Thursday, June 1, 2023

Fed Prepares to Skip June Rate Rise but Hike Later; Used car prices down; Robinhood users hit three-year low; Sector reversal; The Stock Market's Great Divide; Manhattanhenge

By Whitney Tilson

1) It looks like the first part of my prediction about what the Fed will do the rest of this year is going to prove correct...

Starting with not raising interest rates at its next meeting coming up in two weeks, based on this story from the front page of today's Wall Street Journal: Fed Prepares to Skip June Rate Rise but Hike Later. Excerpt:

Federal Reserve officials signaled they are increasingly likely to hold interest rates steady at their June meeting before preparing to raise them again later this summer.

Investors in recent days had expected the Fed would lift rates at its meeting June 13-14, prompting two policy makers Wednesday to publicly underscore their preference to forgo a hike, barring a sizzling jobs report on Friday.

The strategy would give officials more time to study the economic effects of the Fed's 10 consecutive prior rate rises, as well as recent banking stress, by spacing out further increases. They have lifted rates by five percentage points since March 2022 to combat high inflation, most recently on May 3 to a range between 5% and 5.25%, a 16-year high.

The biggest question is: What will the Fed do over the four subsequent meetings this year on July 26, September 20, November 1, and December 13? The Journal article notes:

The evolving strategy around skipping a June hike suggests more officials could see a July increase as appropriate, which would move up the median projection of the peak rate to around 5.4%. That would be a 22-year high.

On Wednesday, investors saw a 65% chance that the Fed would raise rates at least once by July.

My view is that the Fed will not raise in July. Instead, it will hold steady because inflation will continue to trend downward, and the economy will slow thanks to the credit crunch in the banking sector and the housing slowdown.

In fact, for these reasons, I think the Fed will cut rates by 0.25% in two of its final three meetings of the year.

If I'm right, I think this is bullish for stocks.

2) Here's CNBC's Carl Quintanilla with another data point about falling inflation:

3) Here's another healthy sign for the markets...

The number of monthly average users of the Robinhood (HOOD) trading platform, which is mostly used by inexperienced individual investors to speculate in overvalued growth stocks, cryptos, and options, is at a three-year low:

4) This tweet by Charlie Bilello shows the extreme sector reversal in the markets this year versus last year:

5) I always like to consider and share views contrary to my own, so here is a bearish take on the markets today by my buddy Doug Kass of Seabreeze Partners:

The Stock Market's Great Divide

The month of May provided more evidence that the market lacks broad-based participation – a potentially adverse backdrop for equities over the balance of the year.

Not since 1998-99 has a small cadre of generals – large-cap tech stocks – so materially outperformed the soldiers and smaller stock brethren as in 2023.

The recent dramatic divergence had an exclamation point during the month of May.

The following chart (which my pal Peter Boockvar generously prepared for us), indicates that, in May, the NDX rose by +7.73% in the past four weeks compared to a -3.94% decline in the equal weighted S&P Index (!):

Taken in a broader context, over 100% of all the gains this year in the S&P Index have been driven by seven stocks. Three of those seven stocks account for 68% of the S&P's entire yearly gains. Year-to-date the S&P Index has climbed by +9.1%, thanks to a +30% rise in technology, while the Russell Index is down 1.0% and the equal-weighted S&P 500 Index is 1.1% lower.

This differentiated performance between the Nifty Five and the rest of the market has been a constant theme of mine as, over history, it has ended badly – most notably in the aftermath of the Nifty Fifty and eras.

Bottom Line

Markets are the weakest when they narrow to a handful of stocks:

"The breadth of the market is important. Broad-based rallies have the potential to continue, while narrowing rallies are prone to failure." - Bob Farrell

I continue to expect an adverse outcome without a broadening out in the overall market, as the multiple headwinds – higher cost and availability of capital, sticky inflation, deteriorating global economic growth, high valuations, etc. – offer a stiff resistance against the non-Nifty Five "catching up" to the anointed few.

Moreover, as noted in my columns this week, for numerous reasons I am skeptical that the AI-fueled catalyst, which recently catapulted the shares of Nvidia (NVDA), Microsoft (MSFT), Meta (META), Alphabet (GOOGL), Amazon (AMZN), and others, will sustain the market's leaders over the next few months.

I remain net short in exposure.

6) On Tuesday evening at sunset, I biked across Central Park and exited on 97th Street. I saw a couple dozen people snapping pictures of the amazing sight known as "Manhattanhenge," which only happens four days a year (the next dates are July 12 and 13):

Here's an article about it.

Best regards,


P.S. I welcome your feedback at [email protected].