GOOGL - Recession? No One Can Tell When; Meanwhile We Rally

2023-04-17 01:00:57 ET

Summary

• Many economists are saying the end of next quarter, and more are saying the latter part of the 4th quarter. The Fed's own economists are looking to 2024.
• My main point is if it’s not happening this month, next quarter, or the latter half of 2023. If you push it out to 2024, maybe it’s not coming at all.
• $4T of stimulus is finally hitting the economy, which could delay the recession long enough that it really doesn't matter for our current market.

Everyone talks about the bear case, what about the bull case?

Last year the S&P 500 has been struggling with the super-strong dollar that robbed it of 15% of earnings right off the top at the zenith of its range. The DXY went as high as 114.78 about 6 months ago, Just this Friday it was trading at 100.85. A lower dollar is supportive of S&P earnings which everyone is in a hurry to press downwards for 2023. It is supportive of Oil, Copper, and nearly every other commodity priced in the dollar. It is also supportive of tech stocks, and exports like Airliners, Arms sales, Cloud services, and many other US services and products. With a revalued S&P 500 due to better earnings results. Not only tech stocks but any global S&P 500 stock should be doing better from PepsiCo ( PEP ), and Exxon Mobil ( XOM ). Lower interest rates could save US consumers as well.

The stock market is celebrating the steady stream of disinflationary economic data. The regional banking crises will have a greater effect on pulling back on economic growth and demand-driven inflation, obviating the need for any further hikes from the Fed. The market is going higher, especially if the current spate of earnings reports comes in better than feared like all the big bank reports this past Friday.

Here is a selection of recent quotes

“Banks are likely to become somewhat more cautious in this environment,” Yellen said in an interview on CNN’s Fareed Zakaria GPS scheduled to air on Sunday. “That does tend to lead to somewhat greater restriction in credit that could be a substitute for further interest-rate hikes that the Fed needs to make.”

She remained optimistic the US could avoid a recession and a meaningful jump in unemployment as the economy cools and inflation slows.

“I’m not seeing anything at this time that is dramatic enough or significant enough, in my view, to significantly change the outlook,” she said, according to a CNN transcript. “The outlook remains one for moderate growth and continued strong labor market with inflation coming down.”

You could (as I would) point to Secretary Yellen being partisan now that she is part of the Biden admin. So take David Rubenstein who was once part of the Carter admin, and now is the founder of the Carlyle Group. One would be hard-pressed to accuse him of being partisan now since he has been out of government for many decades and never talks about politics.

Carlyle’s David Rubinstein (paraphrased from a Yahoo Finance interview video) said the economy has proven its resilience, with interest rates going up so sharply in the past 12 months you’d expect lower economic growth, and people talking about recession more. Recessions were predicted for this year by many people. So far it seems unlikely that we’re going to have a recession this year or less likely than people once thought. No one can say that Mr. Rubinstein is not a savvy businessman, even he, without an axe to grind is saying that we are likely not going to have a recession this year.

Jamie Dimon was also quoted just a few days ago on CNBC that the recession is most likely coming in 2024.

Let’s use the Fed’s own economists

Minutes of the Federal Reserve’s December meeting show that the central bank’s staff now don’t think the roughest patch for the economy will happen until late 2024 — a year later than in the previous forecast.

As I said earlier, if we are pushing out this recession to 2024, maybe we skirt it entirely. Let’s recall that the economic experts were expecting a recession last year, and I could be wrong but hasn’t this been an oft-repeated mantra since 2021? My point is, when an economic event is earnestly predicted year after year it follows that the stock market has had plenty of time to discount such an occasion. We should at least make room for the possibility of a strong stock rally if there is an improvement in conditions. Perhaps the great bank earnings strengthen the bulls making this argument now and the S&P 500 goes higher than anyone expects? Whether this is a bear market rally or not, we at the Dual Mind Research Community are participating in this rally. I have closed out my VIX Calls because they continue to drop and very significantly it was dropping as hard as the market was selling off. What does this paradoxical behavior mean? It means that experienced market participants that use hedging the most are just not hedging right now. Let’s also bear in mind that it was only a few years ago that the VIX dropped to 10 and below.

The SPX price action has been behaving quite well, though with a lot of volatility to mask the improvement rally. Let’s start with the 3-month.

It’s clear that the S&P 500 in this case the ETF ( SPY ) is moving higher, in fits and starts but every higher and now as the second blue line illustrates a more acute angle. The green horizontal line is marking out the last rally’s peak which was 4176 for the SPY ETF so the number might be off by a few points. The point is it is pretty apparent that we are going to reach that level and exceed it. In fact, last week I charted a measured move that had the rally moving to 4350ish. This is a level I find hard to imagine right now myself. I expect that once we break above the last rally’s peak the index will accelerate higher. Perhaps this assertion sounds irresponsible, I have been accused of this before. The last time the S&P 500 reached 4300 was back on July 27 2022. I aver that current economic conditions are better, not worse. For one we are either already at the end of rate hikes or one more and the Fed will have to rest. The increments are now at .25%. On July 27, it was .75%, there would be several more .75% raises to come before even getting to .50%. In August the recession was supposed to be already happening and was going to last into mid-2023 at least. Meanwhile, by now, I think the recession idea is getting stale as we have seen the economy handle these higher rates. The Fed could crash us into a recession if it wanted to, The Fed ’s aim was to target inflation and make economic growth a lower priority. In August, this negativity was set aside and market participants decided that the Fed would be pivoting. Looking back we see it perhaps as the market being illogical as it can be from time to time. Now we are truly at the turning point where the Fed truly pivoting in our version of pivoting the Fed is about to stop rising rates. The bond market is predicting rates to be lowered at the end of this year. I am a bit skeptical that rates will be lowered even if a recession comes calling. However, once the upward momentum starts, market participants will take these lower rates more seriously. Price action does influence positive expectations for a stronger market. So is 4300 really so outer a level right now? I don’t think so, though if we do see 4300 I will be delighted, and maybe a bit surprised. Also, I doubt we are getting there in a straight line. Be ready to use Cash Management Discipline to manage volatility.

My trades:

So this week I was more active in starting new positions this week. As I am getting more confident about this rally and that it will broaden. I believe that smaller tech names should get more assets. I was holding Datadog ( DDOG ) equity, and this week I added Call options. DDOG is a leader in observability. This cloud software is for cybersecurity, and cloud application tuning. These are 2 very important sectors. DDOG can observe cloud software in operation and identify areas that consume too many CPU cycles, and storage. These are big drivers of cloud services costs.

I also added Call options on SentinelOne ( S ) to my shares that I have been holding long-term. S is using AI/ML to successfully prevent hacking. I believe that as the rally progresses these smaller names will also rise.

I’m still long Alphabet ( GOOGL ) Calls and I am up 27% so far, I believe that GOOGL will continue to go higher, it is at its highest level so far this year.

On Friday I got back into Boeing ( BA ). I believe the BA MAX delivery kerfuffle will be attended to in a week or two. I previously sold all my BA calls a week ago when they rose to 212ish. I will look to close out this position at a similar level.

I went long silver leveraged ETF ( AGQ ) Call options, and gold miners ETF ( GDX ) Call options because the dollar is falling hard.

I wish you all luck this week.

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