By Bobby Molavi, Goldman trader and managing director
Here we are in July….with the S&P up 18.5% and with July witnessing more of a ‘melt up’ and ‘stopping in’ feel to trading. The CPI print initially seemed to auger a continuation of all that was in May/June. If June was a rally for all things Equity on a beta chase and broad re-grossing then the CPI print seemed to trigger an acceptance that the Fed’s work was closer to being done than many expected and that while higher for longer may remain the case….how high was no longer up for debate. The breadth of the rally has widened. We started in May with a narrower AI/Tech driven move….but gradually this has broadened to capture almost all equities…including small caps/cyclicals/old economy/lower quality.
It has felt like the market has spent much of 2023 looking for a smoking gun: a narrative to justify the bearishness; a reluctance to back the feds ability to deliver a soft landing. We started the year under positioned and we’ve spent most of the year waiting for a correction and talking about ‘delayed effects’ and it just being a matter of when….not if. In the meantime, the consumer has held up remarkably well….and corporate earnings and margins thus far have also held up better than expected. The mixed signals persist though. We’ve seen a slew of Chemicals profit warnings heading into numbers, some softening in demand in demand for well owned well liked quality (Luxury), we’ve seen some need to sacrifice margins to maintain volumes (Autos). At the micro level we’ve seen Richemont talk to a slowing in the US, we’ve seen Fort and Tesla cut pricing on models, we’ve seen multiple companies talk to impacts of commercial real estate exposures and yet index levels and multiples remain peak cycle and buoyant. Consequently, that short bias has been painful, and in part has fuelled this recent beta chase. GS PB has a note out entitled "De-grossing activity by hedge funds is starting to broaden out amid a challenging backdrop for shorts." On a trailing 15 day basis, cumulative Fundamental L/S short alpha now stands at -1.5%, the worst 3 week stretch since Nov '22.
