Market Snapshot
briefing.com
| Dow | 33788.78 | +61.44 | (0.18%) | | Nasdaq | 13411.68 | -81.22 | (-0.60%) | | SP 500 | 4345.03 | -4.57 | (-0.11%) | | 10-yr Note | +23/32 | 3.72 |
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| | NYSE | Adv 1887 | Dec 1023 | Vol 830 mln | | Nasdaq | Adv 2106 | Dec 2334 | Vol 4.4 bln |
Industry Watch
| Strong: Real Estate, Energy, Materials, Utilities, Industrials |
| | Weak: Communication Services, Information Technology, Consumer Discretionary, Health Care |
Moving the Market
-- Weakness from mega cap stocks, likely driven by ongoing consolidation efforts
-- Quarter end rebalancing
-- Wait-and-see ahead of busy week of economic data
-- Possible geopolitical angst after weekend reports that the Wagner military group led a short lived armed uprising against Russian military leadership that ended following a Belarusan-brokered deal
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Closing Summary
26-Jun-23 16:25 ET
Dow -12.72 at 33714.62, Nasdaq -156.74 at 13336.16, S&P -19.51 at 4330.09
[BRIEFING.COM] The session started on a more upbeat note, but the three major indices all closed in negative territory. The S&P 500 and Nasdaq settled near their worst levels of the day while the Dow Jones Industrial Average closed just below its flat line.
Weak mega stocks, which were trading down due to ongoing consolidation efforts, were integral to index level performance. The Vanguard Mega Cap Growth ETF (MGK) closed with a 1.3% loss while the market-cap weighted S&P 500 fell 0.5%.
Tesla (TSLA 241.05, -15.55, -6.1%), which was downgraded to Neutral from Buy at Goldman Sachs, and Alphabet (GOOG 119.09, -3.93, -3.2%), which was downgraded to Neutral from Buy at UBS, were some of the worst performers from the space.
There was some underlying strength, though, as evidenced by the 0.6% gain in the Invesco S&P 500 Equal Weight ETF (RSP). Also, small and mid cap stocks were relative outperformers. The Russell 2000 closed with a modest 0.1% gain and the S&P Mid Cap 400 rose 0.8%.
Roughly half of the 11 S&P 500 sectors closed with gains. Real estate (+2.2%) led the pack by a wide margin followed by energy (+1.7%) and materials (+1.0%). Meanwhile, the communication services (-1.9%), consumer discretionary (-1.3%), and information technology (-1.0%) sectors fell to the bottom of the pack, dragged down by their respective mega cap components.
The consumer discretionary sector was also weighed down by a sizable loss in Carnival Corp. (CCL 14.60, -1.20, -7.6%). CCL had risen 80% since late April, but lost ground today after an earnings report that was better than expected.
In other corporate news, Dow component IBM (IBM 131.34, +1.91, +1.5%) agreed to buy Apptio for $4.6 billion cash.
Other factors driving the mixed price action, aside from weak mega caps and consolidation efforts, included some possible quarter-end rebalancing in favor of bonds, along with some geopolitical angst.
That geopolitical angst was part of the market narrative due to reports over the weekend indicating that Yevgeny Prigozhin, leader of the mercenary Wagner Group, led an incursion into Russia that has been described as a coup attempt. It ended quickly, though, after Prigozhin accepted asylum in Belarus.
Treasuries settled with gains. The 2-yr note yield fell one basis point to 4.74% and the 10-yr note yield fell two basis points to 3.72%.
- Nasdaq Composite: +27.4% YTD
- S&P 500: +12.7% YTD
- Russell 2000: +3.5% YTD
- S&P Midcap 400: +4.3% YTD
- Dow Jones Industrial Average: +1.7% YTD
There was no U.S. economic data of note today, but it's a busy week of data that will culminate with the release of the Personal Income and Spending report at 8:30 a.m. ET on Friday that will feature the Fed's preferred inflation gauge (the PCE and core-PCE Price Indices).
Looking ahead to Tuesday, market participants will receive the following economic data:
- 8:30 ET: May Durable Orders (Briefing.com consensus -1.0%; prior 1.1%) and Durable Orders -ex transportation (Briefing.com consensus 0.0%; prior -0.2%)
- 9:00 ET: April FHFA Housing Price Index (prior 0.6%) and April S&P Case-Shiller Home Price Index (Briefing.com consensus -2.5%; prior -1.1%)
- 10:00 ET: June Consumer Confidence (Briefing.com consensus 103.8; prior 102.3) and May New Home Sales (Briefing.com consensus 665,000; prior 683,000)
Treasuries settle with gains; econ data releases on Tuesday
26-Jun-23 15:30 ET
Dow +79.69 at 33807.03, Nasdaq -96.65 at 13396.25, S&P -5.79 at 4343.81
[BRIEFING.COM] The major indices are little changed over the last half hour.
Treasuries settled with gains. The 2-yr note yield fell one basis point to 4.74% and the 10-yr note yield fell two basis points to 3.72%.
Looking ahead to Tuesday, market participants will receive the following economic data:
- 8:30 ET: May Durable Orders (Briefing.com consensus -1.0%; prior 1.1%) and Durable Orders -ex transportation (Briefing.com consensus 0.0%; prior -0.2%)
- 9:00 ET: April FHFA Housing Price Index (prior 0.6%) and April S&P Case-Shiller Home Price Index (Briefing.com consensus -2.5%; prior -1.1%)
- 10:00 ET: June Consumer Confidence (Briefing.com consensus 103.8; prior 102.3) and May New Home Sales (Briefing.com consensus 665,000; prior 683,000)
Energy complex settles higher; small and mid caps outperform
26-Jun-23 15:05 ET
Dow +61.44 at 33788.78, Nasdaq -81.22 at 13411.68, S&P -4.57 at 4345.03
[BRIEFING.COM] The Dow remains near its best level of the session while the Nasdaq and S&P 500 are trying to find upside momentum.
While the market-cap weighted S&P 500 sits near its low of the day, the Invesco S&P 500 Equal Weight ETF (RSP) trades at its high of the day, up 0.8%.
Small and mid caps continue to outperform. The Russell 2000 is up 0.7% and the S&P Mid Cap 400 is up 1.2%.
Energy complex futures settled higher. WTI crude oil futures rose 0.5% to $69.49/bbl and natural gas futures rose 2.8% to $2.80/mmbtu.
Boston Properties bucks broader market weakness, office REITs stronger on SLG stake news
26-Jun-23 14:30 ET
Dow -15.19 at 33712.15, Nasdaq -116.38 at 13376.52, S&P -14.20 at 4335.40
[BRIEFING.COM] The S&P 500 (-0.33%) is in second place once again on Monday, hovering near lows of the session.
S&P 500 constituents CarMax (KMX 81.91, -4.30, -4.99%), Etsy (ETSY 85.10, -3.83, -4.31%), and First Solar (FSLR 15.35, -0.13, -0.84%) pepper the bottom of the standings. KMX slips despite sell side analysts raising targets, while BofA Securities cut their target on FSLR.
Meanwhile, Boston Properties (BXP 55.84, +4.34, +8.43%) is today's top performer, higher given today's SL Green Realty (SLG 28.21, +4.66, +19.79%) stake news.
Gold recoups some of last week's dip
26-Jun-23 14:00 ET
Dow +13.32 at 33740.66, Nasdaq -108.01 at 13384.89, S&P -9.40 at 4340.20
[BRIEFING.COM] With about two hours left to go on Monday the tech-heavy Nasdaq Composite (-0.80%) is hovering just off lows of the day, still up about +3.48% month-to-date.
Gold futures settled $4.20 higher (+0.2%) to $1,933.80/oz, aided in part by geopolitical angst in Russia, rebounding off last week's losses.
Meanwhile, the U.S. Dollar Index is down about -0.2% to $102.70.
Market meanders into the new week
There isn't a lot to be said about the equity futures market this morning, which is in a meandering mode. Currently, the S&P 500 futures are down four points and are trading 0.1% below fair value, the Nasdaq 100 futures are down three points and are trading 0.1% below fair value, and the Dow Jones Industrial Average futures are down 24 points and are trading 0.1% below fair value.
There is an understandable, wait-and-see element in the trade. The S&P 500 and the Nasdaq Composite saw their extended winning streaks come to an end last week and we are moving closer to quarter end, which is oftentimes accented with rebalancing gyrations.
This morning, market participants are taking in the news that Tesla (TSLA) was downgraded to Neutral from Buy at Goldman Sachs and that Alphabet (GOOG) was downgraded to Neutral from Buy at UBS. The weakness in those stocks following the ratings changes has been a drag on the futures market.
Nonetheless, there isn't any concerted selling interest at the index level.
There isn't a lot of news of note ahead of the open, although there was a noteworthy development on the geopolitical front over the weekend. The leader of the mercenary Wagner Group, Yevgeny Prigozhin, led an incursion into Russia with a purported motive of supplanting Russia's leadership, yet the insurrection effort ended almost as quickly on a reported agreement that enables Prighozin to settle in Belarus.
In brief, Prigozhin and his mercenaries will not be marching on Moscow, yet his actions have infused a bit more geopolitical uncertainty into the mix.
That consideration might be infusing a little bit of a safe-haven trade in Treasuries. Then again, Treasuries could also simply be getting the benefit of some quarter-end rebalancing activity. The latter carries a little more weight in the explanatory realm knowing that the U.S. Dollar Index is down 0.2% and oil and gold futures are little changed.
The 2-yr note yield is down four basis points to 4.71% and the 10-yr note yield is down six basis points to 3.68%.
There isn't any U.S. economic data of note today, yet this week's calendar will be bookended by the May Personal Income and Spending Report, which will contain the Fed's preferred inflation gauge in the form of the core-CPE Price Index.
Separately, there will be a smattering of earnings reports from some high-profile companies this week, including Carnival Corp. (CCL) today and continuing with Walgreens Boots Alliance (WBA), General Mills (GIS), Micron (MU), Paychex (PAYX), and Nike (NKE) over the remainder of the week.
-- Patrick J. O'Hare, Briefing.com
Mercury sinks after deciding not to sell; focusing on a turnaround under new leadership (MRCY)
Mercury (MRCY -11%) is sinking to levels not seen in over five years today after announcing on Friday after the close that instead of selling, it will forge ahead under refreshed leadership, including a new CEO and CFO. The sensor and processing tech supplier for mission-critical use has struggled significantly over the past few months, seeing its shares plummet by over 41% without incorporating today's move since February highs. With the market likely anticipating that Mercury would seek out a buyer after initiating its evaluation of strategic alternatives in January, the company's decision not to sell is triggering a substantial sell-the-news reaction today.
- Making Mercury's woes this year more glaring is that its primary end markets are global aerospace and defense, two sectors that have held up relatively well despite macroeconomic uncertainty. Several organizations have expressed their bullishness toward these segments over the past month, such as DuPont (DD) CFO Lori Koch, who noted that aerospace will be an area of strength moving forward, and Honeywell (HON), which returned to growth within its defense and space division in MarQ.
- Mercury noted last month that end-market demand is not so much the problem as are derivative factors of the pandemic, which has caused margin degradation. Mercury commented that over the past several years, it won a considerable amount of new business requiring program development. While before the pandemic Mercury saw solid performance within 18 months, this timeframe has been extended to around 30 months, fueled by supply chain delays like long semiconductor lead times and tight labor markets.
- While these issues are primarily timing and cost-related, investors have grown impatient. Mercury still expects its challenges to be short-lived, expecting margins to return to pre-pandemic levels once it overcomes these short-term headwinds. However, with gross margins down over 400 bps yr/yr for three consecutive quarters and Mercury cutting its FY23 adjusted EPS forecast to $1.36-1.50 from $1.90-2.08 in MarQ, the near-term is not looking exceptionally bright.
Despite Mercury's perpetual problems, investors were still hopeful of a potential takeover. Beginning in 2023, Mercury engaged in an evaluation of strategic alternatives, including a possible sale. There were a few names interested in acquiring Mercury, which provided a temporary boost to the stock. Nevertheless, Mercury decided to charge forward under new leadership. Former CEO Mark Aslett is now out, with Board member Bill Ballhaus named Interim CEO. The Board also underwent changes, appointing an independent director from Eve Air Mobility, with plans to nominate another candidate: a former CEO of an aerospace defense contractor. Mercury will also announce its new CFO in the coming weeks.
As Mercury no longer pursues a buyer, it is looking to mount a massive comeback. The good news is that its end markets remain resilient. However, new leadership does not automatically translate to success. Therefore, it would be best to wait and see how things shake out, possibly after Q1 (Sep) results.
IBM's effort to reshape itself into a larger cloud company accelerates with buyout of Apptio (IBM)
Last Friday night, the Wall Street Journal reported that IBM (IBM) was in discussions with Vista Equity Partners to acquire cloud software company Apptio from the private equity firm. This morning, those reports came to fruition with IBM announcing a $4.6 bln acquisition of Apptio in a bid to bolster its higher growth software segment.
- Apptio, which provides offerings that help businesses track, analyze, manage, and optimize their spending on cloud services, went public in 2016 before Vista Equity Partners purchased the company in November 2018 for nearly $2 bln. As a privately held company, financial information for Apptio is more limited and this morning's press release didn't shed any light on the company's recent financial performance.
- However, based on other reports, it appears that Apptio's revenue run rate in 2022 was about $189 mln. If we assume that its revenue is closer to $200 mln for 2023, we can estimate that IBM is paying more than 20x revenue for the company. That's a steep price tag, especially since Apptio is unprofitable.
- With more than $17.3 bln in cash and short-term marketable securities on the balance sheet, IBM is able to finance the acquisition without raising capital through a debt or equity issuance. That's a significant positive, but the initial knee-jerk reaction to the deal was negative, perhaps due to concerns that IBM is overpaying in a market environment that's still shaky.
From a strategic standpoint, the deal makes a lot of sense for IBM.
- In recent years, IBM has worked to reshape and reorganize its business to better capitalize on the digitalization trend, and, more recently, the emergence of AI. This strategy has resulted in the divestiture of certain non-core businesses, including the spin-off of IT infrastructure company Kyndryl in 2021, and the streamlining of operations through a recent workforce reduction of 3,900 positions.
- At the same time, IBM has been looking to expand its cloud software offerings while lessening its dependence on sales of expensive mainframe computers. Although the addition of Apptio won't immediately move the needle on the top-line for IBM -- a company that's projected to generate revenue of $62.2 bln this year -- it can eventually become a meaningful contributor as it becomes integrated into IBM's vast sales channels.
- Additionally, IBM intends to combine Apptio with its existing automation software and AI platform, creating more value and capabilities for customers to derive greater value from their cloud services.
Overall, the acquisition of Apptio look like a good fit for IBM and its software segment in particular, which generated sales growth of 6% in constant currency last quarter, compared to flat growth for infrastructure. The acquisition price looks quite generous, but IBM has the resources to grow Apptio into a much larger business over time.
Carnival hitting some choppy waters today as Q3 guidance could have been better (CCL)
Carnival (CCL -12%) is sailing in pretty choppy waters despite reporting upside with its Q2 (May) earnings report this morning. The cruise line reported a sizeable adjusted loss of $(0.31) per share, but that was better than expected. Revenue more than doubled yr/yr to $4.91 bln, which was also better than expected. However, the mid-point of Q3 (Aug) EPS guidance was a bit below analyst expectations even as CCL raised its FY23 EPS outlook.
Adjusted EBITDA is a good metric to use given the huge depreciation generated by capital-intensive cruise ships and because CCL guides for this metric. That came in at $681 mln, which was at the high end of prior guidance of $600-700 mln. CCL also increased its FY23 adjusted EBITDA guidance to $4.10-4.25 bln from $3.90-4.10 bln.
The cruise line is seeing an acceleration in demand, with total bookings reaching a new all-time high. Bookings for Q2 exceeded Q1's booking volumes, which was the previous record high. In addition, CCL says it's benefitting from favorable pricing trends. Booking lead times for its North America and Australia (NAA) segment are now further out than CCL has ever seen. Lead times for its Europe segment continue to lengthen and are now within 10% of 2019 levels.
CCL said something we thought was notable, namely that the company had reached a meaningful inflection point for revenue this quarter with net yields surpassing 2019's strong levels.
So why is the stock lower?
- The main problem seems to be the Q3 EPS guidance with the mid-point coming in below range. It was a bit strange to see CCL increase FY23 EPS guidance pretty substantially despite the mediocre Q3 guidance. That tells us CCL seems to be expecting a pretty robust Q4 (Nov) result. Also, perhaps investors wanted to see more robust Q3 adjusted EBITDA guidance.
- Another factor potentially weighing down the stock was Q2 adjusted EBITDA coming in at the high end of guidance. While that is not bad, CCL reported well above the high end of prior guidance last quarter, so maybe a little disappointment there. Also, the stock had run about 70% since May 1, so it seems expectations were running pretty high.
Despite today's hiccup, we think CCL is a name to keep on the radar as it's benefitting from pent up demand for travel as consumers spend more on experiences. Air travel has mostly recovered, but we always felt cruise demand would take longer for people to feel safe following the pandemic. It's one thing to take a 2 hour flight then go wherever, but on a cruise, you're in the same enclosed space with the same people for a week. However, the cruise industry seems to be returning to normal and the stocks are still well below where they were trading pre-pandemic.
Lucid Group charges up after forming a strategic partnership with Aston Martin today (LCID)
After establishing a long-term strategic partnership with luxury automaker Aston Martin, electric vehicle maker Lucid Group (LCID +10%) is seeing a clear path higher today. Under the partnership, Lucid will give Aston Martin, which is targeting a 2025 launch date for its first pure electric vehicle, access to its electric powertrain technology. This type of deal is the first for Lucid and is worth north of $450 mln.
Like many of its EV startup peers, including Fisker (FSR) and Lightning eMotors (ZEV), Lucid has endured several hurdles since its stock peaked months after going public via a SPAC in early 2021. Even after shares popped in February, they quickly erased those gains, recently taking out all-time lows last week.
- Production has been a persistent issue for Lucid, as supply chain disruptions caused massive delays over the past several quarters, more so than some of its competitors given that Lucid is a new player in the auto manufacturing space (not having established long-standing relationships with suppliers) and the amount of semiconductor content powering its vehicles. It is also unclear if production problems have cleared, given that rivals Rivian (RIVN) and Polestar (PSNY) delivered roughly 8,000 and 12,000 vehicles in Q1, significantly ahead of Lucid's 1,400.
- Macroeconomic challenges present the next major headwind for Lucid. CEO Peter Rawlinson commented in May that the company now faces unfavorable economic conditions coinciding with high-interest rates. With the least expensive Lucid model currently costing over $127,000, Lucid is clearly not targeting the average car buyer. However, as we have seen with other firms operating in the higher-priced discretionary space, like luxury furniture retailer RH (RH), this does not provide complete defense from the sour economic environment.
- Meanwhile, Lucid is burning through cash, with its Q1 free cash flow at $(678) mln, forcing it to raise additional capital through equity offerings. For example, after commencing a $3.0 public offering earlier this month, shares sold off, ending the day roughly 16% lower.
However, even though today's Aston Martin partnership does not solve all of Lucid's problems, it could be the spark that triggers a meaningful turnaround for the company. Forming a strategic partnership with Aston Martin could generate interest from other high-end automotive manufacturers looking to launch pure EVs in the coming years. Meanwhile, Lucid's largest shareholder, Saudi Arabia's Public Investment Fund (PIF), is committed to fueling its future growth, pouring billions of dollars into Lucid and ordering 100,000 vehicles. Lucid is also expanding its footprint in China, which could spawn substantial future demand, evidenced by Tesla (TSLA) deriving around a fifth of total revs from the region in Q1.
Bottom line, Lucid is amid a nice relief rally after dropping nearly 30% this month after announcing its collaboration with Aston Martin. Although plenty of risks cloud Lucid's future, it has many encouraging developments that might finally electrify the stock. Still, the company's cash burn and share dilution needs to improve.
Under Armour continues to shed market value following a downgrade at Wells Fargo today (UAA)
Under Armour (UAA -2%) extended its lengthy downward action today after Wells Fargo downgraded the sports apparel firm to "Equal-Weight" from "Overweight," citing risks to its sales outlook and a challenging North American wholesale channel. Including today's adverse reaction, shares of Under Armour have shed over 40% since February highs as two consecutive earnings reports proved quite disappointing.
Briefing.com notes that shares are ticking down to potentially retest multi-year lows from October 2022. However, although headwinds abound, with the stock significantly depressed, Under Armour might be shaping up to be a reasonable buy.
- Under Armour's recent stock decline was kicked off following Q3 (Dec) earnings in early February, only to persist after issuing downbeat FY24 (Mar) guidance in early May. The biggest concern plaguing Under Armour going forward is margins, which may encounter lingering pressures as consumer discretionary spending wanes, triggering a heightened promotional environment. However, competitor lululemon athletica (LULU) commented earlier this month that although it anticipates further marketplace discounting, it does not expect it to be worse than it has been, underpinning some stabilization.
- An area where Under Armour has underperformed compared to its peers is e-commerce. For instance, in MarQ, Under Armour delivered just a 6% improvement in e-commerce revenue yr/yr, while NIKE (NKE) registered a 24% jump in digital sales in FebQ. However, after tapping former Marriott (MAR) President Stephanie Linnartz to be its CEO in December, Under Armour is focusing on ensuring its online platform becomes a showcase for the brand. Given CEO Linnartz's prior duties involved leading a technology transformation program and reinvigorating the brand at Marriott, we would not discount Under Armour's capacity to swiftly enhance its online offerings and improve brand recognition.
- With Under Armour emphasizing its e-commerce offering, the company could begin seeing its direct-to-consumer (DTC) sales return to positive growth after several quarters of low to negative yr/yr growth, helping margins in the process. Furthermore, consumers may reduce their trips to physical retail shops as they tighten their budgets, paving the way for increased e-commerce traffic.
Still, Under Armour's ailing stock price reflects numerous hurdles standing in its way. The company's FY24 guidance did not paint a rosy picture, expecting North American sales to be down slightly yr/yr. Also, although Under Armour did project International revs to grow at a mid-single-digit percentage rate, deteriorating economic conditions overseas could lead to the company missing this target.
Bottom line, FY24 will be a re-building year for Under Armour as its newly appointed CEO looks to reinvigorate the brand despite sour economic conditions. However, with shares trading around multi-year lows, the market may have already priced in much of Under Armour's current woes.
The Big Picture
Last Updated: 23-Jun-23 15:06 ET | Archive
Stock market diverges from recession view
Two roads diverged in a wood, and I --
I took the one less traveled by,
And that has made all the difference.
--Robert Frost
There has been a divergence of sorts between the stock market and Treasury market since the middle of October 2022. That is when the S&P 500 bottomed following the insufferable slide that began in January 2022 on the back of valuation concerns, rampant inflation, and a shift to an aggressive rate-hike campaign by the Federal Reserve.
The catalyst for the turn in October, ironically, was a bad September Consumer Price Index. It was so bad that there was a feeling that it could not get any worse. By and large, market participants had that right.
Total CPI was up 8.2% year-over-year last September and core CPI, which excludes food and energy, was up 6.6%. The latest readings recorded just a few weeks ago showed total CPI up 4.0% year-over-year in April and core CPI up 5.3%.
Core inflation is still too high, and the Fed has an aim to solve that with additional rate hikes. The question is, just how well will the economy handle additional rate hikes, let alone the 500 basis points of rate hikes recorded since March 2022?
The improvement in stock prices suggests the economy should handle things just fine. The widening in Treasury spreads, however, is leading some to think that the economy just might follow a different road.
Things Have Changed
Typically, longer-dated maturities have higher yields than shorter-dated maturities because one is taking on more risk for the longer holding period. When the S&P 500 bottomed last October, the spread between the 2-yr note yield and the 10-yr note yield was inverted by nearly 40 basis points, meaning the 2-yr note yield was yielding nearly 40 basis points more than the 10-yr note yield.
In this instance, the inversion was a reflection of market participants' concerns that the Fed would have to be aggressive in raising rates; and that by doing so, the Fed would effectively slow the economy in a pronounced way that would get inflation under control.
Meanwhile, the spread between the 3-month T-bill yield and the 10-yr note yield flattened during the stock market's sell-off in 2022, but it was still positive by about 20 basis points when the S&P 500 bottomed in October 2022. Oh, how things have changed.
Today the spread between the 3-month T-bill yield and the 10-yr note yield is inverted by 157 basis points. That's better than where it was at the end of May, but it remains a long way from suggesting the Treasury market thinks the economic outlook is hunky dory. The same goes for the 2yr10yr spread, which is inverted now by 100 basis points.
It is a peculiar divergence indeed. The stock market has been rallying off its October lows for a variety of reasons, but prominent among them is the notion that the economy will avoid a hard landing, that the Fed is close to being done raising rates because inflation is headed back to the Fed's two percent target rate, and that earnings growth will accelerate again in 2024.
When grading on a curve so to speak, the Treasury market seems to be seeing things differently.
Supply Lines
To be fair, the Treasury market is not only seeing, but also staring at a wall of new supply coming its way as the Treasury Department works to replenish its General Account. The bulk of the issuance, which is estimated to be around $1 trillion, is expected to include mostly shorter-dated maturities.
What we are driving at is that the widening inversion taking place as the stock market has broken out to its highest level since April 2022 could be based more on supply considerations than a forlorn economic outlook. To that end, we would be remiss not to point out that high-yield spreads have come in about 100 basis points since the stock market bottomed in 2022 and are sitting around the same area they were at when the year began, and 2023 recession calls were high pitched.
Nonetheless, the inversion is not a welcome development for banks, which borrow at short-term rates and lend at long-term rates, so they would have an increased tendency to tighten their lending standards, thereby curbing the credit expansion that is a lifeblood for economic growth. At the same time, the demand for new loans will go down because of the higher borrowing costs and that, too, would crimp growth prospects.
So, supply is one thing to explain the inversion, but we cannot entirely dismiss growth concerns as a causal factor.
What It All Means
The relatively calm demeanor of high-yield spreads, however, continues to be a feather in the cap for proponents of the soft landing/no landing view. It runs counter to the recession outlook that is presumably being presaged by 14 straight monthly declines in the Leading Economic Index.
Arguably, it could be the calm before the storm, yet the economic hurricane someone once said we should prepare for is still nothing more it seems than a tropical depression. Q1 real GDP growth was 1.3% and the latest Atlanta Fed GDPNow model estimate for Q2 real GDP growth is 1.9%.
For a forward-looking market, then, one has to respect the fact that high-yield spreads aren't yet sniffing bigger economic problems down the road. That is perhaps why the stock market is looking away from the widening spreads in the Treasury market and showing some broadening in this year's gains beyond the mega-cap stocks.
It likely also helps explain why the countercyclical utilities, health care, and consumer staples sectors are not only underperforming the market-cap weighted S&P 500 (like most sectors are) but also, more tellingly, the equal-weighted S&P 500.
The stock market's forward view doesn't see dark storm clouds on the horizon, only some grey clouds that also feature a silver lining of an acceleration in earnings growth in 2024. Maybe that's when the long and variable lags of the Fed's rate hikes will show up and storm clouds will appear. Maybe.
Thus far, when it comes to recession views, the stock market has taken the road less traveled by in 2023 and that has made all the difference.
-- Patrick J. O'Hare, Briefing.com
(Editor's Note: The next installment of The Big Picture will be published the week of July 3)
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