Flagship Pod 84: A Shift in the Market

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Now let's get into what we reviewed.

 

Here are the 4 key things we went over:

• How the CPI report kicked the market into gear

• Why banks are finally in a great place

• The key things to watch for in the markets through the end of 2023

• Where pitfalls can hit the market

And if you're too busy to listen to the entire recording, below we included a compact summary of what went down.

To get all the juicy details, just listen to the entire recording.

And now, onto the summary 👇

Overview:

We received so many fundamentally good pieces of news this week that it's honestly getting harder and harder to contain our bull sentiment.

The CPI last week came back at one of the lowest levels it's been since early 2021, with only shelter and insurance costs really pushing prices up now. 

This combined with the higher employment data we got two weeks ago, fundamentally shifts the sentiment in the market. We're seeing inflation crash while employment stays high -- a deeply encouraging sign that the Fed does not have to break the economy in order to guide the market out of this inflationary spiral. 

Then, we got really solid banking news on Friday suggesting that the entire financial system did a good job digesting the collapse of SVB. JPMorgan rocketed to over $14 billion in profits, which can be taken as more of a long-term worrying sign than an encouraging one. 

But small cracks are forming in other bank earnings that make us nervous. We'll cover that in a bit. 

Meanwhile, travel demand appears to be picking up in a big way thanks to Delta and their brilliant earnings call. This brought even more bull sentiment back to the market because rising demand suggests that consumer spending still has some gas in the tank despite inflationary pressures that have been playing out for years.

And then, U.S. courts set off an absolutely manic run in the crypto space by declaring that XRP is not a security (when purchased by individuals at exchanges), bringing all sorts of speculation back to the market. 

It is an absolutely wild time in the market as bull sentiment starts to really take over various sectors here. We're not calling it a bull run yet, but it's getting harder and harder to stay cautious here.  

But let's try to take an even-handed look at what's happening in the markets now and see where we can grab some long-term upside rather than FOMO'ing our way into a bear trap.

There are too many details to count, but let's try and cover the big ones👇

 

Economic Wins:

The real highlight of the week that got buried under the rest of the news was inflation only rising 3% YoY in June. Last year, inflation peaked in June with a 9% increase in prices. One year of truly punishing rate hikes managed to cut price growth by two-thirds. Nice. 

When we look at the granular CPI data, there's a lot of great price action in there. The main drivers of inflation right now are shelter and insurance costs, while energy prices have absolutely collapsed. 

That's not as encouraging as it could be, considering that energy prices are generally volatile and were absolutely out of control last year. If we see supply shocks drive the price of oil and gas upwards again, it can undo a lot of the Fed's progress. 

Next month's CPI is going to be even more important, as it will show either:

1. How the market reacts to inflation rates flattening a bit, or

2. Inflation re-entering the Fed's ideal 2% range. 

The first outcome is far more likely with shelter and service inflation potentially staying sticky and other supply issues like India's tomato crisis keeping food costs higher. But if the market doesn't overreact to inflation being less transitory, that in and of itself is a great sign. 

Otherwise, the big figure we're still waiting on is GDP growth numbers which will come out in two weeks.

That will be the most major deciding factor in regard to our nascent bull run. If GDP prints north of 2%, we're off like a rocket. If GDP growth actually declines, we could erase a lot of the gains we made in the last few months. 

Far more likely is somewhere between 0 and 2%. That figure would simply add more noise to the market and keep us in this limbo state where it's difficult to determine where we are in terms of growth. 

 

The New Cryptomania:

Adding to all the bull sentiment last week was crypto markets ripping on news that a Federal Judge in the Southern District of New York ruled in favor of XRP not being a security. 

The ruling itself is actually really complicated, but an oversimplified version here is that simply, if individuals purchase the XRP token from exchanges, then that is technically not a security.

However, ICOs and other private offerings to institutions WOULD count as a security and that could shift the rules in the crypto market. 

Regardless, this was a massive deal and a huge signal to the crypto market writ large. XRP rose as much as 80% on the news (but stabilized in the 70%s after all the hype died down).

Meanwhile, every major altcoin saw north of 10% growth on the news as buyers flooded back into the market. Coinbase managed to notch 30% growth on the news as it suggests they may get a fairer deal from the SEC during their lawsuit. 

It's still toon to say if this is the moment that fully breaks crypto winter.

Frankly, our analysts are going to remain extra cautious about crypto until a firmer regulatory framework is put in place. That will bring more institutional money to the industry and stabilize a lot of the wildest price action and help growth moving forward.

 

Wrapping This Up:

We also covered a lot about the banking industry in this podcast, but the only real highlights here that we are concerned about are JP Morgan leading off a wave of consolidation and the cracks starting to form in Citibank's loan business.

As long as those factors stabilize, we should be in a strong position with the rest of the financial system reporting their earnings early this week.

 Consumer credit and the commercial real estate situation are still genuine concerns that could lead to contagion once the cracks really start showing, but right now it's simply awesome to just feel the good vibes and move forward.

Growth is returning to a lot of sectors and it looks like the winners just keep on winning. 

We'll keep you posted as the market develops.