QQQ - Fed Preview: Hot Recent Data Pose Problems ACWI A Hold Into August And September

2023-07-25 11:00:39 ET

Summary

• A quarter-point rate rise is expected to be announced by the Federal Reserve as the 10-year breakeven inflation rate ticks to 4-month highs.
• There is uncertainty over a second rate increase later this year, with a more than 1-in-3 probability of a pair of hikes by the November 1 meeting.
• Despite inflation concerns, the US economy is performing well with Q2 expansion at 2.4%, but hot economic surprises lately pressure the Fed to continue to clamp down on inflation.
• I have a hold rating on global stocks amid renewed interest rate risks and an unfavorable season stretch ahead.

A quarter-point rate rise is highly anticipated to be announced Wednesday afternoon as the Federal Reserve convenes for its meeting today and tomorrow. There is no all-clear on inflation, however. Just recently, oil prices have climbed to 3-month highs as the broad commodity index rises above its year-long downtrend and 200-day moving average.

What’s more, 10-year breakeven inflation rates have crept up to 2.38% - the highest percentage since early March. The good news is that the labor market appears to be softening while many non-commodity-related areas of CPI and PCE show ebbing trends, including wages and used car prices.

DBC: commodities highest close since January

WTI Crude Oil: Fresh 3-Month Highs

RBOB at $2.90 today would put the USA pump avg at $3.80 in a few weeks. A $0.25 jump from the current national average.

10yr breakeven inflation 2.38%, highest since March 7

So, there’s uncertainty as to whether a second rate increase will be needed later this year. We will get a key update from Chair Powell during the upcoming Jackson Hole, Wyoming symposium in August before the September FOMC meeting. If we see further commodity upside price action and wage growth tick up, then it is quite possible the Fed Funds target range will have an upper bound at 5.75% before year-end.

As it stands, there’s a more than 1-in-3 probability of a pair of hikes by the November 1 meeting. I anticipate a material risk of a six-handle upper bound if we see inflation indeed rear its head once again over the coming weeks. Currently, the terminal rate is priced at 5.43% in November, implying that savers will be able to earn about 5.3% in money market funds toward year-end. So, there is quite the attractive alternative to pricey stocks today.

37 Percent Chance of Two (or more) Hikes In 2023

Atlanta Fed GDPNow: Latest estimate: 2.4 percent -- July 19, 2023

Those hopeful about inflation trends indeed coming down over the coming months also assert that a soft landing, or no economic contraction at all, is doable. I think that is a legitimate potential outcome given the health of the consumer and corporate earnings that appear to be coming in healthy so far this reporting period, though the EPS beat rate is under that of Q1 and second-quarter top-line numbers are particularly less positive versus expectations compared to a quarter ago.

Bigger picture, the U.S. economy is chugging along. The Atlanta Fed’s GDPNow tool shows Q2 expansion at 2.4% while overall economic surprises have been much better at home versus abroad. The Eurozone economic surprise index recently printed fresh lows not seen since mid-2020.

US Economic Data: Too Strong For the Fed's Comfort?

Goldman July FOMC Preview: The Last Hike

July FOMC Statement: Projected Changes (BofA)

I will be paying close attention to the press conference that begins at 2:30 p.m. ET on Wednesday. Given recent strong economic data points, Jay will be painted into the corner of remaining steadfast in the never-ending battle against inflation, which could pressure stocks given the strong rally lately. Also, with a dollar that is higher each of the last 6 sessions (including Tuesday's intraday gain), foreign stocks could be hit if a hawkish stance leads to a greenback gain.

With that in mind, let’s assess the situation with the iShares MSCI ACWI ETF (ACWI). I have a hold rating on the fund after being bearish on it last August .

ACWI is a popular investment option for investors seeking exposure to a broad range of companies across the globe. The fund aims to track the performance of the MSCI ACWI index, which includes large- and mid-capitalization companies from developed and emerging markets. With an expense ratio of 0.32%, there are cheaper ways to own a global market portfolio, and the ETF’s 1.66% dividend yield is about on par with the S&P 500 (SP500), for perspective. ACWI is a large fund – total assets under management sum to $18.2 billion as of July 24, 2023, and the portfolio houses more than 2,300 equities. Compared to the SPX’s high concentration of its top 10 stocks, ACWI’s top 10 represents less than 18% of the allocation, so there’s some added diversification through a global portfolio.

Sector-wise, tech makes up 22% of the fund, but that’s sharply lower than I.T.’s share of the S&P 500. You also get more Financials exposure. In net, there is more value access with ACWI compared to the growth-heavy U.S. market. Finally, ACWI’s price-to-earnings ratio is about 10% cheaper than the SPX and has a significantly lower price-to-book ratio, albeit with lower EPS growth expectations.

ACWI: Portfolio Summary

Seasonally, the global stock market tends to struggle in August and September, according to data from Equity Clock . The latter portion of the third quarter is sometimes marked by heightened volatility and corrective price action. So, this is a bearish near-term consideration to weigh.

ACWI: August & September Struggles

The Technical Take

I had an ACWI sell recommendation in mid-August last year, eyeing a pullback from a strong summer rally in 2022. That played out, but I have not revisited my outlook on global stocks through ACWI since more than 11 months ago. Today, the chart pattern looks much healthier. Notice in the graph below that shares notched a lower low under the June 2022 dip in October, but then put in what turned out to be a bullish rounded bottom pattern.

You might also see a bullish inverse head and shoulders bottom with a neckline at $93 – the resistance I pointed out last August. Upon breaking out above that level, the fund recently notched fresh 52-week highs above $98. I see next resistance in the $102 to $103 range while $93, former resistance, is now support.

Overall, with an upwardly sloped long-term 200-day moving average, the bulls appear in control, so a buy-the-dip strategy appears to be the right way to go about ACWI.

ACWI: Bearish to Bullish Reversal, $102 Resistance, $93 Support

The Bottom Line

I expect a particularly hawkish Fed tomorrow. Recent domestic data have been clearly on the hot side, and the FOMC cannot turn its back on the inflation fight right now. That could result in a pause in the global stock market rally.

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