Mid year 2023 Macro Update

Most talked about recession in history which is not happening : Fed vs. Market | GDP vs. Stocks | HY not cracking

Dated : July - 3 - 2023

If you refer my blog from Q12023 , I had predicted that 2023 statistically is better positioned for more upside than downside just given excessive overselling ( above avg. down days with higher drawdowns in last 5 years). 2023 got us back to the avg. , roughly 11 up days each any given month.   My prediction for SPY was a 10% return for 2023 and as of June 30th , we are already at 15.43% given the risk factors outlined in prior Q12023 blog

Obvious question is can this bull run continue and the answer is "No", not that fast "America". We have to be content with a 15% to 20% SPY return this year and that means either a large dip ( in excess of 10%)  or a sideways market in +/- 10% range. 

My recommendation is to raise some cash now , and recycle that via dips over 7% to fully get into stocks and index's by end of 2023. I recommend Small cap exposure 

Lets recap the tug of war b/w expansion and recession and what lies ahead

1) Debt celling is done and US will borrow more for next few years - Bullish for stocks

2) Russia- Ukraine war and China geopolitics is keeping defense sector humming -Bullish

3) Inflation reduction act's $360 Billion tax credits and $ 50 Bil credit in Chips Act are going to create both demand, jobs and wages  - Bullish

4) Higher expected short term rates have a bifurcated impact on US consumer , 1) home owners with lower mortgages and higher cash savings have a real benefit but is being eroded by inflation and 2) New aspirational home buyers or equity buyers in the younger demographic ( 25 years to 35 years) have less money saved up and can't afford mortgages at 7% and higher  -  Neutral affect

5) AI Hype , Chat-GPT , Nvidia ,semis, MegaCap rally  - Very Extended valuations - bearish for stocks

6) Modest surge in defaults and high recovery's being predicted by markets ( HYG, HYD, BDC tickers haven't' seen large drawdowns even during FRC and Bank run crisis of March 2023) - Bullish

7) Excessive Yield Curve inversion ( 3m vs 10y or 6m vs10y  or 2y vs. 10y) - always has led to a recession and its about due statistically that we have one -  Very Bearish 

8) S&P vs. Equal Weight S&P differential is very wide indicating most of the rally is not broad-based - Neutral to somewhat bearish

9) High reinvestment risk post 2 more FED Hikes in 2023 - Excessive cash rolling from Money market funds, CDs, T-bills next year when FED will have to indicate rate cuts in 2024 - Bullish with a 6 to 9 month lead in stocks

SPY Down and Up days by Month ( count and returns) - Updated

3m vs. 10y Treasury Yield Spread ( source : FRED) 

Never seen before inversion - typically leads to a recession . Currently Fed's projects was .9% growth this year which means we may get into 0% or negative GDP in Q4-2023 or Q1-2024. Remember, this doesn't mean stocks will drop , infact stocks can well behave as  mirror image to the contraction due to monetary easing which follows

Conclusion

We have a strong run up until mid year led by large mega caps and semis vs. rest of the market. Economy data has been resilient but clearly there is caution and need to pause to review which stocks/sectors are better portioned as odds of recession increase on the back of more Fed tightening and curve inversion . For longer term investors, dips like that seen in Oct/Nov 2022 and March 2023 during banking crisis are lessons in investing to pick the winners at bargain prices. Stocks I recommend - Plug , Enphase, Walmart, Uber, Google, AMD, TSLA, DOCU , NEE , AMZN, Dow Jones. Sectors to avoid - Banking , oil/energy industry in H2-2023. Size bias favors buying small caps and REITs (medical, industrial and datacenters) in next pull back