is free but I expect all of you no matter how big or small to pay up and show your appreciation for the work that goes into these comments by contributing using PayPal options on the top left-hand side.

Everybody loves to get paid big bucks, especially Canada's pension plutocrats who complain about the "war on talent."

Really? All I see is the best pension/ investment analyst ripping all of you and still providing incredible free comments to all my readers despite back surgery and a plethora of other health concerns.

Like I said, LTK Capital Management is in BEAST MODE, and you're all very luck I'm gaining strength and coming back to my old charming self. Pay up, don't make me chase you!!

One final note, this is why you do not discriminate and hire a guy with progressive MS who knows the biotech market inside out:

And when this puppy gets bought out at a nice premium, you can all thank me there too!

I've got plenty more LONG and SHORT ideas but you simply do not pay me enough to provide you with my expert knowledge. Capiche?? (maybe Ken Griffin, Steve Cohen and Izzy Englander can throw me some serious money to manage but my only rule is GET OUT OF MY FACE!!)

Alright, onward and upward, time to enjoy my weekend.

Below, Bob Doll, Crossmark Global Investments, and Mimi Duff, GenTrust, join 'Closing Bell Overtime' to discuss market risk, a possible recession, and what the Fed's next move might be.

Next,Chris Toomey, Morgan Stanley, joins 'Closing Bell' to discuss the tech rally and the potential for a fallout and earnings recession.

Third, David Rosenberg, Rosenberg Research founder and president, joins 'Squawk on the Street' to discuss the Federal Reserve loan officers' survey data and more.

Fourth, Jamie Cox, managing partners at Harris Financial Group, says investors are not as scared about a recession as they are the fallout from a potential debt ceiling default.

Fifth, Kris Sidial, Co-Chief Investment Officer at Ambrus, joins CNBC’s Melissa Lee and the Options Action traders to discuss real and perceived volatility and how that is impacting the VIX.

Sixth, Berkshire Hathaway Chairman and CEO Warren Buffett and Vice Chairman Charlie Munger preside over the 2023 Berkshire Hathaway annual meeting. The two discuss the U.S. property market and commercial real estate.

Lastly, at the 2023 Sohn Investment Conference on May 9, 2023, 13D Research & Strategy Founder Kiril Sokoloff spoke with Duquesne Family Office CEO Stanley Druckenmiller about the future of investing. 

James Carville, adviser to President Bill Clinton, once said that were he reincarnated, he would choose to return as the bond market: he could then intimidate anyone.

I would choose to return as Druck, not Soros, Dalio, Griffin, Cohen, or anyone else. Stan's the man!!!!