Mr. Market Is Always Right. | Morning Express 06/02/22

Posted: June 2, 2022, 9:12 a.m.

E-mini S&P (June) / NQ (June)

S&P, yesterday’s close: Settled at 4099.00, down 32.25

NQ, yesterday’s close: Settled at 12,551.00, down 95.50

Fundamentals:

U.S. equity benchmarks are so far doing a terrific job digesting gains. The S&P rallied 10.4% from low to high in six trading days. In our Midday Market Minute yesterday, Bill Baruch pointed to a series of 100-point days as sounding nice, but ultimately something that characterizes a bear market rally and would potentially lead to a limit-down crash. Remember, we must trade the market we have, not the market we want and therefore we need the market to tell us the worst is over. The first step in this process would be to move away from the precipitous selling that took hold through April and May, where no buyers showed up on down days. Yesterday was a great start in an uphill battle.

We do find this an opportune window for U.S. equity benchmarks to rebound. April and May were never meant to be an inflection point for inflation, it is June, July, and August, in data that begins hitting the tape in July, therefore leading into the Inflation Showdown at Jackson Hole. In comes this opportune window with earnings in the rear-view mirror, China reopening, and excessive negativity. Now that earnings are behind us, this opens the door for corporate buybacks. According to the Wall Street Journal, as of last week, “S&P 500 companies that have reported first-quarter results so far spent $269 billion on buybacks in the period, up 58% from a year earlier, according to data provider S&P Dow Jones Indices. Buybacks reached a new peak of $972 billion during the 12-month period ended in March, S&P Dow Jones Indices said, up from $499 billion during the prior-year period.” With most companies trading at lower levels, we expect this trend to continue. Shanghai, China’s largest city, was completely locked down since March. The reopening will ease supply bottlenecks and most importantly help ease the U.S. Dollar’s broad strength against global currencies. Finally, we believe excessive negativity has led to many portfolio managers and investors being offsides. These market supply-demand fundamentals can certainly help fuel higher prices. Now, if inflation proves to have cooled during those summer months, we could see a 2019-style rebound even without a sharp U-turn from the Federal Reserve.

With all of that said, it is of the utmost importance to remember Mr. Market is always right. Reiterating the above, we must trade the market we have, not the one we want. If inflation does not cool this summer, there is an extremely high probability the market will be much lower.

On today’s economic calendar, ADP Payrolls for May whiffed with 128,000 jobs added versus 300,000 expected. April was also revised from 247,000 to 202,000. This was not necessarily new news after seeing yesterday’s ISM Manufacturing Employment component contract. Initial Jobless Claims came in better at 200,000 versus 210,000 expected. Revised Q1 Unit Labor Costs increased from 11.6% to 12.6%, but Nonfarm Productivity improved from -7.5% to -7.3%; a little less-worse production still costs more. Factory Orders are due at 9:00 am CT.

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