Market comment 2023

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The first wave, primarily in consumer durable goods, "was demand-led," Donovan explained. "That's over. Durable goods prices in the States are falling. You've got outright deflation." That was followed a second wave of supply-led inflation, he added, "and that was the energy shock coming out of the war in Ukraine." And then "the third wave of inflation — the one we're getting now — is this unusual profit-led inflation story."

Sometimes called "excuseflation" or "greedflation," profit-led inflation occurs when consumer-facing companies toward the end of the supply chain persuade shoppers to accept price hikes by pointing to plausible explanations (such as historically-elevated inflation). However, Donovan said, the true reason for these elevated prices could have more to do with expanding margins and keeping investor sentiment high than with increased input costs. "It's using excuses," Donovan said. "It's using a cover."

The US is in its third inflation wave, and corporate profits may be a major reason why

Toyota says it has found a technological breakthrough that will allow it to bring solid state batteries to market as early as 2027. It's one of several advanced battery technologies that will underscore the brand's new EV focus as it pivots away from its former CEO's hybrid-centric strategy. Solid state batteries promise greater energy density, higher electric range, and faster charging that puts refueling time on-par with a gas-powered vehicle. Scientists, researchers, and automakers have spent decades trying to crack the code on their commercialization, but so far no EVs have them, including Toyota's own offerings: the Toyota bZ4X and Lexus RZ.

Toyota Touts Solid State EVs With 932-Mile Range, 10-Minute Charging by 2027

The world’s demand for oil is set to “shrivel” before the end of the decade, according to the leading global energy authority on Tuesday. Soaring prices and concerns over energy security caused by Russia’s invasion of Ukraine have hastened the decline as many countries rapidly shift to renewables, the International Energy Agency (IEA) report revealed. It’s an update to IEA findings last year which said oil demand would tail off in the mid-2030s. Oil demand will still rise by six per cent between now and 2028 due to strong demand from the aviation  industry and petrochemical sector. Despite this, IEA says that “peak demand is in sight”.

Demand for oil to ‘shrivel’ by 2028, says global energy authority

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Beaten-down stocks of smaller companies are finally making a comeback, underscoring Wall Street’s newfound optimism. The S&P 600 small-cap index has rebounded roughly 8% from its low in May, and is on pace to notch its first winning month since January. Small cap stocks are domestic bellwethers, since smaller companies generate most of their revenue from US customers. They also have large exposure to financial stocks. While those stocks have stabilized since the banking turmoil earlier this year, their continued steadiness is necessary for a sustained market rally, since healthy banks underline a healthy economy.

Small stocks are cheap and finally joining the market rally

Euro zone business growth stalled this month as a manufacturing recession deepened and a previously resilient services sector barely grew, leaving the European Central Bank in a policy dilemma as it presses ahead with rate hikes to fight inflation. HCOB's flash Composite Purchasing Managers' Index (PMI) for the 20 nations sharing the euro currency, compiled by S&P Global and seen as a good gauge of overall economic health, sank to a five-month low of 50.3 in June from May's 52.8.

Deepening economic pain leaves ECB in policy dilemma | Reuters

But Dr. Mark Zandi, who directs economic research at Moody’s Analytics, on Tuesday laid out five reasons why he’s “betting against a US recession” in 2023, noting that despite what pessimists say, “we haven’t suffered a recession, and the odds are that we won’t.”

Moody’s chief economist lays out 5 reasons why the US will avoid a recession

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Moreover, it’s looking like the U.S. economy will avoid recession. Market bears keep pushing back their recession timing, but are not giving up. Their latest rallying cry is that U.S. consumers will soon run out of excess savings, slow their spending and kill growth. This is not going to happen. Consumers have plenty of spending power. Baby boomers alone have $74.8 trillion in net worth and they are spending it, points out Ed Yardeni of Yardeni Research. Total net worth is $140.6 trillion for all U.S. households.  

Next, employment remains strong, and it is not letting up. “The U.S. economy remains admirably resilient, and odds of a recession beginning this year are receding,” Moody’s Analytics economist Mark Zandi predicts. “The economy’s resilience is clearest in the job market. Job growth is steadfast at near 250,000 per month. It is difficult to envisage a recession without significant job losses.” Beyond that, consumers have a record $7.6 trillion in annual unearned income from sources including interest, dividends, rents and Social Security. Consumer loan delinquencies are low, and debt-servicing costs are contained relative to income.

This new bull market is just getting started. Buy stocks on weakness.

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That might give some pause about natural resources, often scooped up by that global growth engine. But our call of the day from Tavi Costa, portfolio manager at Crescat Capital, says investors should be allocating capital toward those assets that have been long undervalued against equities and fixed income. “This is an important way of trying to capitalize on what I think is going to be a true generational wealth period for a lot of investors,” he told financial platform Real Vision in an interview that published Wednesday. “It’s very difficult to be structurally bullish on the economy today, especially seeing what we’ve seen in credit markets, the Treasury curve being as inverted as it is, despite the fact long term and short term yields are rising,” which is creating a stagflationary environment, said Costa. All this comes amid a “chronic underinvestment in natural resources,” and inflation that will keep driving up prices of about everything, he says.

A generational wealth period awaits for investors ready to buy this neglected sector, says strategist

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“Growth and unemployment rates at these levels are not only a sign of an extraordinary recovery from the previous recession, but also are a sign that this is not your parents’ labor market,” said RSM US chief economist Joe Brusuelas. “Today, we think the natural rate of unemployment is closer to 4%, which reflects a mixture of efficiency gains driven by technology and demographic factors that dampen overall unemployment.”

The efficiency of searching for jobs online and a newfound ability to work at home means that there’s less friction in finding employment than ever before, he said. That may permanently lower unemployment rates. Plus, the mass retirement of baby boomers, slowing of immigration rates and long-term health impacts of Covid have also permanently altered the labor market.

Why it matters: These changes have led many economists to say that the labor market doesn’t matter anymore, said Kathryn Rooney Vera, chief market strategist at StoneX. The gig economy, generational differences, and baby boomer retirement make this “unlike anything we’ve seen,” she said. “You have so much Fed tightening, and the most forecast recession in my lifetime, but consumers have not tightened their belts at all whatsoever.” People clearly feel good right now, said Vera, and when people feel good their habits of consumption don’t change..

Does the Fed have the labor market all wrong?

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According to Bank of America strategists led by Michael Hartnett, the new pain trade, so to speak, would be lower bond yields with a lower Nasdaq and a stronger Japanese yen. “Every billionaire minting same long T-bills, long Nasdaq barbell…biggest Q3 pain trade is lower yields, lower Nasdaq, plus higher yen…no one has that on,” the strategists say in their weekly flow show commentary. No carry trade, they say, is bigger than long the Mexican peso against the Japanese yen MXNJPY, -0.45%. This year the Mexican currency has vaulted 23% against its Japanese counterpart. 

A carry trade involves borrowing in a low interest-rate currency to fund an investment at a higher rate. The Nasdaq COMP, -0.82% also has seen meteoric gains this year, with the Nasdaq Composite jumping 31% so far. Techs have weathered higher rates from the artificial-intelligence speculative frenzy, though they do to tend to react to changes in the interest rate environment. Tech stocks have led gains for the S&P 500 SPX, -0.79%, up 14.9% year-to-date, while the Dow Jones Industrial Average DJIA, -1.07% lags behind, up 2.4%.

Here's the new pain trade, and it involves rates, tech stocks and the Japanese yen, says Bank of America

Short sellers likely lost $37 billion in June, according to an estimate by analytics provider Ortex. Losses have been piling up for bears all year as optimism over artificial intelligence propel technology giants, lifting the S&P 500 to double-digit returns that have defied doomsayers. Signs are multiplying that skeptics, willingly or not, are in retreat after initial resistance. Large speculators, mostly hedge funds that saw their net short positions in S&P 500 swell to a record at the end of May, were busy unwinding bets in the following four weeks. Their bearish holdings fell by 226,000 contracts over the stretch, the largest drop since mid-2020, according to data from the Commodity Futures Trading Commission compiled by Bloomberg.

Stock Market Short Sellers That Helped Fuel 2023 Rally Are Finally Giving Up - Bloomberg

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He adds: “The change in the interest rate environment has happened much faster than anyone expected. “There will be relentless pressure across all aspects of society and some businesses will go over the cliff.” The pressure on PE has been building for the last 18 months, pre-dating central banks’ decisions to increase interest rates to combat soaring inflation. Corporate auctions for companies including the high street pharmacy chain Boots and Motor Fuel Group, Britain’s biggest forecourt operator, failed to attract the multi-billion pound bids their owners expected in the spring of 2022. And just last week it emerged that Canadian investor Brookfield was struggling to garner interest in Center Parcs, which it has recently put up for sale for about £4bn. Quinn, of 17Capital, says the “mismatch on buy and seller expectations” after economies emerged from the Covid pandemic compounds matters. He suggests it is almost as if PE managers are unwilling to accept that their assets are not worth what they think they are.

Why rising interest rates risk turning private equity into the next ‘Ponzi scheme’

Scientists have achieved a major breakthrough using a so-called ‘miracle material’ to boost the efficiency of solar panels. Two separate studies published on Thursday demonstrated how the material perovskite could push the power conversion efficiency rate of photovoltaic (PV) solar cells above 30 per cent – beyond the theoretical limit of 29 per cent for traditional silicon (PV) solar cells. “Overcoming this threshold provides confidence that high-performance, low-cost PVs can be brought to the market,” wrote material science researchers Stefaan de Wolf and Erkan Aydin, who were not involved in the research, in an article published in the journal Science. Perovskite has emerged in the past 15 years as a material capable of transforming an array of industries, from renewable energy, to ultra high-speed communications... Last month, a startup in China announced that it planned to begin production of tandem solar cells, with the abundance of perovskite cutting costs to “just one 20th of traditional solar cells”, according to Professor Tan Hairen from Nanjing University.

‘Miracle material’ perovskite smashes solar panel efficiency threshold | The Independent

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The producer price index (PPI) fell for a ninth consecutive month in June, down 5.4% from a year earlier, the National Bureau of Statistics (NBS) said on Monday, the steepest decline since December 2015. That compared with a 4.6% drop in the previous month and a 5.0% fall tipped in a Reuters poll of analysts. The consumer price index (CPI) was unchanged year-on-year, compared with the 0.2% gain seen in May, driven by a faster fall in pork prices. That dashed expectation for a 0.2% rise and was the slowest pace since February 2021.

China's factory gate prices fall at fastest pace in 7 years | Reuters

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The president has been terrific at staying out of the Fed’s way, something presidents don’t always do. When the central bank raised rates last time around, President Donald Trump went berserk. He declared the Fed chair whom he himself had appointed, Jerome H. Powell, an “enemy.” Trump also repeatedly threatened to fire Powell, a legally dubious action that would have roiled markets.

It also would have compromised the Fed’s long-term ability to fight inflation. That’s because a central bank’s independence, both real and perceived, is critical to the institution’s ability to achieve price stability. The public must believe the Fed is willing to “take away the punch bowl” — that is, raise interest rates when the economy overheats — to get inflation under control. That way, expectations of further high price growth don’t take root and become self-fulfilling..

Who’s responsible for cooling inflation? Credit Biden, if not Bidenomics.

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Our AI-powered journey with OpenAI's ChatGPT, pitted against 10 of the leading U.S. equity funds, continues in its pursuit to answer: Is ChatGPT a better financial advisor? For the uninitiated, we gave ChatGPT a hypothetical $10,000 to create an investment portfolio, with the challenge to beat several leading U.S. equity funds. So, what’s the word for our AI-curated portfolio in the tenth week, and how did it hold up against well-known ETFs such as the SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust Series 1 (NASDAQ:QQQ)?

 Wall Street Traders May Be Replaced By AI If ChatGPT Keeps This Up | CapEdge

• The ChatGTP portfolio was up 11.35% in 10 weeks
  
• Our new marketplace portfolio did better: 10.92% in 8 weeks