Stocks closed out the week in the red, reversing a 5-week winning streak as investors collected their thoughts in a still-credit-tight environment. Purchasing managers in the US are not exactly upbeat as the composite PMI slips in June.
A bull in a china shop. If you stepped away from the markets for a minute, you might be thinking “what is going on, are we in a bull market or not… AND why are all of my stocks not higher?” Well, we were on quite a winning streak for stocks, clocking in 5 straight weeks of S&P500 gains, until last week, where the index gave up some -1.39%. Markets, being pressed by humans, need to rest sometimes. They can’t just keep going up and going up. After 5 weeks of gains, a consolidation in the markets is acceptable, if not welcomed by technical traders. Besides, the world’s central bankers, including the US’s very own Jerome Powell, sent a clear message last week that the monetary strangling is still very much on. That can certainly overhang any festivities and confound further gains, though, as I mentioned last week, markets have pretty much factored all that in… though UK’s +50 basis-point bump was a bit of a surprise.
What is not a surprise by now is the potential for a late-year recession in the US. The Treasury yield curve is a smoldering dumpster fire in a gas station parking lot, which has been flashing warning signs for some time. Manufacturing activity in the US has pulled back even further into the contraction zone, according to the latest S&P Global Flash Manufacturing PMI, out last Friday. The PMI print is consistent with the numerous and sundry regional Fed reports which have disclosed a sluggish manufacturing economy. Though you probably can’t see any smokestacks outside your back window, manufacturing is a major force in the US economy, and it has a sizable impact on the determination of economic growth. In other words, the economists over at NBER, as in the National Bureau of Economic Research, as in the folks that are tasked with making the official determination of recession, weigh manufacturing sector health quite heavily. I just pulled up the recession probability forecast on my Bloomberg and – what do you know – the median forecast of some 50 plus bigshot economists puts a probability of 64%... down by -1 percentage point from the last time I looked. A more informal survey of traders conducted by Bloomberg showed that 80% of traders expect the yield curve to remain inverted while some 50% respondents expect at least 2 more rate hikes, which surely suggests that the Fed is playing a high stakes game of chicken. Running down a list of countries in the Eurozone, the US still has the highest probability of recession in the next year, according to the experts. Same for Asia, where despite the recent stimulatory efforts of the government, China’s probability for a recession is only 10%.
Last week’s market action is a reminder of just how delicate this recent rally in stocks has been. If you owned index ETF’S you would probably not even suspect the weakness. If you owned any stock related – even loosely – to artificial intelligence, you are wondering what weakness I am talking about… and possibly considering a kitchen remodel or adding a boat to your fleet of toys. If you owned anything else, you would probably be thinking “where is the bull market everyone is talking about?” If you are in that latter category, be patient, good stocks with solid management will have their day in the sun. If you are in category 2 (anything even loosely AI-related), I am not so sure a boat is a good investment strategy at this point as the market has yet to sort through the recent gains to pick the true long-term winners. Some of the recent gains were well-deserved by companies who had, indeed, invested in AI before it became a household buzzword. Still others who were quick to respond to the markets’ newfound interest in the space will rise to the occasion in the months ahead and quickly shift resources, which would also make recent gains well-deserved. Then there is that third category. If you own stocks there and are wondering why they went up, you should probably take a closer look at them… maybe start with one of those cool flamingo pool floats and hold off on the boat. It’s gonna’ be a long hot summer.
STOCKS ON THE MOVE THIS MORNING
Tesla Inc (TSLA) shares are trading lower by -2.01% after being downgraded by Goldman Sachs to NEUTRAL. Goldman follows other recent downgrades as analysts adjust their ratings and targets to recent vehicle delivery numbers and the stock’s recent surge. . Potential average analyst target upside: -17.9%. WHY IS THIS NUMBER NEGATIVE? Because the stock is currently trading higher than median average price targets of analysts. While that can be interpreted as the stock being overpriced, it does not mean that the stock will not continue to climb as analysts potentially raise price targets.
Moderna Inc (MRNA) shares are higher by +2.79% in the premarket after the company was upgraded to BUY by UBS analysts. UBS cited the company’s beyond-COVID pipeline as being “under-appreciated” by the market. Potential average analyst target upside: +67.9%.
FRIDAY’S MARKETS
Stocks closed out the week on a sour note breaking a 5-week rally run as traders took a load off to determine what’s next. The S&P500 Index declined by -0.77%, the Dow Jones Industrial Average lost -0.65%, the Nasdaq Composite dropped by -1.01%, and the Russell 2000 Index traded lower by -1.44%. Bonds gained and 10-year Treasury Note yields slipped by -6 basis points to 3.73%. Cryptos rose by +1.92% and Bitcoin advanced by +2.56%. The S&P ESG Index lost -0.83%.
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