Macro Recap - 2024-08-28
It's been a while since my last update. I was away on a two-week vacation in Vancouver, so I wasn't able to keep up with things, but a lot has happened that's worth discussing.
My last update (July 15th) highlighted the historic rotation from tech to small cap. It was also conveniently around the top before we saw the market declined >9%. I considered the whole episode a technical pullback rather than a shift in economic fundamentals. Markets are always forward looking. Prior to the CPI on July 11th, we saw prices climb in anticipation for the pivotal CPI print. By the time the number was out, market participants started to repositioning for the upcoming rate cut narrative. This is very important to observe (even in hindsight as I write) because it sheds light on how the market is positioned. As narratives change, this allows us to anticipate how portfolios are affected.
The second leg of the decline that started in end of July was triggered mainly by the Yen carry trade. This was caused by BOJ’s surprise 0.25% rate hike which caused forward rates to be repriced which means position unwinds.
In both of these cases, it was positional in nature. Be it forced unwind or repositioning, these moves often snap back in my experience (obvious to say now we are almost back at the high). Why do they usually snap back? I believe irrational/systematic selling disregards fair values. You aren't going to think about fair values when your risk manager is breathing down your neck. After these overreactions, bids will come back in. I’ve seen this during COVID and in various crypto crashes and it all plays out similarly.
Fundamentals
Inflation is continuing its decline with the last July print showing YoY at 2.9% (vs est 3%). The influence CPI has on the markets in my opinion has shifted relative to earlier this year. The reaction function is no long good print → rate cut → stock market go up. Rather the focus has shifted to the earnings, growth, election, and unemployment rate. These factors will ultimately determine the expectation of forward returns in the market.
Q2 earnings
WMT for example raised guidance along with EPS beat and Rev beat. Moderation of groceries inflation. Stock was up 6.5% post earning.
TJX EPS at 96c (exp 92c). Comparable sales were up 4% (exp 2.73). Management attributes comp sales increase to higher number of transactions. Stock jumped 6.11% post earning.
Target (TGT) reported EPS beat at 2.57 (exp 2.18). Comparable sales up 2% (exp 1.1%). Management also mentions traffic is up 3%. Stock was up 11% post earnings.
Home Depot (HD) reported EPS beat at 4.67 (exp 4.52). Comp store sales were below expectations -3.6% (exp -2.6%). Guidance was cut. Stock gapped down at the open but ended up 1% for the day.
CAT reported EPS beat at 5.99 (exp 5.53). Revenue came in less than expected -4%. Sales outlook trimmed for rest of the year. Stock was up 3% post earning.
From Factset (Aug 16th), 79% of SPX reported positive EPS surprise, 60% reported revenue surprise. YoY earning growth at 10.9%. Guidance wise, 48 companies issue negative EPS guidance and 41 issued positive EPS guidance.
So overall, I’m fine with these results. I’ve just cherry picked firms that stood out to me. Also felt consumers are reducing their big ticket item purchases.
The next thing to focus on is the NVDA earnings coming up today. I expect another quarter of strong results given what peers have shown in Q2. Their CEO Jensen Huang is scheduled to be interviewed by bbg later today. I mean he wouldn’t really do that so publicly if the results are in line or good. Let see if my read is right…
Unemployment
The trend for unemployment has been up since May. It went from 3.7% to the most recently 4.3%. On an historical level, I think we are fine but its really the trend that is worrisome. Some market commentators have mentioned its largely driven by immigration. Various sources have mentioned there’s been 7 to 15 million immigrants in to the USA since 2021. I’ve not been able to verify this but it does pose whether cutting is really the right move. We shall see in the coming months.
Elections
Since Harris took over for Biden there is definitely a momentum for her campaign. Shes a fresh face and it gives voters some new to choose from. But I am still very much on the fence with her. In the Biden administration she was practically invisible. I’ve seen Biden’s wife more than I’ve seen Kamala. I’m not entirely sure if she will hold up to Trump but am looking forward to their debate on September 10th.
Kamala’s policies so far have centered around Tax hikes for the wealthy. More specifically, she will not raise any taxes for household making less than 400k a year. Per WSJ: “Under that plan, the top marginal income-tax rate for individuals would climb to 44.6% across almost all income types, compared with today’s lower top rates (23.8% on capital gains, 29.6% on some business income and over 39% on wages). … Harris, adopting Biden’s plan, also would create a novel system that would tax the unrealized capital gains of people with net worth exceeding $100 million.” While I doubt unrealized capital gains tax will actually happen, it doesn’t cast a good backdrop for the markets going in to 2025. Its notable that her tax policies are rather opposite to that of Trumps.
With Trump, we know he is pushing for cuts. The question is how will he fund it to prevent the deficit from widening. He said Tariffs but I think that ultimately just means higher prices for consumers… I think its still too early to map out what this means for the market. I think it is to simplistic at the moment to simply say Trump = stock up, and Harris = stock down.
FED and Market Expectations.
Not surprisingly and given the above, the Fed has finally signaled it is ready to cut in September during Powell’s Jackson Hole address. Their focus has pretty much shifted mostly to unemployment and growth as I’ve mentioned in the past several months. I think we are at the point of the cycle where its more likely everyone will be focusing on the data. Fed’s reaction function has be communicated very transparently so I’m not too concerned about policy surprises.
I’ve personally maintained long equities throughout the year. My portfolio is structured around long SPY + various quality stocks I hold for the long run. On the risk management side, I have puts which I roll opportunistically depending on my view towards the market. In the recent downturn, I’ve increased exposure to Costco and added Amazon and Constellation Software. I also dabble a bit in special situations here and there. I may do a post on my investments in the future.
Thanks for reading!