Market comment 2023

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The recession caused by the Covid-19 pandemic was the shortest on record, thanks to rapid, robust and bipartisan congressional action. It took just over two years to regain all of the jobs lost — hard to fathom given that more than six million people filed unemployment insurance claims in one week at the end of March 2020. Americans were made whole by their government, which staved off what otherwise would have been mass financial suffering. “This is the best, most successful response to an economic crisis that we have ever mounted, and it is not even close,” H. Luke Shaefer, a professor at the University of Michigan who is an expert on deep poverty, told a House committee in the fall of 2021..

Don’t Let Inflation Bury the Memory of a Government Triumph

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The crushing demand for AI has also revealed the limits of the global supply chain for powerful chips used to develop and field AI models. The continuing chip crunch has affected businesses large and small, including some of the AI industry’s leading platforms and may not meaningfully improve for at least a year or more, according to industry analysts. The latest sign of a potentially extended shortage in AI chips came in Microsoft’s annual report recently. The report identifies, for the first time, the availability of graphics processing units (GPUs) as a possible risk factor for investors. GPUs are a critical type of hardware that helps run the countless calculations involved in training and deploying artificial intelligence algorithms.

The big bottleneck for AI: a shortage of powerful chips

The latest Consumer Price Index shows that shelter costs contributed 90% of total inflation last month — but there’s a sharp turnaround ahead, say economic researchers at the Federal Reserve Bank of San Francisco. Housing makes up the largest chunk of CPI, and that measurement, known as shelter inflation, is expected to cool this year and might even go negative next year, according to the researchers.

The rising cost of shelter represented 90% of last month’s inflation

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Alarm bells over growth rang during the global financial crisis in 2008-09 and during a capital outflow scare in 2015. China came out of those with a shock boost to infrastructure investment and by encouraging property market speculation, among other measures. But infrastructure upgrades have created too much debt, and the property bubble has already burst, posing risks to financial stability. Given China's debt-fuelled investment in infrastructure and property has peaked, and as exports are slowing in line with the global economy, China only has one other source of demand to tinker with: household consumption. In that sense, this slowdown is different. Whether China bounces back largely depends on whether it can convince households to spend more and save less, and whether they will do so to such an extent that consumer demand compensates for weaknesses elsewhere in the economy.

How much worse can China's economic slowdown get? | Reuters

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“This is new. Investors have shifted their trading behavior from a BTD “Buy the dip” market to STR “Sell the Rally” market. This is a new change in tone and sentiment. This is something that I have not said often,” he writes. The Goldman pro, who has studied flow data for two decades, also frets that already jittery markets are about to face vacation headwinds.

'This is no longer a buy-the-dip market.' Why this Goldman Sachs veteran is worried about the stock market.

China has stopped releasing youth unemployment figures, which were seen by some as a key indication of the country's slowdown. The decision is due to changes in the world's second largest economy and its society, a government spokesman said. In June, China's jobless rate for 16 to 24 year olds in urban areas hit a record high of more than 20%. The country's central bank also cut the cost of borrowing on Tuesday in an attempt to help boost growth. Official figures published on Tuesday showed China's overall unemployment rate had risen to 5.3% in July.

China halts youth jobless data as economy falters

The Federal Reserve Bank of Atlanta’s running estimate of US economic growth is on the rise. The regional Fed branch’s real-time model for gross domestic product (GDP) moved up its third-quarter GDP prediction from 4% to nearly 6% in a matter of weeks. The latest increase in the outlook came from a surge in new construction projects for single-family homes in July.

Why the Atlanta Fed sees near 6% US GDP growth for Q3

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It’s hard to overstate the importance of the property market China. The industry accounts for as much as 30% of the country’s economic activity, and more than two-thirds of household wealth is tied up in real estate. But nearly three years of “zero Covid” restrictions sapped China’s economic growth, and consumers have been reluctant to buy new homes in the face of higher unemployment and falling property values.

Evergrande’s bankruptcy may be just the beginning of China’s real estate crisis

Over the past year, the Financial Times has identified more than 110 large-scale manufacturing announcements — including in semiconductors, electric vehicles, batteries and solar and wind parts — spurred by the landmark legislation. We have examined them and spoken to experts, and here is what we have learned

.Inside the $220bn American cleantech project boom | Financial Times

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As Dhaval Joshi of BCA Research points out, China has generated 41% of the world’s growth in the past 10 years, almost double the 22% contribution from the US, and dwarfing the 9% contribution from the euro area..

Since 2015, bank deposits as a share of China’s GDP have risen by 50%. Private-sector consumption of durable goods is down by about a third versus early 2015, and has continued to decline since the reopening of the economy rather than rise as a result of pent-up demand. Private investment is down by two-thirds since the first quarter of 2015, including a decrease of 25% since the pandemic started.

“Those trends reflect people’s long-term economic decisions in the aggregate, and they strongly suggest that in China, people and companies are increasingly fearful of losing access to their assets and are prioritising short-term liquidity over investment,” Posen says. These fears, he adds, have been heightened by the severity and unrelenting nature of China’s lockdown.

China is too big for a Soviet Union-style collapse, but it’s on shaky ground

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The recent rise in long-dated Treasury yields boils down to mostly one single thing, which is higher real rates resulting from changing expectations for U.S. economic growth, according to Joseph Kalish, chief global macro strategist at Ned Davis Research. Kalish attributes 90% of the increase to that factor alone. He points out that 5-, 7-, 10- and 20-year Treasury yields are all up significantly since 2021-2022. On Tuesday, the 10-year rate finished at 4.327%, slightly off its almost 16-year high. Meanwhile, the 5-year Treasury yield, which reflects the intermediate part of the Treasury curve known as the belly, has trended higher as traders and investors factor in prospects for a stronger U.S. economy beyond the next few years.

Rise in Treasury yields is almost entirely due to one factor, strategist says

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But amid this market instability, the most important factor for the stock market's long-term performance was actually getting better. And that is corporate earnings. "At the end of the earnings season for the second quarter, have analysts lowered EPS estimates more than normal for S&P 500 companies for the third quarter?" asked FactSet's John Butters in a note published Friday. "The answer is no." Butters notes that during July and August, earnings estimates were raised for the third quarter, fourth quarter, and remainder of 2023, as well as 2024 full-year forecasts. Notable not only because earnings are the most important long-term driver of stock prices, but because analyst estimates are typically revised lower during the first two months of a given quarter.

The most important driver of stock prices is on the rise: Morning Brief

Huawei Technologies Co. and China’s top chipmaker have built an advanced 7-nanometer processor to power its latest smartphone, a sign Beijing is making early progress in a nationwide push to circumvent US efforts to contain its ascent. Huawei’s Mate 60 Pro is powered by a new Kirin 9000s chip that was fabricated in China by Semiconductor Manufacturing International Corp., according to a teardown of the handset that TechInsights conducted for Bloomberg News. The processor is the first to utilize SMIC’s most advanced 7nm technology and suggests the Chinese government is making some headway in attempts to build a domestic chip ecosystem, according to the research firm.

Look Inside Huawei Mate 60 Pro Phone Powered by Made-in-China Chip - Bloomberg

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As cash-strapped developer Country Garden battles to stave off default, its sprawling $100 billion development in Malaysia has come under scrutiny from creditors even as the Southeast Asian nation dangles financial incentives to lure investments. Billed as a paradise with turtles and white-sand beaches, Country Garden's Forest City development in the state of Johor next to Singapore aims to house 700,000 people across 7,000 acres on four reclaimed islands upon completion in 2035. Seven years in, Country Garden has invested 20 billion ringgit ($4.3 billion) in the project, Forest City said, a far cry from the initial $100 billion plan. Today, with development still in progress, it houses fewer than 10,000 people - about 1% of its target. Forest City has become emblematic of the risks Country Garden and some of its Chinese peers took on with their debt-fuelled building boom not just at home but also in offshore markets.

'Seeing is believing': Country Garden's Malaysia project in spotlight | Reuters

The worst part of today’s report was that real average hourly earnings declined 0.5% in August, taking a large bite out of consumer spending power.

For stocks this was ‘the worst part’ of inflation report, says First Trust

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But there are perhaps four important reasons why bulls should hold their ground.
First, the technical. The S&P 500 has just moved back above its 50-day moving average, which is supportive, while even after the decent run it’s 14-day relative strength index, a momentum gauge, is trending up but at 56 sits well below overbought territory.

Next, and alluding to easing angst in the fixed income arena, Fundstrat’s Tom Lee notes that the equity rally, which followed the European Central Bank’s decision to deliver a ‘dovish hike,’ bodes well for when the Fed also signals it is done tightening. The ECB’s move “and the market’s reaction is a harbinger of the 1982 moment ahead for the S&P 500…the key takeaway is equities went to an all-time high 17 trading days after Volcker publicly considered ‘ending the inflation war’,” says Lee.

There’s another fundamental microeconomic reason encouraging bulls: company profits. As John Butters, senior earnings analyst at FactSet notes, earnings forecasts have been improving over recent months and now the S&P 500’s aggregate third quarter earnings per share are expected to rise 0.5%.

“If 0.5% is the actual growth rate for the quarter, it will mark the first quarter of (year-over-year) earnings growth reported by the index since Q3 2022,” says Butters in his latest note.

Finally, among the most important prerequisites for a sustained bull run is firepower. It can mean that when new highs are made there’s still sufficient cash to support the trend. So, consider the chart below from Stephen Suttmeier, technical research strategist at Bank of America. It shows the amount held in money market funds has hit a fresh record of $5.625 trillion .

“Investors love cash,” he says, but at 5% cash lags the year-to-date return for the S&P 500 of about 17%. “Since the SPX can continue thrive after solid returns for 1H and YTD through August, it would not surprise us to see investors put cash to work and fuel a rally into year end,” Suttmeier concludes.

There are 5.6 trillion reasons that stocks can enjoy a year-end rally - MarketWatch