Things you need to know
- Job market is strong, but bond market is inverted across the spectrum
- Earnings begin next week and T-14 days until taxes are due
- FED members making more noise about 50 bps (yawn)
- The IEA joins the US in releasing oil from strategic reserves
- Just to be clear – a recession IS coming….
- Try the Spaghetti with leeks, pancetta, and cream
The US job market is strong…. the NFP report showed that we added 430k new jobs – a bit below the estimate of 459k, but still a strong report. Unemployment fell to 3.6% while wages continue to advance…. yet not enough to keep up with rising inflation. Avg hourly earnings up 5.6% yoy while inflation is running at the PPI level is topping 9.5% while at the CPI level is above 8% yoy and expected to go higher in the months ahead. ISM Manufacturing came in at 57.1 – below the expectation of 59 but still in expansionary mode. These reports only bolstering the case for the FED to raise rates by 50 bps in May (and June, July, and September!) as per the Goldman call.
The Yield curve is inverting across the spectrum and flashing all kinds of warning bells – but the algo’s did not seem to care one bit. The 2’s and 10’s inverted – 2.47% vs. 2.39% and the 2’s and 30’s inverted 2.47% vs. 2.44%, the 5’s and 10’s inverted 2.57% vs. 2.39% and the 5’s and 30’s inverted 2.57% vs. 2.44% – all as they warn of slowing economic growth ahead. Now some of the brain trust is assuming that any recession is still a year and half away while others are suggesting that it is more like November / December 2022. And history tells us that when the inversion happens, a recession COULD occur anywhere between 8 months and 18 months…. So, what are you to do?
Well, do not go setting the place ablaze…that is never a good idea…. what we must do is look at the current situation to put it in perspective…. We are in unprecedented times – right? We have had more than 12 yrs. of stimulus in various forms…but zero rates, unbridled money printing and a willingness to buy bonds and mortgage-backed securities for FAR too long is the core of this problem. The signals began to flash last spring (2021), yet the FED played dumb and dumber………Inflation which had remained sub-pars for all of those years, suddenly raised its ugly head and is now about to blow thru the roof – reminiscent of the late 70’s. Now in the face of this rising inflation – the FED is beginning to respond – a bit late, but better late than never! They are now forced to make more aggressive moves (as per the more hawkish commentary of late coming from a range of analysts/economists and FED members) – bond markets have had to reprice (and attempt to guess what the FED will do) as we move through this policy pivot and while there is plenty of concern, there those that are telling us that these inversions are ‘transitory’ – a temporary side effect of the FED’s recent actions….vs. a more fundamental reason…and to that I say – Have you gone off the deep end? Are we really gonna start with the ‘transitory’ argument all over again?
My sense is that the moves are not transitory – NOT transitory by any stretch (unless you are defining transitory in terms of years) …so now the FED and its members must find where the neutral rate is – because it is not here. Remember – the neutral rate is the rate that neither restricts nor spurs economic growth and as you can imagine – there is NOT any consensus on what that rate is and THAT increases the risk that they will make another policy mistake. So, two things can happen here…they raise rates too high too fast and push us into a recession OR they can go slow never fully taming inflation allowing it to spin further and further out of control becoming at the best an ‘endemic’ or at the worst a ‘pandemic.’
In any event – it was a mixed day and while Investor’s/traders and algo’s loved the reports there was another flashing red light….…. The Dow rose 140 pts or 0.4%, the S&P’s up 16 pts or 0.3%, the Nasdaq up 41 pts or 0.3% while the Russell gained 20 pts or 1%. So where is the flashing red light? The Transports! They got clobbered falling 770 pts or 4.7% – but no one seemed to notice…On Friday March 28th – the WSJ ran with an article that said –
“Transport Stocks are Flashing Bullish Signals for Broader Market” – the story went onto suggest that a rising index was a sign of optimism and could fuel a broader rally…. Now by early March – the index was off by 12% but managed to rally back to unchanged by the 28th well ahead of the other indexes – which remained lower by about 6%. ….and then on Friday the treasury curve started to invert across the spectrum and the algo’s went into reverse…. taking profits off the table in the transport sector and re-allocating to sectors that have been underperforming.
Of the broad 11 sectors – Industrials, Tech and Financials ended the day lower – while the other sectors ended the day in the plus column.
The value trade – SPYV was up 0.5% while the growth trade – SPYG was flat. Metals and Mining, Cybersecurity and artificial intelligence trades all did better while the Semi’s got punished falling 1.4%. Biotech’s – XBI had a banner day – rising 4% after some news reports began sifting thru the wreckage in the space…the group was off 43% from the Summer of 21 highs due to the talk of higher rates and some scientific setbacks, but now you’ve got a bunch of analysts telling you that now is the time to scoop up some bargains…and the XBI ETF is the safest way to play it – the algo’s go wild….and BOOM- up we go….maybe that is where some of the transport ‘profits’ went!
Oil continued to fall and ended the week below $100 barrel as Joey announced the release of 1 mil/barrels per day for 6 months and the members of the Int’l Energy Agency agreed to join in – bringing even more supply to the market…..there are 29 countries in the agency – you can find them here: https://en.wikipedia.org/wiki/International_Energy_Agency
And they all agreed in spirit to release reserves…. when and how much are still not clear – but they are joining in and that has also added to the pressure on oil – at least for now – offering some ‘transitory’ relief from $120 oil. But as I said – any price decline is only transitory – if you think demand is waning – you better wake up…. demand for oil is NOT declining by any stretch…2050 – maybe but 2022 – not happening. This morning oil is trading at $100 barrel.
US futures are trading mixed….as the day begins…Dow futures are down 50 pts, S&Ps are lower by 3 pts, the Nasdaq is higher by 16 pts and the Russell is down 4 pts. In addition to the yield curve inversion – the geo-political crisis continues to weigh in on the markets as the fighting continues and shows no signs of abating.
And the bond market continues to send conflicting signals.
The 2’s, 5’s, 10’s and 30’s are yielding 2.44%, 2.56%, 2.39% and 2.45% respectively…leaving the yield curve in an inverted position…. causing more angst and conversation as the week begins…and the talking heads tell us what to expect. San Fran Fed President Mary Daly reiterating on Sunday that the case is ripe for at least a 50-bps hike in May……and that we should expect more hikes in the months ahead. (Hello Mary – old news!)
Eco data today includes Factory Orders -0.6% and Durable Goods of -2.2%. Recall last month I pointed out that weak Durable goods orders could be because of the inability to get the products – not because there is no demand. When you have to wait 8 months for a car or 10 months for an appliance – that will see prices continue to rise…you to say, “Screw it, I’ll keep what I’ve got until this calms down”. Or maybe it is because of that ‘looming recession’ that everyone is talking about or maybe it is because of prices that have gone thru the roof causing buyers to say – “I’ve had enough…” Whatever the cause – it is what it is, and we look forward to seeing what the report actually says.
European markets are mixed this morning….as they monitor the crisis in Eastern Europe. The EU (European Union) condemning Russia for the atrocities in Mariupol and other cities and that the union would work ‘as a matter of urgency’ to impose additional sanctions on Moscow and this is casting new doubt on the outcome of the ongoing talks between Ukraine and Russia.
Bitcoin is trading at $46k and Ethereum is at $3,500.
The S&P closed at 4545- up 16 pts…. after trading in a range of 4507/4548…. We are right on the short term trendline, and this morning’s action suggests that we may move lower and test the intermediate trendline at 4485……
Let us not kid ourselves – a recession IS coming…. it is called cyclicality – it happens – so if anyone thinks it is not happening –I would say – you need to come out of your cave. The question is twofold – will it happen in late 2022 (as some suggest) or will we see it in June of 2023? And that answer – will dictate how you might (or might not) set up your portfolio…. And next – what will be the depth and length of such an event – well, good luck with that – as it is very difficult to define but will be defined by the actions the the FED takes in the months ahead…will they be as aggressive as the rhetoric suggests or will they back off if the data starts to suggest a swifter downturn in economic activity? Hold on – we are about to find out….
Earnings reports and taxes are due in 2 weeks and that usually gives the market pause, but the final two weeks of April typically sees a rally…. with April being one of the best months for stocks. Let us see if that is the story this year…. Expect to hear more about how inflation is affecting company earnings and future guidance and expect to hear more from the FED about what the plan is going forward. May is expected to deliver a 50-bps increase. What is ahead for June, July, and September?
I remain in the camp that the immediate future is not all smooth sailing….I think the recent surge higher is more technical in nature and that once we get more out of the FED in the next couple of weeks – the markets will once again hit some potholes….which means – stay the course…….I continue to favor value… Staples, financials, energy and big US industrials – that provide exposure to the markets, pay decent divvy’s and have global footprint. I remain underweighted in tech relative to the benchmark – younger investors should be more aggressive and should lean into more tech….40 yrs. of growth are a much longer period than say 20 years….
Take Good Care
Chief Market Strategist
kpolcari@slatestone.com
Spaghetti w/Leeks, Pancetta and Cream
Simple to make and it presents beautifully….
For this you need: Butter, olive oil, 2 medium leeks, chopped – trim the bottom and the top off and then use the stalk, s&p, chopped fresh chives the Spaghetti, diced Pancetta, heavy cream and fresh grated Parmegiana Cheese.
Bring a pot of salted water to a rolling boil.
On medium heat melt the butter and a splash of oil in sauté pan. Add leeks and cook, stirring occasionally until softened, about 4 minutes. Add diced pancetta – sauté for a couple of mins and then add in the heavy cream…. Cover and keep warm.
Add the pasta to the water and cook until al dente – maybe 8 mins…. Strain – always reserving a mugful of the water. Toss the pasta into the sauté pan with the leek sauce and stir to combine. If you need to add a bit of the water – do so now to keep it moist. Add chives, toss, and serve immediately. I always like fresh parmegiana with any pasta dish…so always have that at the table for your guests to enjoy.
Buon Appetito
