“If you have a clear mind, you won’t have to search for direction. Direction will come to you.” ~ Phil Jackson

Good evening,

The last trading day of the month and quarter arrived on the Thursday of a shortened trading week. Markets continue to advance, with the S&P 500 closing at new all-time highs on Wednesday and Thursday, notching five consecutive months of gains. Fundstrat Head of Research Tom Lee sees more gas in the tank, with fund flows and cash on the sidelines suggesting that we have yet to approach a top in this latest rally. As he pointed out to clients this week, $22 billion was taken out of the stock market between March 13 and March 20: “Clearly, people aren’t that bullish if they’re withdrawing funds from the U.S. equity market.”

Mark Newton, Head of Technical Strategy, agreed. For him, extremely bullish optimism would be a warning sign. However, right now, in his view, “sentiment is not that extraordinarily giddy and complacent. We don’t see indiscriminate buying across the whole market.” 

Adding to Lee’s continued constructivist view, while margin debt rose in February, it remains “well below” October 2021 levels – as shown in our Chart of the Week below. “So I think there’s still plenty of dry powder,” he asserted, “and, until margin debt rolls over, I wouldn’t even consider stocks being anywhere near a peak.”

Lee’s analysis is consistent with Newton’s technicals-based conclusion. “Today’s the last day of the trading month and trading quarter, and we’re on track to see the best start to the year in the past five years, back to 2019, and there’s really no evidence of any technical deterioration whatsoever,” he said during our weekly research huddle.

Lee has described the current rally as “mature,” but Newton suggested that “maturing” might be a more appropriate descriptor. “I see this rally as gradually maturing,” he said. “The waning of Technology over the last month has been encouraging, because it really has not caused any technical damage to the market. We’ve seen the move in Industrials, Financials, and Discretionary all give way to strength in commodity-based sectors. Energy has just broken out to its highest level in 10 years. I wrote more about this move, and about some of my favorite names in that sector, a few days ago,” he reminded us. 

“Materials are also breaking out, to new all time highs today. That actually deserves an overweight in my book,” Newton added. “With China starting to reawaken a bit, I think that is likely to cause a pretty decent move to the upside in many commodity stocks in the months to come.”

On small-caps ($IWM)

We saw small-caps outperforming this week by about 100 basis points. Lee sees the Fed as dovish, and he believes that if it remains dovish, market consensus will come to realize this. In his view, “a lot of things will come into place [when this happens], and the group that should benefit is small caps.”

“I agree with this fundamental reasoning; I love the idea, and I think it makes sense,” said Newton. “However, I don’t know that now is the time to act on it, to expect a 50% rally in small caps right away.” Expanding on this, he clarified, “The key might be the PCE coming in unexpectedly soft. That might cause rates to really start to roll over. If you see the 10-year [yield] crack 4%, I think that might reignite the small-cap sector and we might see that breakout. But, technically, right now, I’d urge careful consideration.” 

PCE

Although markets will be closed tomorrow (Friday, March 29), the Bureau of Economic Analysis will remain open, publishing the PCE deflator numbers for February. As Fundstrat clients know, PCE is the Fed’s preferred inflation indicator, and it can also be largely extrapolated based on recent CPI and PPI numbers. (To a significant extent, all three indicators draw on similar data.) “Tireless Ken” – Head of Data Science Ken Xuan – sees core PCE (MoM) coming in at 0.27, below Street consensus of 0.29.

Elsewhere 

The U.S. has proposed “freedom bonds” to aid in Ukraine’s fight against Russia, reviving an idea perhaps best known for its use in World War II. The U.S. proposal would have G-7 countries issue $50 billion in bonds to raise money for the Ukrainian war effort, with interest to bondholders to be generated by $280 billion in frozen Russian assets. The proposal is an alternative to the European suggestion of seizing Russian assets outright and appropriating them for the same purpose.

Disney settled its longstanding legal dispute with Florida Gov. Ron DeSantis over the status of the special tax district in Orlando, where the Disney World resort and amusement complex is located. The conflict arose after Disney publicly criticized a law supported by DeSantis regarding restrictions on sexual-orientation and gender-identity education, known as the Parental Rights in Education Act, or, more informally, as the “Don’t Say Gay” law. Under terms of the settlement, the status of the district will be renegotiated and both sides will drop the various lawsuits they had filed against each other without admitting fault or liability. 

Boeing CEO David Calhoun will resign by the end of the year on the heels of a scandal sparked by an incorrectly installed door blowing off an Alaska Airlines Boeing 737 Max 9 flight in mid-air. Calhoun was hired in 2019 to fix the aerospace giant’s safety problems and to improve its reputation, after two 737 Max 8 planes crashed, killing 346 people. Stan Deal, president and CEO of Boeing Commercial Airplanes, has also resigned, effective immediately. COO Stephanie Post will take his place, leading the key division.

The collapse of Baltimore’s Francis Scott Key Bridge after a cargo ship crashed into one of its pylons has raised the specter of supply-chain disruptions, and thus – inflation. As of this writing, six people are presumed dead after the Tuesday morning disaster, and the Port of Baltimore remains closed to maritime traffic. In addition to the human tragedy, the crash is likely to impact trade: Baltimore is a key port for car and coal shipments, handling around 47 million tons of cargo a year. The schedule for reopening the port is unclear. The bridge itself was also important for shipping – before the disaster, approximately 1.3 million trucks crossed it every year. 

The U.S. revised its Q4 2023 economic statistics, reporting that GDP grew at a 3.4% annualized rate – rather than 3.2% as previously estimated. The number is still a decline from the 4.9% annualized growth seen in Q3 2023.

Sam Bankman-Fried was sentenced to 25 years in prison after his conviction on charges related to one of the largest frauds in U.S. history. The founder of the cryptocurrency exchange FTX has said he plans to appeal both his conviction and the sentence. 

And finally: In a stark illustration of Japan’s aging population, Unicharm, a leading Japanese diaper brand, reported that sales of adult diapers have outpaced sales of baby diapers to such an extent that it will stop making the latter altogether. On the other hand, one silver lining of Japan’s aging population is that the shrinking working population has tightened labor markets enough to force corporations to raise wages, potentially helping to bring an end to decades of economic stagnation.

Notice: U.S. markets and Fundstrat offices will be closed Friday, March 29, 2024 in observance of Good Friday. There will be no publications on that date.