Things you need to know 

• It was ugly, but it was the end of the month
• FOMC meets this week – news out on Wednesday at 2 pm
• ADP and NFP also due out
• Berkshire Hathaway annual meeting is both educational and entertaining
• Try the Spaghetti and Asparagus

Oh boy…it was a brutal day on Friday that ended a brutal month.  So much for Marky Zuckerberg and how FB saved the day!   Stocks got slammed as the day drew to a close…and that is not surprising at all…it was after all, the final day of the month…..an opportunity to for asset managers to ‘clean house’…..and since April is NOT a quarter end – no one is getting a report card per se  – it makes sense that in an anxious environment when the FED is about to announce the start of a rate hiking cycle – an announcement that seems to change nearly every week if not every day – that the markets remain on edge.  I mean – just think about it for one minute – think about where we were in January, what the tone of the conversation was then and how it has changed dramatically.  Toss in the ‘Putin War’, exploding inflation across the whole spectrum, a FED that appears to have lost complete control and the most recent GDP print that revealed negative growth – which was a big surprise for all of the analysts that had predicted otherwise. 

And now you want to know why stocks are under pressure?  Remember in the fall of 2021 – when hints of policy change began to simmer on the back burner, when inflation readings were steadily increasing month over month.  Recall that I said –

‘Look – the macro data is changing, inflation is rearing its ugly head, the FED is hinting at a policy change (at the time it was a minor change – now it is more of a major change) – so you would have to expect that valuations have to change….because – when you CHANGE the inputs, the output (ANSWER) has to also change as well’.

So, think of valuations like this – because it is nothing more than a math problem.  The expectation was for the equation to be  10+10 and that equals 20, and so investors will pay X times for that valuation…… but when the equation suddenly becomes 5+5 = that only equals 10 or 50% of the original expectation…..so investors will need to decide what that new valuation is worth….and it is not worth X times any longer….so as the economy slows, due to declining economic activity or rising rates or surging inflation or the combination of all 3 inputs – then valuations MUST change and that is what we are seeing now….and as a result stock prices are in retreat.

At the end of the day on Friday – stocks retreated….the Dow gave up 940 pts or 2.8%, the S&P’s off 155 pts or 3.6%, the Nasdaq down 540 pts or 4.2%, the
Russel gave back 55 pts or 2.8% and the Transports coughed up 460 pts or 3% and that now puts all of these indexes well into negative territory for year – which doesn’t reflect the pain seen from the highs of the fall of 2021.

YTD – the Dow is down 9.2%, the S&P down 13%, the Nasdaq is down 21%, the Russell is lower by 17% and the Transports are off by 9.8%.  And to be a bit clearer – the Nasdaq and Russell are both down more than 24% (BEAR Mkt) from their November highs.  So, it has not been pretty at all.  But – you cannot say it is completely unexpected and if you do – then you’ve been living in a cave all this time.

Recall that the conversation about how the FED was going to be ‘slow and methodical’ when it came to policy change – not ‘swift or haphazard’ and how that conversation has since changed.  Recall how some of the FED members tried to jawbone the markets a bit lower to take the fluff out without causing more angst….How the committee was split on what should happen etc.….And then  recall how that changed – and changed dramatically – suddenly ALL of the members of the committee were on the same side of the fence – even Dove Lael Brainard – switched her feathers to become a Hawk….as she pointed out the FED needed to be more aggressive  – something that most of the country knew already but were being told that it was ‘ok’…. ‘We got this…’

10 yr. treasury prices have retreated and that means that yields have surged….and that surge is equal to 98%…. recall that yields were 1.5% in January and ended the day on Friday yielding 2.93% and only going higher.  Mortgage rates have also surged – 30 yr. money was 2.75% in January, and it is now more than 5% for the same money – that is an 81% increase in the cost of that mortgage.

Oil has gone from $73/barrel in January to a high of $120 settling in at $102/barrel on Friday…. a 40% increase in the cost of energy…. while gasoline at the pump has increased by the like amount….

Earnings for the second quarter – have been mixed…. beats on the bottom lines, misses on the top, mixed forward guidance for the next 4 – 6 months has only added to the angst.  Disappointment in Apple and Amazon are only the latest reasons for the sell off – but I have to really ask – were their results really disappointing?  I mean think about it…Apple reported revenues of $97.2 billion for the QUARTER (one 3 month period), while AMZN reported 1Q sales of $116.4 billion that somehow turned into a 3.8 billion loss…but let’s not kid ourselves….they has sales of $116.4 billion in 3 months….so get over it….

The reaction in the market was ridiculous – it’s both Apple and Amazon….two companies that have and are changing the world (to be clear we are not talking about HOOD -98% or TDOC -81% from their highs)….Apple is down 13% ytd and Amazon is down 28%…while the broader is down 13%…..all because the FED has signaled confusion and sent the message that they have lost control of the narrative  – essentially – the FED is losing credibility….and the idea that we are depending on the FED to solve a problem they created only creates more angst.
So – get ready…But in my opinion – AMZN and AAPL…..you don’t just throw them out….

Now over the weekend – we had the Berkshire Hathaway annual meeting, and it was entertaining if nothing else – they took shots at Bitcoin and HOOD and offered up all kinds of advice to investors.

This morning – it is a new month and guess what?  US futures are UP!  Surprise!!!  Dow futures are up 180 pts, the S&P’s up 25 pts, the Nasdaq up 85 pts, the Russell up 10 pts. There is NOT anything new between Friday’s sell off and this morning….the macro data is the same, the FED is in lockdown mode – the only difference is that stock prices are beginning the month at lower prices than they began last month and if we get a 50 bps move in rates on Wednesday AND a sense that we might get another 50 bps move in rates in June then I think the market stabilizes…..but if the conversation is more aggressive than that – think 75 bps in June with the possibility of another 75 bps move in July – then I think markets will continue to struggle.  In any event – prepare yourself for continued volatility in the weeks ahead – making sure to adjust or add to your portfolio with names that make sense.  Value continues to be play for me.

As of this morning we have Communications (XLC) down 24% ytd, Consumer Discretionary (XLY) down 21% and Tech (XLK) down 19%, Semi-Conductors (SOXX) down 26%,  Retail (XRT) down 22%…on the flip side – Metals/Miners (XME) is up 26%, Fertilizer names and Coal names are up big, Energy (XLE) up 35%,  Consumer Staples and Utilities are flat on the year (which is a win) and are good divvy payers, Going ‘short’ has also yielded big benefits with the SH, PSQ and DOG etf’s all up on the year 12%, 22% & 8% respectively.

Eco data today includes S&P Manufacturing PMI of 59.7 while ISM Manufacturing is expected to be 57.6 in expansionary territory.  Tomorrow brings us Factory orders, Durable Goods and Capital Goods Ordered and Shipped.  Wednesday is that all important day…. the FOMC rate decision and as discussed, we are expecting a 50-bps increase…. which then puts us in the 0.75% – 1% range.
Wednesday also brings us the ADP report of +400k new jobs, and Friday brings us the NFP (non-farm payroll) report and here we are also expecting an increase of 385k new jobs…. Avg hourly earnings m/m of +0.4% and y/y of 5.5%.   Unemployment of 3.5% and the underemployment rate at 6.7%.

Look – at the end of the day – markets were in an oversold position – which does not mean they cannot go lower; it just means that it can and remain irrational until we get more clarity…. remember – the market can deal with both good and bad news – but it has difficulty with uncertain news….

Earnings will continue – as we wind down into the end of this reporting season.

The S&P closed the day at 4131 after testing as low as 4124…. still not piercing the February low of 4114…… and while this morning feels like a bit of a relief – do not let your guard down just yet…. what the FED says on Wednesday will determine the next move. Recall that the FED is in a quiet period now, so do not expect to hear anything from the FOMC members until Wednesday.  Many analysts are now speculating on the narrative – trying to change the story…going from multiple 75 bps moves in June and July to 50 next week, then 50 in June and then 25 at each of the remaining meetings in July, Sept, Nov and Dec bringing us to 2.5% by year end – down from last week’s hysterical 3.5% that was bandied about….now remember – these are not FED officials saying this, but it could be the FED that is leaking the story to analysts to prep the markets – Capisce?  They always do…they leak the info – allow the big boys to say it, put it in the public square and then when they say it – everyone looks like a hero!  It will also serve to stop the selling – if markets think that the FED moves will NOT be as aggressive as believed.  In the end – Stick to the plan.   Invest in good solid names, do your homework, and remember that chaos creates opportunities for the long-term investor.
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Take Good Care

Chief Market Strategist
kpolcari@slatestone.com

Spaghetti & Asparagus

Here is another great Springtime dish…. Looks great on the plate and is pleasing to the eye and pallet.  Try this on a night when you can set the table outside, play some classic Gigi D’Allessio on Spodify and enjoy the night.

For this you need: 1/2 Pound Fresh Asparagus Spears, Diced Pancetta, sliced Garlic, 1/2 Cup White Wine, Grated Pecorino Romano Cheese, Finely Chopped Fresh Parsley, 1 lb. of Spaghetti.

Begin by trimming asparagus, and cut into 2-inch pieces, Cut the white end of the stalk off and discard.  Blanch the asparagus in boiling water until tender crisp, then drop into a bowl of ice water. Do not overcook – you want the asparagus to be firm not limp.  Once cooled – cut into bite size pieces – saving the flower aside.

In a lg sauté pan – sauté the pancetta and garlic in some olive oil.  do not burn…. Add in the asparagus and stir.  Add the wine and cook until it has been completely absorbed.

Bring a lg pot of salted water to a rolling boil and add the spaghetti.  Cook for 8 – 10 mins or until “al dente”, then drain and add to the sauté pan with the pancetta and asparagus.  – Reserve a mugful of the pasta water. Add back a bit to moisten…do not leave a puddle…. stir to mix well.

Serve in individual warmed bowls, adorning with the flower – offering extra grated Pecorino cheese at the table for your guests.  Compliment with your favorite white wine…. Nothing too fruity.

Buon Appetito.