“Pause Rebounders” stocks to watch
Critical information for the U.S. trading day
May is kicking off with a deal for First Republic Bank, though there’s no real celebrating across Wall Street. That’s as investors face a week full of potentially market-moving events — a Fed meeting, jobs data, Apple earnings and ongoing debt ceiling negotiations.
We’re also coming off the highest level since February for the S&P 500, which closed out last week at 4,169. And obviously that “Sell in May and go away” mantra is making the rounds, with MarketWatch’s Mark Hulbert advising investors stick around, but in safer stock-market sectors.
Onto our call of the day from the team at Evercore ISI, where senior managing director Julian Emanuel says get ready for a Fed pause after one last 25 basis point hike this week, with a playbook for that as well as the debt-ceiling tussle.
“The Fed pause on 5/3, whose ‘rumor’ has been priced by the SPX (SPX)/VIX (VIX) collapse, will be ‘sell the news,’ given inflation remains a problem and the SPX 4,200 ceiling collides with the debt ceiling,” said the team at Evercore.
“A hawkish pause, decelerating economy and contentious debt ceiling debate drives volatility and results in rotation back to prior defensive leaders, all of which outperformed in April,” they said, noting that they like healthcare and staples here.
And just as the Fed is pausing, investors should be doing the same owing to higher risk around the debt ceiling debate that’s showing up via ever higher U.S. sovereign CDS prices and a year spread between 1 and 3 month Treasury bills, they say. They aren’t though.
“Because until equity markets begin to notice. it’s unlikely politicians will feel compelled to act. Political brinkmanship will fuel market volatility — the VIX (VIX) trades to 40 in 2023; SPX retests the 3,800 floor. The similarities to 2011 (where arguably Democrats and Republicans were more ‘reasonable’ than in 2023) are striking,” says Emanuel and the team.
The big date to watch for equities may be May 2, which Evercore points out marked the S&P 500 peak and VIX trough of 2011.
“Buying healthcare, staples and portfolio convexity is the best way to handle the ‘summer heat,’ which, similar to 2011’s debt ceiling, will begin in May.” That convexity strategy for Evercore consists of option calls — right to buy an asset at a set price by a specific date — on the SPDR S&P Biotech ETF (XBI) and puts — rights to sell — on Invesco QQQ Trust Series I (QQQ).
As for those so-called “pause rebounders,” the Evercore team has screened the Russell 1000 (RUI) for healthcare, biotech and consumer staple stocks which have lagged behind their sector median performance, but have 2023 earnings per share growth above the sector median. They say those stocks could outperform in the second quarter and beyond, focusing partivcuarly on Seagate Technology (STX) and BioMarin Pharmaceutical (BMRN)
Here is their full list:
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