Things you need to know
- Jay signals larger hikes and stocks surge/bond plunge
- Will history repeat itself? Sure looks like it…
- Oil took a breather but is higher again today
- New Home Sales due out at 10 am
- Joey goes to Europe and Ketanji goes to Capitol Hill
- Try the Rigatoni with Sausage and Brocolli
So, Jay gets more aggressive, and investors love it……Stocks have done nothing but go up while bonds have done nothing but go down since Jay and the FED launched round 1 – a 25 bps rate hike and announced what he expects will be a 50-bps hike in May – after acknowledging that ‘inflation is too damn high’! Joining other central bankers that include the BoE (Bank of England) and the ECB (European Central Bank) – as both the UK and the EZ (Eurozone) are also experiencing upward pressures on prices for everything…. The BoE has now raised rates 3 times in as many months while the ECB has indicated that they are getting close to making a move.
As a result – global bonds have suffered an unprecedented loss of $2.6 trillion since their peak in August 2021 as central banks began to hint at new policy moves that include a move off of zero rates and back to what might be viewed as ‘normal’. And this has caused investors to bail out on lower coupon bonds in favor of stocks. And this is expected to continue as global central banks have committed to steady increases in borrowing costs for the foreseeable future……And right now – the risk/reward is still favoring stocks because of what the inflation expectations are…. but at some point – rates will get to a level that will compete fiercely for investor dollars and then we’ll have another conversation….
Now for those of us who were around and remember the challenges that higher rates posed to stocks back in the late 70’s and early 80’s (that’s 1970 and 1980). Inflation had shot up to better than 12% and Paul Volker (Fed Chair at the time) had no choice but to jam rates higher – and higher they went – 21% to be exact…. causing stocks to plummet…. for weeks, then months as the country went into a recession…. Here is where it became logical to put all of your money in the bank and earn 21% GUARANTEED, SLEEP AT NIGHT, WITH NO RISK, thus stocks plunged….
It was only when he shifted gears in the summer of ’82 that the opportunity revealed itself. It was August 17th – and he announced a 10% (read ten percent) CUT in rates that defined the first of many moves lower after he successfully tamed and destroyed the inflation that was destroying the country. The Dow on that day stood at 792….and roared ahead by 4.5% or 35 pts in 6 ½ hrs.…and THAT was the birth of the greatest bull market this country and the world has ever known…. It was an incredible day… full of excitement and hope…. I can still feel the sweat running down my back as the phones rang and the clients were screaming: BUY, BUY, BUY! (Happy to discuss that day in history as well as so many of the others that followed…. because it is so important – as it appears that history is about to repeat itself.)
Now at the moment – with inflation running at 8% and interest rates at 0.25% – it makes perfect sense to put your money in the market…but when rates get to 3% + then you can expect the story to start to change – as interest rates go even higher…….Now look – I am not calling for 21% rates at all….but what I am saying is don’t be fooled – the FED is behind the curve and will need to get more aggressive (see Jay’s comments) and that will force a recession in the country and that will force stocks to reprice…..….now whether it happens in late 2022 or early 2023 isn’t the point….The point is – a recession is coming (but that does NOT mean you panic)….the idea that the FED can engineer a soft landing (now) is comical…..they are too far behind the curve. I hope I’m wrong.
Now at some point – higher rates will cause stocks to reprice and then stabilize but for right now – rates are still artificially low and that is supportive of stocks….…as it always is…. which is why you need to stick to the plan…Don’t go lighting your hair on fire…. that would be an overreaction….
By the end of the day yesterday – the Dow added 255 pts or 0.7%, the S&P ended the day up 50 pts or 1.1%%, the Nasdaq surged by 270 pts or 1.9%, the Russell tacked on 23 pts or 1.1% and the Transports gained 143 pts or 0.8%.
Gains yesterday were led by Consumer Discretionary – XLY +2.4% (which would suggest that consumer sentiment is high), Financials – XLF + 1.6%, Communications – XLC up 1.8%, Tech – XLK up 1.4%, Consumer Staples – XLP up 0.7% – Energy – XLE was the only sector down it fell 0.7% (but recall it was up 3.5% on Monday). The Value trade – SPYV gained 0.26% while Growth – SPYG gained 1%…. Leaving the value trade flat on the year (that’s a win) while growth remains lower by 9.25%.
10 Yr. Treasury’s ended the day yielding 2.38% – which is the highest it’s been since May 2019…. and if the FED ups the fund rate by 50 bps in May – 10 yr. yields will go even higher….in fact – expect yields to lead the way higher and that will tell you what investors think is going to happen.
Oil – which shot higher on Monday – up 7% – took a breath yesterday….as it digested that move up ……this morning we have reports that crude inventories are lower than expected and that is causing oil to move higher yet again…WTI (West Tx Intermediate) is up 1.8% or $1.90 at $111.15/barrel. Like I said – I think we are in the $100/$120 range for WTI for now…but as the summer driving season takes hold, I would expect oil to move higher still. Unless of course it causes gasoline to get so expensive that everyone just stays home again….as they are forced to choose gas over food.
This morning US futures are lower…. Dow futures down 88, S&P’s down 13, the Nasdaq down 66 and the Russell is off by 11 pts. Global bond markets are attempting to stabilize from the recent beating while investors continue to put money to work in the stock market as an inflation hedge.
Joey is on his way to Europe this morning to meet with global leaders as he is expected to address a meeting of the European council. He is also expected to have an emergency NATO summit – and then go onto a meeting of the G7.
Ketanji Brown Jackson held her own yesterday on Capitol Hill after 14 grueling hours and is expected to return today. In the end – the Senate is expected to confirm her nomination to the Supreme Court but not before all of the pomp and circumstance.
ECO data this morning includes – New Home Sales – expected to by up 1.1% this month…. Remember – this is a key data point…because it speaks to the level of interest rates vis a vis mortgage rates…. Capisce?
European markets are also slightly lower this morning…. down between 0.3% – 0.8% across the board. UK inflation is running at an annual rate of 6.2% – the highest since 1992 – like here – it is soaring food, fuel and energy costs that is impacting everyday Europeans.
The fighting is still going on in the Ukraine – while Zelensky has proposed a number of cease fire talks, Vlad wants to destroy the place first before he sits down to discuss what is next. But the Ukrainians are not giving up just yet and this is causing Vlad to call upon Belarus to join Moscow in bringing Ukraine to its knees. What will Belarus do and then what’s next? In addition – He has begun to threaten Poland – warning them to stay out of this battle…. and so, this crisis is far from over…. Remember – Poland is a full member of NATO and has been since 1999.
Bitcoin is trading at $42,100 while Ethereum is at $2950.
The S&P closed at 4,511 – up 51 pts…. after trading as high as 4522. We pushed right up and through resistance at 4471 so now 4550 is the next real challenge. The S&P is now up 8.7% in one week….and is completely defying the ‘death cross’ indicator that took place on the 14th……Now look, if we break out of 4550 – then the algo’s will kick in and we could easily trade right back to the highs of the year – 4800……the move all driven by the algo’s that control so much of the action.
Take Good Care
Chief Market Strategist
kpolcari@slatestone.com
Rigatoni w/Grilled Sausage and Broccoli
Simple, hearty, and delicious –
You will need Italian Sweet Sausage (Feel free to use hot sausage if you prefer), broccoli, garlic, olive oil, chicken stock and grated Parmigiana.
Bring a pot of salted water to a boil. Light the grill and get it nice and hot.
While that is heating up – sauté some crushed garlic in olive oil in a large sauté pan… when golden – add in sliced broccoli heads – season with s&p, turn heat to med/med low and cover. Stirring occasionally.
Next place sausage on grill and cook… turning sausage so that you do not burn on any one side. Once cooked – remove and place on cutting board…let rest for 5 mins. Slice sausage into bite size pieces and add to the broccoli and garlic on the stove – now add about 1 cup of stock. Season and let simmer.
Boil the Rigatoni, for about 8 /10 mins or until aldente. Strain – always keeping a mugful of pasta water in reserve. Return to pot… add back 1/4 of the water…toss and let sit for 2 mins to absorb… now add the sausage/broccoli mix to the pot….2 handfuls of the grated Parmegiana – mix and you are done. Serve immediately in warmed bowls with toasted garlic bread – complement with a nice glass of wine and some dinner music and Boom! You win the prize. Always have extra grated cheese on table for your guests.
Buon Appetito.
