Things you need to know –
- Rates on the rise! Algo’s loved it
- Vlad pushes deeper but remains out of control
- Global sanctions beginning to sting
- OPEC holds production steady despite the surge in prices
- Jay to re-appear on Capitol Hill – Expect more of the same
- Try the Herb/Balsamic Marinated Pork Chops
Wait…What happened yesterday? Stocks did what? Jay said what? All while Vlad pushed deeper into Ukraine, and oil and other commodities continued to push higher and higher – Oil piercing $112/barrel before settling at $110.60 and this morning oil is trading up 2.8% or $3.20 at $114 after OPEC and its allies decided to hold production steady despite the spike in oil prices over the past 3 months.
It was all about the FED……
And it was all about Jay Powell ….…. investors putting Vlad and Ukraine on the back burner as they listened intently to what Jay had to say to the House Finance committee during his bi-annual Humphrey-Hawkins testimony. And they liked what they heard! Jay told the committee and the world that he would ‘propose a 25-bps rate increase at the next FOMC (Federal Open Market Committee) meeting that begins on Tuesday March 15thand ends on Wednesday March 16th. It was not the classic Jay…. he ended the debate (vs leaving it vague) about what the move would be – recall the speculation had been for a 50-bps increase (I was in that camp) – but he put that argument to bed saying:
“For now, I would say that we will proceed carefully along the lines of that plan. We are going to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain moment.” (Carefully defined as 25 bps)
Do you think? He was hit on both sides by members of the committee when it came to understanding inflation…many putting the blame squarely on him – saying that he held rates too low for too long – which so many of us knew and had been screaming about since the spring of 2021 – when many were encouraging the FED to move yet they remained stubbornly attached to zero saying that they didn’t see the problem that the rest of us did.
Now, a 50-bps increase was put to bed yesterday but not for future increases……he left the door open to that possibility this summer saying that the more traditional 25 bps increases that many expect is not carved in stone and that he and his colleagues expect to see inflation continue to rise before it begins to fall….
In what I think was a laughable comment – he went onto say that
“This is strong, high inflation, and it’s very important that we get on top of it and that’s exactly what we’re going to do.”
Get on top of it? Did he really say that? Jay, I hate to tell you, that boat sailed months ago, you guys missed it. You can’t possibly believe that the anyone thinks you guys got this…. that you guys are on top of the inflation issue, can you? I mean – come on! Inflation at the producer level is about to print with a 10 handle and you think you got this?
By the end of the day though, investors loved the clarity…they loved the fact that they now know what to expect in two weeks. Remember – the market hates uncertainty but embraces certainty – no matter what the certainty is. So, while many had priced in a 50 bps move, they were surprised that he defined it so succinctly and promised only a 25 bps…. which leaves the FED still in a ‘dovish’ position allowing the algo’s to go hog wild. The Dow gained 600 pts or 1.8%, the S&P up 80 pts or 1.9%, the Nasdaq up 220 pts or 1.6%, the Russell up 50 pts or 2.5% and the Transports up 400 pts or 2.6%.
The advances were broad based….with most sectors up better than 2%….Financials – XLF taking the lead – rising by 2.6%, Energy – XLE up 2.3%, Basic Materials – XLB, Industrials – XLI, Technology – XLK, Consumer Discretionary -XLY, all up better than 2.1%, Real Estate up 1.8% while Utilities – XLU, and Consumer Staples gained 1.2% leaving Communications – XLC up 0.9%.
As you can imagine – the short hedge trades fell….as the markets advanced…DOG down 1.7%, PSQ down 1.7% and SH down 1.8%. If you were playing the short side with the triple levered ETF – SPXS you got whacked as it fell by 5.3% while the triple levered long ETF – SPXL surged by the same 5.3%. Value continued to outperform Growth with the SPYV up 1.8% and the SPYG was up 1.7% leaving those indexes down 2.7% and 12% ytd respectively.
10 yr. treasury yields also surged as money moved out of the safety trade and into the risk trade….by the end of the day – the yield moved from 1.71% to 1.86% and going higher…30 yr. rates moved higher too – conventional rates are now 3.7% while jumbo rates are topping 4% and they are expected to continue to move higher and that will put a cap on housing (finally) leaving many priced out of the market unless of course – housing prices decline offsetting the rise in rates….which is what will happen if Econ 101 is correct. (Expect that to lag by about 6 months)
And today is round 2 on Capitol Hill, but I would not expect the same dramatic move….as many analysts and commentators begin to dissect and digest his comments and what that means for future increases….Bill Gross – the former bond king at PIMCO is not a believer that yesterday’s move in stock prices was justified….He thinks we are in for tougher times ahead and makes note of the ‘fiscal drag’ that is yet to come…
[Fiscal Drag is defined as the economic condition whereby inflation and wage growth move taxpayers into higher tax brackets, increasing gov’t tax revenues without increasing rates. The increase in taxes reduces aggregate demand and consumer spending from taxpayers as a larger share of their income goes to taxes which leads to deflationary policies or a ‘drag’ on the economy] – InvestopediaIn any event – it was what it was and today is a new day…the Russian/Ukrainian crisis now enters week 2. Vlad frustrated with his lack of control over the region – he thought it would happen in 2 or 3 days but has been completely surprised by the strength and commitment of Ukrainians and by the response of the civilized world to his unprovoked attack on a sovereign nation.
As noted, – Jay will re-appear on Capitol Hill starting at 10 am and resurrect the conversation from yesterday…Do not expect the message to be different – just attacked from a different angle as the Senate gets their shot at him. What will they learn? What will we learn?
In the end – soaring oil prices and soaring commodity prices threaten to unleash more volatility in the days ahead and stocks are still in a downward trend that really began on January 4th – when the S&P ticked at an all time high of 4,818 only to fall by 14.6% by February 24th to end the day at 4,114. Yesterday’s move leaves the S&P at 4,386 – still down 8% ytd and below all 3 trendlines…..4,463 is the next level to watch – it represents resistance (it is the 200 dma) and with the 50 dma turning lower we are just days away from what could be a death cross – that is when the down trending 50 dma pierces the rising 200 dma….indicating the potential for a sell-off….so keep your eyes focused on the technicals over the next week or so….the death cross (if it happens) could see the S&P retest the February 24th low of 4,114 before this is over….
US futures this morning was green but now have turned slightly red…. the Dow down 78 pts, the S&P’s down 12 pts, the Nasdaq off by 60 pts and the Russell down by 11 pts. Eco data today includes the usual suspects – Initial Jobless Claims and Continuing Claims, but it also includes Unit Labor Costs – exp of +0.3%, Markit Services PMI of 56.7 (bullish), ISM Services PMI of 61.1 (more bullish). We are also getting Factory Orders of +0.7%, Durable Goods of +1.6% and Durable Goods ex Transports of +0.7%.
Tomorrow brings us the all important Non-Farm Payroll report – and the expectation is for 418k new jobs created (or I say restored – because we are still some 3 million jobs away from where we were prior to the gov’t mandated covid 19 shutdown 2 yrs. ago.) – so before you can create ‘new’ – you have to regain the lost ones first…Yes, it’s semantics, but it is what it is….New is new….not old. Unemployment is expected to come in at 3.9%, and Average Hourly Earnings are expected to be up 5.8% y/y and 0.5% m/m. Labor Force Participation to hold steady at 62.2% while the Underemployment rate hovers at 7%.
As you can see – geo-political issues can cause short term chaos (I have said this many times) and that is what Vlad has done, but investors then begin to push that to the back burner once it becomes clearer about what the outcomes could be and refocus on the economic fundamentals. The walls are caving in around Vlad. More companies cutting ties to Moscow. Banks are pulling back from financing and the threats of new sanctions are keeping buyers at bay. Loyal oligarchs are now getting hammered, threats to their wealth are real and so we are beginning to see cracks in the wall. Tankers filled with millions of dollars of Russian oil are headed to the US – what will we do, accept delivery or turn them away? Sanctions are expected to continue to push oil prices higher…. along with other supply chain issues. China left in a tough spot – should they jump in and help mediate this crisis or will Xi Xi sit back and watch it implode? It’s a tangled web we weave. This is not the time to fall asleep.
European stocks are lower…not dramatically…. but they are all lower by about 0.7% – 1.5%. Reports of explosions in the Kvyv overnight putting the invasion into a new position. Kharkiv suffered heavy bombardment yesterday while Kherson is now under Russian control. Yes, there are individual company earnings due out, but the reality for Europe remains what is happening in Ukraine. The continued uncertainty will continue to affect Europe more so than the US.
Crypto’s holding steady – Bitcoin is trading in $43,500 while Ethereum is trading at $2,900.
The S&P closed at 4386 – I defined what to watch for. We remain in the 4114/4460 trading range. I do expect that we need to retest that low before this is over…and recall – a failure there could see the S&P trade to 3850 before finding any support. Yesterday’s clarity from the Fed has helped, what the market really wants to see now is clarity on any diplomatic conversations guided by China or anyone else and if those conversations are positive then expect markets to move higher, both swiftly and aggressively. If not, then the move lower becomes more of a reality. Vlad needs a way out to save some face, but he has sealed his fate in history. Everyone is going to have to compromise if this is going to end.
Remember – stick to the plan. Call me to discuss.
Take Good Care,
Chief Market Strategist
kpolcari@slatestone.com
Herb/Balsamic Marinated Pork Chops
Start with 4 / 6 pork chops on the bone…. thin or thick cut – whatever you like. Rinse and pat dry. Set aside. In a bowl – add olive oil, balsamic vinegar at the ratio of 1:1. Next add dried rosemary & thyme and fresh basil.
Season the chops with salt and pepper. Marinate the chops in the oil/balsamic mixture for at least 1 hr…. (You can prepare up to this point the day before and leave marinating in the fridge overnight.)
When ready to eat -preheat oven to 400 degrees. Place chops in a baking dish – with the marinade…. cover tightly and place in oven and cook for 30 mins.
Remove cover – and turn on the broiler…. broil chops to create a bit of a crust – flip and repeat…. Be careful not to dry them out. (You can also do these on the grill if you choose)
Serve this dish with roasted smashed potatoes and a green vegetable like French cut green beans – steamed and dressed in a dab of butter and s&p. As usual also serve with a salad of Boston lettuce, arugula, red onions, cucumbers and tomatoes. A nice Pinot Noir works well with this meal.
Buon Appetito.
