Wall Street ends slightly higher
All three U.S. stock index end slightly higher
Financials lead S&P 500 sector gainers; healthcare weakest group
KBW regional banking index up >5.0%
Dollar, gold up slightly; crude dips; bitcoin gains ~5.5%%
U.S. 10-Year Treasury yield slips to ~3.68%
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WALL STREET ENDS SLIGHTLY HIGHER (1615 EDT/2015 GMT)
Shares on Wall Street ended marginally higher on Tuesday, with investors waiting for data on U.S. inflation and the Federal Reserve's monetary policy meeting next week.
The consumer price index is expected to have slowed modestly last month, although core prices are anticipated to remain elevated.
The Fed, meanwhile, is widely seen pausing next week, although a rate hike in July is gaining traction.
Financials .SPSY led gains among the 11 major S&P 500 sectors, while the KBW regional banking index .KRX surged more than 5%. The Russell 2000 index .RUT of small-cap companies rose more than 2.5%.
Investors took a pause after pushing the S&P 500 up almost 20% from its October 2022 lows, boosted by gains in megacap stocks, a stronger-than-expected earnings season.
"There appears to us to be an air of complacency in 'risky' asset markets...The rise in the S&P 500 is showing no signs of abating," wrote Bradley Saunders, assistant economist, at Capital Economics.
"Admittedly, these recent gains have emanated mostly from a handful of large tech stocks. But other measures of risk appetite are also showing similar disregard for the ever-blurrier outlook."
Here is a closing snapshot across asset classes:
(Gertrude Chavez-Dreyfuss)
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NEW BULL OR NOT? (1335 EDT/1735 GMT)
It's been over seven months since the October lows, and during this time, the S&P 500 index .SPX has rallied more than 19% on a closing basis. Naturally, investors are pondering whether this marks the beginning of a new bull market.
As Dan Suzuki, deputy CIO at RBA, sees it, while it's certainly possible for this rally to evolve into a full-fledged bull market, historical precedent suggests it is far from a foregone conclusion.
According to Suzuki, investors always try to anticipate troughs in fundamentals, and the times they get it wrong turn out to be bear market rallies.
However, he also says that sometimes investors do get it right, and thus it's not surprising that the market has historically tended to bottom before earnings growth reaches its trough. Nevertheless, Suzuki says that when the markets have bottomed in the absence of earnings support, there has always been significant support from either liquidity or sentiment/valuation (typically both) to come to the rescue.
Suzuki notes that:
*Fed policy was more difficult to characterize before the Fed began targeting the Fed funds rate in the 1970s, but since then every bull market has kicked off with easing Fed policy.
*Prior to the Internet Bubble, every bull market began with a trailing GAAP P/E multiple below the historical median of 16.6x.
*Up until the pandemic, every bull market started with a P/E ratio on the prior peak EPS below the historical median of 15.4x.
Thus, Suzuki's bottom line is that "The current rally may indeed be the early stages of a bull market, but this would truly be an unprecedented beginning without some signs of improving profit fundamentals, increasing liquidity or much cheaper valuations."
(Terence Gabriel)
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REGIONAL BANKS FUEL SMALLCAP RALLY (1300 EDT/1700 GMT)
Smallcaps are having an excellent Tuesday.
The Russell 2000 .RUT and the S&P Smallcap 600 .SPCY are going to the races, jumping nearly 3% while the broader S&P 500 clings to a meager gain.
The lion's share of the rally is attributable to a healthy jump in regional banks. The KBW Regional Bank index .KRX is currently north of 6% on the day, touching its highest level since late April.
"There are an awful lot of regional banks in the Russell 2000," says Chuck Carlson, chief executive officer at Horizon Investment Services in Hammond, Indiana. "When you look at the financial exposure of the group, when you see big up days or down days that's the reason."
The regional banking sector, plagued by liquidity concerns after a spate of failures that began with SVB and Signature banks, appears to be benefiting from the firming likelihood of a Fed pause at this month's monetary policy meeting.
"A pause by the Fed puts a pause on the what's been negatively affecting the regional banks," Carlson adds. "It might relieve pressure on them having to aggressively pay up to hold onto their deposits."
Playing in the background, the World Bank cut its 2024 global growth forecast but upwardly revised its U.S. GDP estimate for next year, to 2.1% from 1.7%.
That could put smaller firms with less international exposure at an advantage.
The graphic below shows year-to-date performance of the RUT, KRX and SPX, through Monday's close.
The broader market has clearly outperformed the RUT since the March 10 collapse of Silicon Valley Bank:
(Stephen Culp)
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ONLY WAY AROUND THE INVERTED YIELD CURVE, IS THE FED-CUT OFF RAMP (1215 EDT/1615 GMT)
The Treasury yield curve is inverted and the spread between 2- and 10-year notes is now around -80 basis points which is twice what it was one month ago.
Joe Lavorgna, chief U.S. economist at SMBC, recalls that maximum inversion was near -110 bps, which was the week that SVB failed. To him, the larger inversion reflects reduced expectations of near-term Fed easing.
Lavorgna says that curve inversion has preceded every recession. However, since the lead time varies, it is difficult to pinpoint the timing of a downturn.
In any event, according to his analysis, the mean lead time is 13 months. But the shortest time to recession was eight months and the longest time to recession was 22 months, "a big gap. Assuming an average lead time of 13 months, means the economy would enter recession this August," writes Lavornga.
According to Lavorgna, the reason the yield curve is so good at predicting recessions is because it causes them.
"It is standard practice that financial intermediaries borrow short and lend (invest) long. When the curve is deeply inverted, it gums up the money and credit creation process because there is little financial incentive to make loans or invest in securities. Consequently, the inverted curve signals tightening in credit conditions and looming financial market stress," writes Lavornga.
Lavorgna believes lending conditions will worsen in the coming months as the stresses in the regional banking sector continue to play out.
"Eventually, the yield curve will normalize but history tells us this happens only when the Fed cuts rates. In the meantime, the curve will remain deeply inverted and the tightening in lending conditions will persist."
(Terence Gabriel)
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STIFEL SEES S&P 500 AT 4,400 BY Q3 (1135 EDT/1535 GMT)
Stifel chief equity strategist, Barry B. Bannister, on Tuesday is reiterating his S&P 500 .SPX 4,400 target by the third quarter (~3% above current levels), but he’s also issuing a new recommendation: that investors start rotating into cyclical value stocks (banks, materials, capital goods, transportation, real estate, and insurance).
While cyclical growth (technology, semiconductors, internet, media) has dominated this year, Bannister believes now is the start of a "catch-up rally" for value heading into summer/fall.
This would serve to broaden the market rally, while limiting cap-weighted index upside (he says cyclical value is 24% of the S&P 500 but cyclical growth a hefty 44%).
Bannister is more cautious longer-term, watching for signs of a "textbook economic recession and flattening earnings growth by year end." He's also concerned about rising geo-political risks heading into 2024 as the United States has "ceded energy sovereignty to adversarial or non-aligned producers."
(Terence Gabriel)
*****
BMO CAPITAL MARKETS RAISES S&P 500 YEAR-END TARGET TO 4,550 (1045 EDT/1445 GMT)
As BMO Capital Markets' chief investment strategist, Brian Belski, sees it, through five months of the year, it has become increasingly clear that stock market resilience is here to stay.
"Admittedly we entered the year more cautious than we have been in the past given the host of uncertainties the market faced to begin 2023, but it seems that all the doom and gloom that many others were prognosticating has yet come to fruition," writes Belski in a note.
Belski says that the biggest worry entering the year was that the Fed would overdo it, and “hike” the economy into a severe recession.
However, after 5 ppt points of rate hikes, Belski says inflation has clearly cooled, and yet labor market strength has remained intact. In other words, he believes the anticipated recipe for disaster is simply not present.
"So, from our perspective, all the worries that damaged 2022 market performance are slowly beginning to subside. Yes, earnings growth is likely to remain a sticking point, but it appears investors fully understand this and are looking past 2023 results and expecting growth to reaccelerate in 2024 and beyond."
Therefore, BMO expects market price momentum to persist, albeit at a slightly slower pace for the remainder of the year, and are raising their 2023 S&P 500 .SPX year-end price target to 4,550 from 4,300. (4,550 is just over 6% above current levels).
Additionally, BMO is upgrading tech from market weight to overweight and downgrading health care from overweight to market weight.
Belski believes the AI hype surrounding the tech sector is real and likely to propel future growth for many stocks within the group. In contrast, he says that the COVID-fueled boost has clearly evaporated for health care leaving the sector languishing from both a performance and earnings growth perspective.
(Terence Gabriel)
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WALL STREET SUBDUED AS FED OUTLOOK UNCERTAINTY LINGERS (1015 EDT/1415 GMT)
Action on Wall Street is muted early on Tuesday with the main indexes all around flat.
Investors are assessing what the Federal Reserve's policy moves may be later this month. U.S rate futures are pricing in a pause at the next meeting, but a possible hike in July. A mixed set of data released on Monday is contributing to that uncertainty in terms of the policy outlook.
U.S. stocks have posted gains in recent weeks, with a rally in megacap stocks, a stronger-than-expected earnings season and hopes of a pause in interest rate hikes pushing the benchmark S&P 500 .SPX and the tech-heavy Nasdaq .IXIC to fresh 2023 highs on Friday.
Here is an early market snapshot:
(Gertrude Chavez-Dreyfuss)
*****
TECH ABOUT TO TIRE, BANKS ABOUT TO BOUNCE? (0902 EDT/1302 GMT)
Tech has certainly been on a roll in 2023.
The group, up 35% YTD, is the best performing S&P 500 .SPX sector so far this year. And, in fact, the tech .SPLRCT/SPX ratio recently broke out to all-time highs.
That said, that ratio is now at risk of falling for a second week in a row, which is something it hasn't done since mid-April. A break back below its Y2K top could signal a more significant reversal.
Since tech is the primary driver of growth .IGX, if it stumbles, it will likely lead to a relative resurgence in value .IVX. This, especially, if financials .SPSY, a large weighting within value, were to come to life, even if just on a relative basis.
Meanwhile, of note, the tech/S&P 500 banks index .SPXBK ratio appears to be reaching a critical juncture:
With the recent regional banking crisis, on-going fear-of the-Fed, and building recession fears, the tech/banks ratio has also vaulted to all-time highs. This, with the SPXBK down nearly 12% in 2023.
However, this ratio is now reaching the log-scale resistance line from its 2009 high, which marked the end of the Financial Crisis market swoon. This line is drawn across the ratio's post-pandemic panic high.
Thus, traders are on guard as they watch this ratio's behavior at the resistance line as to whether it will breakout and tech will see an even greater relative outperformance vs banks, or if instead, it's time for a turn, one which will in some way, favor banks.
(Terence Gabriel)
*****
FOR TUESDAY'S LIVE MARKETS POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE
TVB06062023 https://tmsnrt.rs/3IU7e4L
US morning snapshot https://tmsnrt.rs/42pqkqs
US2US1006062023 https://tmsnrt.rs/3Cbrzz0
Smallcaps, regional banks and the broader market https://tmsnrt.rs/3WU4ESi
US closing snapshot https://tmsnrt.rs/42qWK3Z
(Terence Gabriel is a Reuters market analyst. The views expressed are his own)
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