Where’s the market heading in the short-term? Nobody seems to know, but some are already anticipating a fourth-quarter turnaround. Bulls have been selectively nibbling on high-quality tech stocks recently (the Nasdaq 100 is up 4 this month vs. the 2% gain of the S&P 500) because they are convinced there is going to be a fourth-quarter rally that will benefit growth. Why? After the hot CPI report last week, the market pulled forward the Federal Reserve’s tightening expectations. We are now witnessing the markets trying to anticipate rate cuts in 2023, which is why some bulls believe tech could rally in the fourth quarter. “It’s as if the equity market is already looking through the tightening cycle to a recession that will foster the next round of accommodative monetary policy,” Mike O’Rourke from JonesTrading said in a note last night. “The optimism entrenched in this market is amazing.” It’s amazing, because there’s a long way between now and the fourth quarter. Most traders seem to be anticipating a retest of the June lows due to: 1) inflation not abating, or 2) a notable cut in second-half earnings estimates. One thing’s for sure: Despite a few occasional up days, buyers are not showing much enthusiasm. Lowry, the nation’s oldest technical analysis service, has been downright dour recently, and they have reason to be. Strings of up days are largely absent. When we get an up day, like we did Friday, the volume is usually light – indicating that while selling interest may have temporarily abated, there is little buying enthusiasm. That’s what it’s going to take for a sustained rally: a sign that buyers are back. It just isn’t there right now. “There is little evidence of the exhaustion of Supply, let alone the return of the vigorous Demand needed to drive a new intermediate-term uptrend,” Lowry said in a note to clients Friday. Like everyone else, Lowry has noticed that small group nibbling on tech stocks. They are not impressed. “Pockets of strength are always welcome but broad-based gains are required to overcome the damage inflicted since January,” the firm said. “While investigating the small group of Demand leaders is a worthwhile exercise, even if only to compile a future shopping list, any actual commitments must be limited. Overall defensiveness remains warranted.” What we’ve learned so far from earnings We get into the bulk of earnings season in the next two weeks. Bank earnings so far have been fair, not great. The key story is most banks are increasing their loan loss reserves to hedge against potential future losses. But that is in the future, and who knows if those losses will ever materialize. Fortunately, the core parts of the banking business — underwriting loans and earning an income spread between what you are loaning out and what you are paying for deposits – seem to be doing fine. It should not surprise anyone that one aspect of the banking business, mortgages, will be under some pressure in the coming months, since refinancing is dropping due to higher rates while purchases will fall off due to higher mortgage costs and still high prices. More important is the cautious language from the few non-bank companies reporting, such as Fastenal, which highlighted higher costs and slowing demand. Vanguard and BlackRock dominance: Good or bad? MSCI released an interesting report over the weekend on the concentration of stock ownership. On one level, it repeats widely-known data that stock ownership is becoming more concentrated in the hands of what they call “universal managers,” most often Vanguard and BlackRock. But it ends with an argument that such concentration may be a good thing. For example, Vanguard is the largest shareholder in most of the largest companies: Vanguard: largest shareholder (% ownership) Apple: 7.7% Microsoft: 8.2% Nvidia: 7.7% Visa: 8.5% Johnson & Johnson: 8.7% JPMorgan Chase: 8% Source: MSCI BlackRock was the second-largest shareholder in the same stocks. BlackRock: second largest shareholder (% ownership) Apple: 6.5% Microsoft: 6.9% Nvidia: 7.2% Visa: 7.5% Johnson & Johnson: 7.2% JPMorgan Chase: 6.3% Source: MSCI MSCI noted that BlackRock and Vanguard also held 5% or more of voting shares at many other index constituents: Vanguard held 5% or more of 395 US listed companies. BlackRock held 5% or more of 458 US listed companies. “These figures are significant because they confirm the extent to which ownership interests and voting power at principal shareholder and widely held companies are concentrated in the hands of a relatively small number of large investors,” MSCI said. We already know that, of course. Is this good or bad? Not surprisingly for an index provider, they do not take sides, but MSCI seems to be throwing its weight behind one of the most controversial aspects of this concentrated ownership: allowing Vanguard’s and Blackrock’s clients to have some say in how proxy votes are cast. “Last year’s announcement by BlackRock that they will allow certain of their institutional clients to cast their own proxy votes, beginning in 2022, provides an example of one possible future direction for these firms, a way that explicitly acknowledges the importance of exercising shareholder rights, “MSCI said. Fair enough, but this argument now turns into a defense of why the growth of ETFs – and, by extension, the growth of the power of the two biggest ETF firms (Blackrock and Vanguard) – is really a good thing. “It also suggests that the apparent ownership concentration we observed may really just reflect a new way of achieving and managing more widely dispersed ownership. If we think of universal managers not as monolithic owners but rather as complex mechanisms by which their many clients may ultimately exercise their shareholder rights and responsibilities more efficiently and effectively, then what we may see is not greater ownership concentration but its opposite. “
