To The Moon

Last week hedge funds bought utilities, real estate, and energy stocks and sold industrials, consumer discretionary, technology, financial and materials stocks.

Chart: Goldman Sachs

The BofA Global Fund Manager Survey saw big positioning into bonds and out of equities last month.

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Below are highlights of some key points from last week, presenting arguments for both optimistic and pessimistic outlooks:

Bullish Highlights for the Week Ending August 16th:

• The soft-landing narrative gained more support with the biggest rise in headline retail sales since January 2023, coupled with the lowest initial unemployment claims since early July.

• Signs of disinflation emerged as core PPI and core CPI came in cooler than anticipated, while the New York Fed’s three-year inflation expectations dropped to their lowest in over a decade.

• Walmart exceeded expectations, raised its guidance, and reported no signs of further deterioration in consumer spending.

• Dovish tones from the Fed, with Bostic and Goolsbee cautioning against the risks of delaying rate cuts.

• Positioning has improved after the post-NFP/BoJ pullback, with Goldman Sachs estimating CTAs offloaded $52B in US equities over the past month, but have now largely turned into buyers under most scenarios.

• Volatility reduction supports a systematic shift, with the VIX down over 40 points from its intraday peak on August 5th and below its level prior to the July NFP report.

• Favorable flow patterns continued with the seventh consecutive week of inflows into US equities and the seventeenth week of inflows into global equities.

• Companies increasingly view cost-cutting and operational efficiency as buffers for margins, especially as pricing power diminishes.

• Significant M&A activity in consumer staples, highlighted by Mars’ $36B acquisition of Kellanova.

Bearish Highlights for the Week Ending August 16th:

• Fed easing expectations for 2024 dropped below 100 basis points late in the week, down from a peak of over 130 basis points on August 5th.

• While core CPI was slightly cooler than forecast, shelter inflation rebounded with both Owners’ Equivalent Rent (OER) and rent figures surprising to the upside.

• Despite improved growth sentiment, the Atlanta Fed’s GDPNow estimate for Q3 decreased to +2.4% from +2.9%, while the Philly Fed manufacturing index, NAHB housing index, and industrial production all fell short of expectations.

• Consumer caution remains high, with recent attention on rising delinquencies in consumer loans (credit cards and autos) and an uptick in bankruptcy filings.

• Home Depot, despite low expectations, lowered its guidance and cited increased macroeconomic uncertainty as a broader pressure on consumer demand.

• More corporate layoffs were announced, with Cisco reducing its workforce by 7% and Sonos by 6%.

• Alphabet underperformed in the tech rally due to reports that the DOJ might consider a breakup as a remedy following a significant antitrust ruling, underscoring the challenging regulatory environment for large tech companies.

• Earnings forecasts for Q3 have weakened compared to the stability seen before the previous two quarters, with analysts now expecting around 6% growth, down from an earlier estimate of 11%.

• China continues to weigh on global growth, with July economic activity data largely coming in softer than anticipated.