Dow, S&P 500 and Nasdaq All Off >1%, China’s Deflationary Economics Weigh on Global Markets

MARKETS TODAY August 15^th, 2023 (Vica Partners)

Overnight/US Premarket, Asian markets finished mixed, Japan’s Nikkei 225 gained 0.56%, while the Hong Kong’s Hang Seng lost 1.03% and China’s Shanghai Composite was off 0.07%. S&P futures opened trading at 0.24% below fair value.

European markets finished lower, London’s FTSE 100 lost 1.57%, France’s CAC 40 down 1.10% and Germany’s DAX off 0.86%.

Today US Markets finished sharply lower, the S&P 500 lost 1.16%, NASDAQ down 1.14% and the DOW off 1.02%. All 11 S&P 500 sectors declining: Health Care -0.36% outperforms / Energy -2.44% lags. On the upside, Industries: Household Durables +1.01%, Media +0.62%, ProShares UShort 20+ Treas ^TBT, US Treasuries, USD Index.

In US economic news, US retail sales in July handily beat estimates. Import prices rose moderately while exports prices rose sharply. The NY Empire State Manufacturing Index declined in August as the headline general business conditions index fell twenty points. Home Builders (NAHB) confidence index dropped 6 points on 7% mortgage rates.

Takeaways

• China Central Bank cut key rates, Yuan hits ‘23 low
• US Treasury yields approaching 13-year highs
• Dow, S&P 500 and Nasdaq down >1%
• All 11 S&P 500 sectors declining: Health Care -0.36% outperforms/ Energy -2.44% lags.
• Trending Industries: Household Durables +1.01%, Media +0.62%
• Treasury yields
• ProShares UShort 20+ Treas ^TBT +1.34%
• USD Index gains
• Reminder, its options expiration week!
• Home Depot (HD) and Nu Holdings (NU) with solid earning beats

Pro Tip: The CBOE Volatility Index ^VIX measures expected price changes in the S&P 500 Index options over the next 30 days.

 Sectors/ Commodities/ Treasuries  

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

S&P Sectors

• All 11 S&P 500 sectors declining: Health Care -0.36% outperforms/ Energy -2.44% lags.
• Industries: Household Durables +1.01%, Media +0.62%
• *1 Month Leaders: Energy +6.85%, Health Care +4.79%, Communication Services +1.43%
• *YTD Leaders: Communication Services +42.56%, Information Technology +38.09%, Consumer Discretionary +33.65%
• *S&P 500 +16.94% *as of Aug-14-2023

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 (TBA)

Notable Earnings Today  

• +Beat: Home Depot (HD), Alcon (ALC), Nu Holdings (NU), Agilent Technologies (A), Cardinal Health (CAH), Jack Henry&Associates (JKHY), Elbit Systems (ESLT), Seadrill Ltd (SDRL)
• – Miss: Sea (SE), Legend Bio (LEGN), Tencent Music Entertainment Group (TME), Pandora ADR (PANDY),

Economic Data

US

• US. retail sales July: act 0.7%, fc 0.4%, prior 0.3%
• Import price index July: act 0.4%, fc 2%, prior -0.1%
• Export price index July: act 0.75%, fc 0.2%, prior -0.7%
• Empire State manufacturing survey Aug: act -19, fc -1.4, prior 1
• Retail sales minus autos July: act 1.0%, fc 0.4%, prior 0.2%
• NAHB builders’ confidence index Aug: act 50, fc 57, prior 56

Vica Partner Guidance August ’23, (updated 8-14)

• Q3+/4 highlighting: Industries; Energy Equipment & Services, Oil, Gas & Consumable Fuels, Interactive Media & Services, Construction Materials, Media, Broadline Retail, Health Care Providers & Services, Containers & Packaging, Office REITs, Ground Transportation, Communications Equipment, Machinery Biotechnology, Pharmaceuticals, Capital Markets, Construction & Engineering, Building Products, Machinery.

• Mid Term: Slight regression on Semiconductor & Semiconductor. Specialized REITs have upside. Undervaluation for Chinese Mega Cap Tech. Japan equities still a better value than US. Energy is where smart money is hedging.
• Cautionary: Current shorter term “hard” shift from Growth to Value. Industries: Independent Power and Renewable Electricity Producers, Automobiles, Automobile Components, Consumer Finance, Passenger Airlines, Hotel & Resort REITs. Global mining on China deflation. Credit default swap (CDS) to pick-up through Q4/Q1.  >20 Year Treasuries price erosion.  Global mining on China deflation.
• 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 Mega Cap longer support – NVIDIA (NVDA), Meta Platforms (META), Microsoft (MSFT), Alphabet (GOOG, GOOGL), Amazon (AMZN), Apple (AAPL), Tesla (TSLA), Taiwan Semi (TSM), ASML Holding NV (ASML).

• 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

• China’s Baidu edges closer to first production EV after Geely venture Jidu gets nod from Beijing – South China Morning Post
• Home Depot’s Inflation Pressures Ease – WSJ
• Maker of $400 Golf Putters Becomes 2023’s Best IPO With a 624% Gain – Bloomberg

Energy/ Materials

• Occidental to Buy Canadian Startup Carbon Engineering for $1.1 Billion – Bloomberg
• Iran-US Diplomatic Thaw May Rattle Oil Markets – Bloomberg

Real Estate

• Berkshire Hathaway’s Latest Bet: Homebuilder Stocks – WSJ

Central Banks/Inflation/Labor Market

• Shoppers Boost Retail Sales for Fourth Straight Month – WSJ
• China Slashes Rates, Suspends Youth Jobless Data as Economy Signals Sharper Downturn – WSJ
• The Fed’s Interest-Rate Debate Is Shifting – Bloomberg

Asia/ China 

• Xi Faces More Tough Choices in Wake of Surprise China Rate Cut – Bloomberg
• No turnaround, jobless rates halt: 7 takeaways from China’s July economic data – South China Morning Post