DOW Gains as Growth Shifts to Value, Oil Stocks Have Solid Fourth Quarter Upside

MARKETS TODAY August 11^th, 2023 (Vica Partners)

Overnight/US Premarket, Asian markets finished mixed, Japan’s Nikkei 225 gained 0.84%, China’s Shanghai Composite lost 2.01% and Hong Kong’s Hang Seng down 0.90%. S&P futures opened trading at 0.41% below fair value.

European markets finished sharply lower, France’s CAC 40 lost 1.26%, London’s FTSE 100 down 1.24% and Germany’s DAX off 1.03%.

Today US Markets finished mixed, the DOW gained 0.30% while the S&P 500 down 0.11% and the NASDAQ lost 0.67%. 7 of 11 S&P 500 sectors advancing: Energy +1.56% outperforms/ Information Technology -0.88% lags. On the upside, Russell 2k, SPDR S&P Banking ETF ^KRE, ProShares UShort 20+ Treas ^TBT, US Treasuries, Industries: Oil, Gas & Consumable Fuels, Diversified Telecommunication Services. Industrial REITs, Mega Cap Value, Gold, Bitcoin and the USD Index.

In US economic news, both headline and core-PPI came 0.1% ahead of estimates. After today’s PPI data the probability of at least 1 additional rate hike through November has risen to 35%.

Takeaways

• The Hang Seng and Shanghai Composite ended the week lower on property market and deflation concerns
• US headline and core-PPI came 0.1% ahead of estimates
• DOW leads majors up 0.30%
• 7 of 11 S&P 500 sectors advancing: Energy +1.56% outperforms/ Information Technology -0.88% lags.
• Industries: Oil, Gas & Consumable Fuels +1.62%, Diversified Telecommunication Services +1.19%, Industrial REITs +1.10%
• Mega Cap Value +0.5%
• Treasury yields up across the curve
• Gold, Bitcoin, USD Index gain
• Soho House (SHCO) with solid earnings beat

Pro Tip: Safe Haven Demand shows the difference between Treasury bond and stock returns over the past 20 trading days.  The current rating indicates market increased volatility.

 Sectors/ Commodities/ Treasuries  

Key Indexes (5d, 20d, 50d, 100d, 200d)

S&P Sectors

• 7 of 11 S&P 500 sectors advancing: Energy +1.56% outperforms/ Information Technology -0.88% lags.
• Industries: Oil, Gas & Consumable Fuels +1.62%, Diversified Telecommunication Services +1.19%, Industrial REITs +1.10%, Pharmaceuticals +1.09%, Leisure Products +1.04%
• 1 Month Leaders: Energy +10.06%, Communication Services +5.37%, Health Care +4.15%
• YTD Leaders: Communication Services +41.09%, Information Technology +35.58%, Consumer Discretionary +33.12%
• S&P 500 +16.27%

Factors

US Treasuries

Earnings

Q2 ’23 Top Line Top Line

• Q1 ’23 Actual: 79% of companies beat analyst estimates by an average of 6.5%
• Q2 Forecast: S&P 500 EPS was expected to decline <7.2%>/ Fiscal year 2023 EPS flat YoY

Q2 Actual (thru 8/04)

• 84% of the S&P 500 have reported results for the second quarter of 2023
• Companies represented in the Morningstar US Market Index are expected to see their earnings decline by about 5.27% from a year ago.
• Based on earnings consensus estimates, consumer cyclical companies are forecast to see the most growth, followed by energy, industrials, and financial services.

Notable Earnings Today  

• +Beat: Soho House (SHCO)
• – Miss: Constellation Software (CNSWF), Credicorp (BAP), Spectrum Brands (SPB)

Economic Data

US

• Producer price index: period July, act 0.3%, fc 0.2%, prior 0.1%
• Core PPI: period July, act 0.3%, prior 0.1%
• PPI (year-over-year): act 0.80%
• Core PPI (year-over-year): act 2.4%, fc 2.5%, prior 2.6%
• Consumer sentiment (prelim): period Aug, act 71.2, fc 72.0, prior 71.6

Vica Partner Guidance August ’23, (updated 8-11)

• Q3/4 highlighting, Industries: Interactive Media & Services, Household Durables, Broadline Retail, Consumer Finance, Automobiles, Construction & Engineering, Semiconductor & Semiconductor Equipment, Energy Equipment & Services, Construction Materials, Specialized REITs, Gas Utilities. Other: Undervaluation for Chinese Mega Cap Tech. Japan equities still a better value than US. Look for continued strength in Mega and Large Cap Growth “the new defensives” Expect Energy Sector rally!

• Cautionary, Banks shortly may be overpricing. Current indicators are mixed. Credit default swap (CDS) to pick-up through Q4/Q1. >20 Year Treasuries price erosion.  Current “hard” shift from Growth to Value.
• Longer Term, NASDAQ 100^NDX/FANG+ ^NYFANG companies will continue to outperform “BIG allows you to invest at scale”. TOP Sector outperform includes AI and Semiconductor Equipment, Key Material like Lithium. Forward looking CAGR growth below:
• Company, we continue to emphasize longer term business strength *quality and strength of balance sheet for all investments. * Strong support – NVIDIA (NVDA), Meta Platforms (META), Microsoft (MSFT), Alphabet (GOOG, GOOGL), Amazon (AMZN), Apple (AAPL), Tesla (TSLA), Taiwan Semi (TSM), ASML Holding NV (ASML), Broadcom (AVGO).

• BIG Picture: Market bottoms are made on bad news and with deflationary signals the current market rally should come as no surprise. The combination of current Fed tightening, higher oil prices and a strong dollar should have given us a final bottom in ’23?

1. Our biggest concern with the current rally is that the Government is not as effective as Free Markets in managing capital. Stock repurchases are just another way to deploy Capital.  Consider that about 63% of the typical business cost is labor. I wholeheartedly trust the Free Market to better spend on CAPEX, R&D, and other.
2. As for Bonds as an alternative investment for Stocks, a >10-year bond should have a return that exceeds nominal GDP, assuming inflation remains above >3%.
3. The argument for Fed further tightening has its pundits. Raising rates to counter jobs (1.6 jobs available for every job seeker) in a rapidly changing economy will NOT moderate on demands.
4. The Fed would benefit by rethinking its 2% inflation target and adjusting it to 3%. This would account for more accurate wages, energy transitions and account for expanding services in BIG tech. In addition, add more protection from deflation.

News

Company News/ Other

• Startups Are Dying, and Venture Investors Aren’t Saving Them – WSJ
• CFOs Are More Optimistic on Side-Stepping a Recession – WSJ
• Index-Tracking ETFs Were All the Rage, Until Now – WSJ

Energy/ Materials

• China’s Carbon Price Hits Record as Polluters Rush for Permits – Bloomberg

Real Estate

• Maui’s Fires Risk Pushing Up Housing Costs in Strained Market – Bloomberg

Central Banks/Inflation/Labor Market

• US Inflation Metrics Diverge, Complicating Outlook for Cooldow – Bloomberg
• US Producer-Price Inflation Picks Up on Boost From Services – Bloomberg

Asia/ China 

• China debt: these 3 regions have the most daunting debt piles. So what can be done about it? – South China Morning Post