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The market may not be as tethered to the Fed as people think. (0:16) The yen’s free fall prompts intervention to support it. (1:40) Apple gets an upgrade ahead of earnings. (3:44)
The following is an abridged transcript:
Our top story so far
Is this the perfect environment for picking stocks?
While it may seem like central banks, geopolitics and other macro factors are driving market performance, Morgan Stanley says price action tells a different story.
“For all the sound and fury coming from the macro, 2024 remains an unusually micro market,” strategist Andrew Sheets says. And the dispersion seen in single stocks is ideal for stock picking.
Morgan Stanley’s Prime Brokerage Strategic Content Group says 1Q24 was the “best first quarter for equity long-short alpha since 2010 (when the data begin). Even more notable, that alpha is coming from both longs and shorts, across the US, Europe and Asia.”
Sheets added: “Stocks and credit are moving more with the ‘macro’ on a day-to-day basis. But 2024 is clearly showing that other forces are at work.”
“The average correlation between individual stocks is historically low. That’s the opposite of the high-correlation world you’d expect if macro factors were in the driver’s seat. Under the surface, this market is a micro machine.”
“This dispersion has practical implications. For active investors, an ideal stock-picking environment is one with enough dispersion to create opportunity, but not so much volatility that it’s difficult to take risk. This seems like a fitting description of the current backdrop,” he argued.
In today’s trading
Stocks are managing only slight gains currently despite a pop in Tesla. Treasury yields are down a bit with traders looking forward to Wednesday’s Fed decision.
The currency market was also getting a lot of attention given the wild swings in the Japanese yen (USD:JPY).
The yen has been tumbling and in Asian trading Sunday moved past 160 yen per dollar for the first time since 1990. It fell more than 1% to a low of 160.17, but has since strengthened and is up more than 1% following reports that Japan’s financial authorities had intervened to support the currency.
Kit Juckes, foreign exchange strategist at Societe Generale says: “Being a cheap tourist destination isn’t, unfortunately, enough to give Japan’s economy a big boost and won’t support the currency much, on its own.”
“More aggressive policy action from both MoF (concerted and repeated intervention) and BoJ (signaling a willingness to normalize policy further) are necessary to stabilize the currency and clearer signs of stronger growth across the wider economy, as well as signs that Treasury yields have peaked, will be needed before a sustainable yen rally can get going.”
“That said, Today’s USD/JPY fall is impressive.”
In other news of note
Tesla (TSLA) rallied to its highest level since March 1 after Elon Musk’s weekend visit to China and reports that the company will partner with Baidu (BIDU) on mapping data collection.
Wedbush Securities analyst Dan Ives said the long awaited full-self-driving approval in China could be a watershed moment for Tesla.
Ives said the next pivotal step would be if Elon Musk is able to obtain approval from Beijing to transfer data collected in China abroad. That approval could accelerate of training of algorithms for Tesla’s autonomous technology globally.
Chinese electric vehicle makers Nio (NIO), Li Auto (LI) and XPeng (XPEV) also enjoyed gains, while BYD (OTCPK:BYDDF) was also higher in Hong Kong trading.
Among active stocks
SoFi Technologies (SOFI) slid after it issued Q2 guidance that fell short of the average analyst estimate.
For Q2 2024, SoFi expects adjusted net revenue of $555 million-$565 million with the consensus at $590.2 million and adjusted EBITDA of $115 million-$125 million. The Visible Alpha consensus is $135.9 million.
Bernstein upgraded Apple (AAPL) to Outperform from Market Perform with a $195 price target.
Analyst Toni Sacconaghi says “AAPL has de-rated significantly amid a weak iPhone 15 cycle and fears that Apple’s China business is structurally impaired. We believe prevailing weakness in China is more cyclical than structural, and note that historically Apple’s China business has exhibited much higher volatility than Apple overall, given its very feature-sensitive installed base.”
Susquehanna says AMD (AMD) is likely to offer up in-line or slightly weaker guidance when it reports first-quarter results later this week, as its core business is still dealing with the frail PC market.
Analyst Christopher Rolland says recent checks shows that AMD may have lost some share in both notebooks and desktops. Rolland kept his Positive rating on the stock but lowered his price target to $185.
And in the Wall Street Research Corner
With interest rate cuts delayed, Goldman Sachs is rebalancing its basket of high-quality stocks.
Strategist David Kostin says “This time last year, the strength of quality stocks could be attributed to investor concerns about a hard landing, During most previous periods of strong S&P 500 profit growth, ‘quality’ stocks such as those with high returns on capital have typically underperformed and traded with much less of a valuation premium relative to their lower-quality peers.”
“Today, rather than growth, concerns over the cost of capital are supporting quality. If the Fed proceeds with cuts later this year and those concerns recede, quality stocks will likely give back some of their recent outperformance,” Kostin said.
But if the outlook for earnings growth deteriorates, “the recent stretch of quality outperformance will likely continue and also expand to include stocks with stable growth.”
Among the new entries in the basket are lululemon (LULU), Hershey (HSY), Coterra Energy (CTRA), Northern Trust (NTRS), Charles River Labs (CRL), KLA (KLAC) and F5 (FFIV).
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