Things you need to know.
– It was a great 6 months…. What will the next 6 bring?
– Tech was the biggest winner while Energy was the biggest loser.
– FED mins due out at 2 pm today…. What will we learn?
– Non-Farm Payroll on Friday….
– Try the Chicken Scarapiello
Good morning……Welcome to the third quarter of 2023……The first half of the year is now history. The Nasdaq was and continues to be the winner in 2023….it ended the first half of the year up 33%, while the Transports and the S&P 500 ended up16% a piece, the Russell gaining 7% while the Dow Industrials struggled to add 3%.
The second quarter began with markets still in the throes of the regional bank crisis following the March failures of Silicon Valley Bank and Signature Bank, and investors started the month of April wary of contagion risks. Those concerns proved mostly overdone, however, as throughout most of the month regional banks were stable. That stability allowed investors to re-focus on corporate earnings, and the results were much better than expected….78% of S&P 500 companies reported better-than-expected Q1 earnings, a number solidly above the 66% long-term average. Additionally, 75% of reporting companies beat revenue estimates for the first quarter, also well above the long-term average. That solid corporate performance was a welcome sight for investors and coupled with general macroeconomic calm, allowed stocks to trade higher throughout most of April. However, following an underwhelming earnings report, concerns about the solvency of First Republic Bank weighed on markets late in the month and the S&P 500 declined into the end of April to finish with a modest gain.
Fears of a First Republic Bank failure were realized on May 1st, as the bank was seized by regulators and the FDIC was appointed its receiver. However, that same day, JPMorgan announced it was acquiring the bank from the FDIC, and that move helped to calm investor anxiety about financial contagion risks. The Federal Reserve also helped to distract investors from the First Republic failure, as the Fed hiked rates at the May 2nd FOMC meeting, but importantly altered language in the statement to imply it would pause rate hikes at the next meeting.
Instead, the tech sector helped push the S&P 500 higher in mid-May, thanks to an explosion of investor and financial media enthusiasm around Artificial Intelligence (AI), which was highlighted by a massive rally in Nvidia (NVDA) following a strong earnings report. However, like in April, the end of the month saw an increase in volatility. This time it was the lack of progress on a U.S. debt ceiling extension and rising fears of a debt default (which was NEVER going to happen). In late May (May 28th – as expected) Joey and Kevin did agree on a two-year debt ceiling extension which got signed into law only 48 hours later avoiding a financial calamity. The S&P 500 finished May with a slight gain.
June began with the debt ceiling resolved, talk of a Fed pause and continued stability in regional banks, we saw investors jump back in causing the rally in stocks to resume. Inflation declined as the Consumer Price Index (CPI) hit the lowest level in two years, economic data remained impressively resilient, reducing fears of a near-term recession or even a crash landing. Then, in mid-June, the Federal Reserve confirmed market expectations by pausing rate hikes and that helped fuel a broad rally in stocks that saw the S&P 500 move through 4,400 and hit the highest levels since April 2022. The last two weeks of the month saw some consolidation of that rally thanks to mixed economic data, political turmoil in Russia and hawkish rhetoric from global central bankers, but the S&P 500 still finished June with strong gains.
In sum, markets were impressively resilient in the second quarter and throughout the first half of 2023, as better-than-feared earnings, expectations for less-aggressive central bank rate hikes, more evidence of a “softer” economic landing and relative stability in the regional banks pushed the S&P 500 to a 14-month high.
Of the broad 11 S&P sectors for the first 6 months – we have Tech – XLK + 39%, Communications – XLC +36%, Consumer Discretionary – XLY +33%, Industrials – XLI +9.3%, Basic Materials – XLB + 7%, Real Estate – XLRE + 2.8%, Consumer Staples – XLP +1%, while Financials – XLF lost 1%, Healthcare – XLV -3%, Utilities – XLU – 6.5% while Energy (last years darling) XLE gave up 7%.
Further down the scale – we had Disruptive Tech – ARKK +44%, Semi’s – SOXX +47%, (NVDA the darling up 190%!), Airlines – JETS + 26%, Housing – XHB +32%, Aerospace and Defense – ITA +4.5%, Biotech’s – XBI flat, Hotels – Up 25%, Metal and Miners – XME +3%, American Industrial Renaissance names – AIRR +23% ytd….while last year’s darlings in the coal/mining/energy space disappointed – falling nearly 15% across the board. We had the Value trade – SPV +11% while the Growth Trade – SPYG + 20%.
As expected, the dollar ended the qtr. higher……up 1.2% leaving it at 103.04 – below the highs of May – when we saw the dollar index trade as high as 104.32. This morning the dollar is ticking higher on the idea that the FED mins – due out today will prove that the FED think is for higher rates in both July and September and higher rates will make the dollar more attractive – so expect to see the dollar challenge those highs.
Oil traded higher on Monday and Tuesday and this morning it is up another $1.42/barrel at $71.20. We are now kissing trendline resistance at $71.44 – will we break through or will we back off. The Saudi production cuts went into effect on July 1st….and the UAE energy minister told reporters that the additional cuts will be enough to help balance the market…We have already had a few oil analysts predicting $85 WTI before the end of the summer…. Let’s see.
Gold – which tested long term trendline support at $1,899 last week on the idea that the FED will keep raising rates – is up $7 this morning trading back at $1,936/oz. Once investors get ‘ok’ with where rates are going – then gold investors can decide what proper valuations for gold should be. As I said, I expected us to test the trendline – which we did – and now I suspect that we will churn around in here – $1900/$1975.
US futures are down…. Not surprised…. The Dow – 136 pts, the S&P’s – 18, the Nasdaq is – 100 pts, while the Russell is down 13. It is the first full trading day of the quarter…. Eco data today includes Factory orders expectations of +0.8%, Durable Goods +1.7%, and at 2 pm we will get the FOMC mins from the June meeting. What will we learn that is NEW? Nothing…. Yes, they paused, but expect rates to continue to rise at the next two meetings. While inflation is coming down – remember – prices are still going up – just at a slower pace….and if you live anywhere – and you go to the supermarket or pay a utility bill etc.…. – the idea that prices are weakening is just not true.
Weakening prices is called ‘deflation’ and that is not happening (yet)….In fact – The Cleveland FED now forecasts that their data shows that inflation will reaccelerate in July…and that confirms what JJ has been concerned about and what I have been saying for months now…….Would we see a repeat of the 1980’s where they paused – thinking that the conquered inflation only to find out that they were wrong and that forced then FED Chair Volker to jam rates significantly higher – sending the US economy into a two year ‘deep’ recession. Let’s hope that is not the case.
The next hurdle for the markets will be the start of earnings season…and that begins officially on July 14th….Expect all kinds of pre-announcements and analyst revisions in the days ahead…..remember – companies that are going to disappoint need to pre-warn investors – who won’t be happy, and who will take some money out of the name vs. those that choose to wait and then they risk getting absolutely slaughtered on earnings day….and remember – it’s all about the forward guidance.
European markets are all lower…. down ~0.5% across the board…. PMI figures for the Eurozone fell for June….as the economy ‘ground to a halt’….and the survey detailed weaker demand in new orders from manufacturers. And don’t forget, it is the start of a new quarter….and markets across the zone did end the 1st half higher (like we did) with 5 of the 6 regions up double digits – think better than 14%. The UK is the only one that underperformed up less than 1% ytd. Weakness in the indexes today and maybe this week – should not surprise anyone.
The S&P ended Monday’s shortened session up 5 pts to end the day at 4455. Last week, I did say that the S&P appeared to want to test the June highs of 4450 – we did that and then some………. The question is what happens next? Do not be surprised to see a pullback ahead of the start of earnings and today’s FED mins. We are expecting the mins to reveal higher rates in the coming months – and that should not be the surprise…the surprise will be if the mins reveal an even more concerned FED – suggesting that we could see higher rates in October and November as well. Not something I expect to see but is always a possibility.
Do not forget – Friday will bring us all important Non-Farm Payroll report and that is expected to show an increase of 225k new jobs, and the unemployment rate go down to 3.6% while average hourly and weekly earnings remain higher… While that all sounds good – it is not good for the current FED think and monetary policy.
Stick to the plan…Do not make emotional decisions. You can find my quarterly commentary and forward guidance on my twitter or my LinkedIn profile. You can also find it on my substack at – Kennypolcari.substack.com.
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
“The market commentary is the opinion of the author and is based on decades of industry and market experience; however, no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of Kace Capital Advisors.”
Chicken Scarpiello
This is a classic Chicken and Sausage dish. There are many ways to make this – so it is about being creative…. Remember – as long as you have the basics down – you can make it your own by improvising seasonings etc. Try this one – it is easy and very good. For this you need:
Chicken pieces on the bone! Legs and thighs are always best – the dark meat is tender, juicy and moist. Sweet Italian Sausage (you can use hot sausage if you prefer), sweet cherry peppers (you can substitute hot if you like), potatoes, garlic, olive oil, s&p, Italian Herb seasoning, red wine vinegar, white wine, Chicken stock and cut Italian Parsley.
Preheat the Grill
Preheat oven to 475 degrees – In a roasting pan – add in the potatoes (you can slice them, qtr. them, cube them – your call) – season with s&p and some of the Italian herb seasoning, drizzle some olive oil – toss and roast for 25/35 mins….stirring occasionally ..remove.
Wash the chicken and dry with a paper towel. Season with s&p and the Italian herb seasoning.
On Med – hi – Heat some olive oil in a large frying pan. When hot – add the chicken pieces skin side down – do not crowd…Cook the chicken until golden brown – careful not to keep turning the pieces – the trick is to let them brown nicely before turning….You should be thinking maybe 4/5 mins before turning….(but watch – as you do not want it to burn). When browned – remove the chicken and place in the roasting pan with the potatoes arranging nicely. –
Next place the sausages on the grill – the trick is to just get the grilled flavor…. stay close so that they do not burn…. turning as they cook. When done – remove and slice into bite size pieces. Add to the roasting pan.
Now – add the chopped garlic to the frying pan and sauté until golden – do not burn. Next add in the sweet cherry peppers – you can cut these in half and remove the seeds. Sauté. Now add in about ¼ cup of the red wine vinegar – allow it to come to a boil – scrape the sides of the pan to release any of the browned bits. When the vinegar is reduced by half – add in the dry white wine – not chardonnay – maybe like ½ cup or so…. bring to a boil and then reduce by half. (no longer than 4 mins max). (If you want a thick sauce – then feel free to add some flour to thicken it up –
Now the chicken stock – about 1 full cup – once it comes to a boil – remove from the heat and pour the whole thing into the roasting pan with the chicken, sausages and potatoes. Do not drown it, just enough to keep it bathing in the sauce. – Place back in the oven and bake for 30 mins…. Remove from the oven – toss in the chopped parsley and serve.
This makes a great dish for a summer cookout. Easy to make a lot of it and present it family style on a nice platter – accompanied by a large mixed salad and you are good to go.
Buon Appetito
