Eco Data Starting Show Cracks – Try the Ratatouille

Kenny Polcari Uncategorized

Free photos of House

Things you need to know 

  • Nasdaq continues to get slammed as investors reprice the risk
  • Eco data is starting to show cracks
  • New Home Sales reacting to higher rates
  • FOMC minutes due out at 2 pm
  • Try the Ratatouille for the weekend BBQ

And the beating continues….stocks under pressure for most of the day, the Nasdaq goes deeper and deeper in bear territory – now down 28% ytd…as concerns deepen over economic growth, rising interest rates, rising inflation and uncertain FED policy all continue to weigh in on markets – SNAP being held responsible for the negative tone…….…the Dow – which had been down 1.6% – found buyers and rallied into the bell rising 48 pts as money moved into the big industrial names.  The S&P fell 34 pts or another 0.8%, the Nasdaq lost 270 pts or 2.3%, the Russell fell 30 pts or 1.6% and the Transports lost 180 pts or 1.3%.

Economic data confirming what we are all expecting and what lies ahead……. S&P Global Services PMI fell to 53.8 down from 56 last month and missing the estimate of 55.7 – taking it closer and closer to the neutral line (50).  Recall that the US economy is a 75% services economy – so this is a very relevant statistic.  And while 53.8 is still in expansionary territory, it is inching closer to contractionary territory – anything sub-50.  S&P US Manufacturing PMI remained steady at 57.5.  The Richmond FED survey was expected to show a 10 reading, surprised analysts – coming in at negative 9 and the big data point that investors were waiting for was New Home Sales….now look – pressure on housing is building as economic concerns rise and 30 yr. mortgage rates are now 80% higher than they were in January, so at some point we should see housing activity come under pressure….the report  which was expected to be weak at -2%, came in at -16.6%, and last month’s report was revised lower reflecting the weakening housing picture.

Now this should be no surprise…. artificially low interest rates and covid have been pushing housing prices higher and now with conforming loans at 5.5% and Jumbo loans greater than 6% (and going higher) many buyers are reconsidering what to do.  Now the slowdown in New Home Sales says nothing about prices (yet), it just speaks to slowing ‘demand’ – a collapse in prices is the next event as higher carrying costs take buyers out of the market and home builders recognize that the party might be over.

Here is what is next – buyers who contracted on ‘New Homes’ 6 & 7 months ago (when conforming mortgage rates were 2.75% and Jumbo rates were 3.5%) may not be able to afford the house now that rates have spiked higher and will be forced to give it up. (Remember – you can only lock in a rate 90 days ahead of the closing – so while you contracted on a NEW house in November 2021 that was not expected to be completed until August 2022 (and maybe later due to supply chain issues)  – you are not able to lock in a rate until June 2022……So, a $500k mortgage at 2.75% (in November) cost $2,040/month (plus taxes and insurance) will now cost the buyer $2,838/month (plus taxes and insurance) – and that is assuming you get a 5.5% rate…..Capisce?  So, you either put more money down to have a smaller loan size or you end up ‘not qualifying’ any longer for a mortgage and that takes you out of the market.  And that is when we will start to see housing prices decline. Does any of this sound familiar to you?

That is exactly what we have been seeing in the stock market….as interest rates rise, and the economic environment deteriorates – investors are re-calculating what stocks are worth in a weakening economic and rising inflationary environment and that new figure is very different from the old figure.  Remember – I have been telling you this is nothing other than a math problem….When the inputs change the answer must change so while investors were willing to pay 24 x’s forward S&P earnings in 2021, they are only willing to pay 19 x’s forward earnings as of yesterday and the estimates suggest that they will only be willing to pay 17 x’s by year end…..and that means that the indexes must move lower to reflect that declining valuation rate….and individual stocks and sectors all trade at their own valuation rates so a correction in those prices is also what we are seeing.  And if interest rates rise faster than expected the equation changes yet again…. resulting in an even lower valuation rate.

And lower valuations means that buyers are no longer willing to pay elevated prices, so they do not, they move lower leaving a void in bids causing sellers to trip over each other to ‘exit the building.’  Now this does not mean the buyers are not there, it just means they are more price sensitive.  So, get ready – because that is what we are about to see in housing prices…New and existing…. I mean, none of this should surprise you.

As the market weakens – we saw strength in Utilities – XLU + 2% and Consumer Staples – XLP + 1.6%, Energy – XLE and Healthcare – XLV also rose slightly up 0.4% and 0.3% respectively.   Tech – XLK lost 1.5%, Semi’s – SOXX lost 2.5%, Consumer Discretionary – XLY lost 2.6%, Communications lost 3.5%, Housing – XHB gave up 2.6%, Retail – XRT lost 3.3% and the list goes on.

10 yr. bond yields are once again under pressure as money moves into the safety trade – sending treasury prices higher and yields lower.  Yesterday they ended the day yielding 2.75% and this morning they are lower again….at 5 am – 10 yr. treasury yields are now 2.73%…. and what that is telling us is that the bond market does NOT believe the FED can do what they say they can do…that they cannot be as aggressive as they suggest they can – without sending the economy into the abyss.  The whole ‘Yeah, we can manage a soft landing’ argument is no longer an option…. Soft – is not happening.

Oil closed flat on the day but is up 1.6% this morning at $111.60.  The story today is all about tight supply and rising demand now that Memorial Day Weekend is upon us……the summer driving season has officially begun, and consumer demand is expected to rise and with that energy prices and gasoline will rise.  Resistance is at $112.80 – if we test that and pierce that then watch oil test the March highs of $120/barrel.

US futures are flat this morning…. Dow futures down 30 pts, the S&P down 2 pts, the Nasdaq down 2 pts, and the Russell is up 2 pts. After the bell last night, we heard from JW Nordstrom’s – and in a twist – investors took the stock up 9% in the after hours trading after they surpassed sales expectations and raised it full year outlook.  The talking point is that ‘shoppers are refreshing their closets for long awaited occasions’ – yes, ok…. Let us go with that….

Eco data today includes Mortgage Apps – and they have been down week over week, what will today show?  Durable Goods – exp of +0.6%, Ex transports of +0.5% and at 2 pm – the FOMC minutes from last month.  What will we learn? Anything new?  Hardly…. unless of course – the minutes suggest that a pause might be in order (as Atlanta’s Raffi Bostic told us on Monday). To me, a pause suggests that the FED does not know what to do……period.  And that would not be bullish decision at all…. But hey, what do I know.  Tomorrow brings us the revised 1st Qtr. GDP figure at -1.3%.  It also brings us Pending Home Sales and they are also expected to be weak at -2% m/m and -8% y/y.  Friday brings us the FED’s favorite inflation gauge – the PCE deflator and that is expected to be +6.2% y/y which would be slightly lower than last month, and they will use that to confirm that inflation is in retreat…. if it comes in at that rate.  The risk is that it does not…so sit tight.

Look – markets have been all over the place and are expected to remain volatile, but opportunities are being created – and while the path of least resistance appears to be lower – there are stocks and sectors that may have already bottomed out or are closer to bottoming out than others, which is why you need the plan, which is why you just can’t sit there and remain paralyzed…..Patience is a virtue and patient investors are now finding bargains in very solid, good quality names.  Do not let the noise distract you and while that is difficult – that is exactly what you need to do…. remain focused and do not get caught up in the emotion of it. It is ok to pause for now, just do not fall asleep.

The S&P closed at 3941…. after trading in the 3875/3955 range.  3800/3855 seems to be a level that the market is getting more comfortable with and may continue to test it to see if buyers defend this position.  The action will continue to be driven by the next set of data points, today’s FOMC mins, June’s Fed meeting and the message that comes out of it…Are we on the path of consistent 50 bps moves or is that about to change? Are year end FED fund rates still 3.25% or are they higher?  And what if they are lower? Are investors growing weary of anything the FED says?

These are all legitimate questions that will drive the action, but they are not reasons to bail and if you have not bailed yet, now is the time NOT to bail….in fact, I would argue that we are closer to putting in a bottom than not.  I am trying to be optimistic…. but recognize that it could all change on a dime.  Stick to the plan, know what you own and why you own it.
Take Good Care

Chief Market Strategist



This is a traditional French dish of stewed vegetables……..Ratatouille – (Rat – ta – too – ey)…..comes from the French word – Touiller – meaning to “toss food”…….because when you make this you – literally “toss” it all together… this can be a side dish, or a main dish…you can serve it over Pasta or Rice and it works great with the weekend BBQ.  

It is a dish – thick and delicious yet not overpowering at all…. If done right – “everyone” should be happy!  The left wing, the right wing, Republicans, Democrats, and the center….

Key Ingredients – garlic, onions, zucchini (green and yellow), eggplant, bell peppers (green, red, and yellow), carrots, celery, basil, crushed tomatoes, s&p, oregano, and olive oil.

Peel and cube the eggplant – layout on paper towels on the counter for about 30 mins or so…

You can also slice the onions, peppers, chop the carrots and celery and cube the zucchini – set aside.

Begin by heating up the olive oil – about 1/2 c or so……now add the crushed garlic and sauté for a bit.  Next add the onions and sauté until translucent, now the peppers, carrots, and celery – continue to cook on med heat…. until they feel soft – about 15 mins or so…. finally add the cubed zucchini and eggplant – mix well and season with s&p.  Cook for another 10 mins or so…. now add a can of crushed “kitchen ready” tomatoes – NOT PUREE.   (Depending on how much you are making you may need two cans of tomatoes).   Now add fresh basil, a bit of oregano and cover – allow to simmer for about an hour – while stirring occasionally.   Feel free to taste in case you need to adjust the seasoning.

At this point the Ratatouille is complete. You decide how to serve it – over pasta – make it a rigatoni and make sure to have fresh grated Parmegiana cheese!

Buon Appetito.