US Macro Strategy Weekly Report

23 Oct 2023

 

By James Ooi/ uSMART Market Strategist

- Over 13 years of experience in buy-side and sell-side of capital markets

- Former Fund Manager of renowned asset management firm
- Focus on fundamental analysis and macro-outlook for US & Singapore markets
- SGX Academy trainer

 

This Week’s Market Outlook:

• The most significant economic data this week includes durable goods orders on Thursday, Q3 GDP, and core PCE inflation data on Friday.
• The Fed has entered a blackout period, during which members of the FOMC won't make statements to the press.
• This week is a significant earnings week. Four out of the "Magnificent Seven," namely Microsoft, Alphabet, Meta, and Amazon, are reporting earnings this week.

Oct 24 (Tuesday): Coca-Cola, Verizon, 3M, GE, Spotify, GM, Microsoft, Alphabet, VISA, Texas Instruments

Oct 25 (Wednesday): Boeing, Thermo Fisher, Hilton, T-Mobile, Meta, IBM, ServiceNow

Oct 26 (Thursday): Merck, Amazon, Enphase, Intel, Ford, Chipotle

Oct 27 (Friday): ExxonMobil, Chevron

• Most of the companies reporting Q3 earnings this week are expected to show better earnings year-over-year growth than Q2. However, this does notguarantee that they will beat earnings expectations or provide forecasts better than market expectations. Investors are looking for companies that surpass market expectations to sustain the market rally.
• According to CME Fedwatch, investors anticipate a 0% likelihood of the Fed increasing rates in the November FOMC meeting. Rates are expected to remain stable for the remainder of 2023 (Figure 1).

 

Figure 1: Meeting Probabilities

 

Source: CME Fedwatch, 23 Oct 2023

 

• The Fed may choose not to raise interest rates in the upcoming meeting, as soaring bond yields are achieving the bank's objectives. Since the last rate hike in the July FOMC meeting, the 10-year bond yield has climbed by 113 basis points, reaching 4.9928% from 3.8658% (Figure 2). The recent surge in long-term interest rates has already achieved what the Fed intended, making additional increases in FOMC rates unnecessary.

 

Figure 2: 10-year bond yield vs Fed Fund Rate

Source: uSMART, Bloomberg, 23 Oct 2023

 

• S&P 500 has failed to break below 50% Fibonacci Retracement Levels on several occasions (50% retracement of Oct 2022 Low to Dec 2022 High, and Oct 2022 Low to Feb 2023 High). Therefore, we consider the immediate support level at 4,207 (50% retracement of Mar 2023 Low to Jul 2023 High) crucial to monitor (Figure 3).
• The S&P 500 is just a step away from dropping below the 500 SMA at 4,204 (Figure 4). Hence, we will turn bearish in the near term if the S&P 500 falls below 4204-4207.

 

Figure 3: Fibonacci Retracement Levels of S&P 500

Source: uSMART, Tradingview, 23 Oct 2023

 

Figure 4: 500 SMA of S&P 500

Source: uSMART, Tradingview, 23 Oct 2023

 

• Equity investors are displaying some real fear, with the VIX index surging to 21.71 on Friday (Figure 5). This marks its highest level in 7 months and the first time it has crossed 20 since May 24. While based on seasonalities, VIX should generally fall and S&P 500 should rally in the 4th quarter, investors should also brace themselves for a potential final equity capitulation should VIX continues to surprise us on the upside.

 

Figure 5: VIX Index Vs S&P 500

Source: uSMART, Tradingview, 23 Oct 2023

 

• In summary, we would like to reiterate our S&P 500 drawdown target, which we mentioned in August. If this follows a typical second-half drawdown pattern, the S&P 500 should have found strong support at the 4223 level. In our worst-case scenario, drawdown levels could reach 3,865 and 3,600.
• The data in Figure 6 illustrates years in which the S&P 500 yielded returns exceeding 10% in the first half of the year but performed poorly in the previous year. The average 2nd half performance stands at 12.92%. Historical records indicate that the second half of those years experienced an average drawdown of 6.47%, with 1975 exhibiting the most severe drawdown at 14.1%. If history repeats itself, drawdowns of 6% or 14% could result in the S&P 500 reaching levels of 4,223 or 3,865, respectively (Figure 7). We consider the worst-case scenario to involve a 20% drawdown, potentially pushing the S&P 500 down to the 3,600 level. However, a more prudent investment strategy would involve accumulating positions at drawdown levels of 6%, 14%, and 20%, rather than waiting for a 20% drawdown to occur.

 

 

Figure 6:  In the year when the S& 500 returned more than 10% in the first half of this year, it was negative in the prior year (Since 1940)

Source: uSMART, Bloomberg, 22 Jul 2023

 

 

Figure 7:  Estimated Max 2H Drawdown

Source: uSMART, Bloomberg, 21 Aug 2023

 

 

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