Things you need to know ~
- Stocks suffered 2 weeks of decline – Where is Santa?
- Global central banks all line up on the same side – rates to go higher.
- Gold pierces $1800 again – resistance at $1816
- Oil bounces around – demand destruction and then not so much….
- The Holidays have begun….
- Try the Butterscotch Clusters – Yum!
Stocks ended the week lower…..suffering the longest streak of loses since September….. The Dow gave up 280 pts or 0.85%, the S&P lost 44 pts or 1.1%, the Nasdaq gave up 105 pts or 1%, the Russell lost 12 pts or 0.6% while the Transports gave up 150 pts or 1.1%.
All because the FED said ‘NO’ (to a pivot) and JJ told everyone that he sees NO rate cuts in 2023 and that the terminal rate ‘may’ be higher than what the market expects. He also emphasized that rates will stay higher for longer – until he (they) are convinced that the inflation monster has been tamed. On Friday – Cleveland Fed President Loretta Mester told Bloomberg TV that she would prefer higher rates than many of her colleagues and that the FED needs ‘sustained tight policy to defeat inflation..’. Which leaves us to wonder – who else on the committee is in her camp? In the end – JJ did offer some hope and said that maybe we could see a rate cut in 2024 – without defining when in 2024.
And then we got the ripple effects……
Other central banks across Europe came out and supported that narrative for their own countries including the BoE (England), SNB (Switzerland), NCB (Norway) and then Chrissy Lagarde – President of the ECB (Eurozone) slammed the door shut – raising rates by 50 bps and telling the investment community that if ‘anyone thinks that she will pivot – think again…’ – and so, maybe, just maybe, investors are starting to reconsider what that means for stocks and for the economy.
Conversations about profit growth (or lack of) are now all the rage, estimates being cut as we complete the final quarter of the year and estimates for 2023 are now under the knife as well. Our friends at Morgan Stanley continue to ‘warn’ investors about the coming earnings recession that could mimic 2008/2009 (think GFC – Great Financial Crisis – Now, that’s not good) while also telling us that price declines for US equities “will be (not could be) much worse than investors are expecting”. Sounds ominous, no?
Many now suddenly concerned that the FED is going to ‘tip us into a recession’….. Well, here’s a NEWS FLASH….- whoever is ‘suddenly’ concerned about being tipped into a recession – should probably wake up from their winter hibernation…..it’s not if but WHEN will the gov’t officially call it?
All signs point towards a recession – weakening macro data, weakening housing prices, stubbornly high inflation, and round after round of layoff announcements – which will see the unemployment rate begin to tick up – most likely in the January report….…. Our friends at Goldman – are only the latest to announce 4k people or 8% of its workforce will be out of work by the end of January 2023. They join the likes of JPM, MS, Amazon, Google, META, Twitter, Zoom, Roku, Teledoc, FTX (joke) and the list goes on….. But the biggest ‘reindeer of all’ is the inverted yield curve – which has been inverted for 7 months now.
So for anyone to tell us that we are not going into a recession – you also better study up on history because every single time the yield curve inverts – we end up in a recession….some shallow while others are deeper, but we always end up there…..…and btw- remember when the curve inverted for all of 10 mins back in February – remember the hysteria in Andy Sorkin’s voice…..?
Remember that CNBC ran a ’special’ on the coming recession……which is usually anywhere between 12 – 16 months out once that signal appears……..but now that it has been inverted for 7 months – suddenly the rules don’t apply, suddenly – a recession is not guaranteed….….Well, that’s true if you try to cancel history….But we aren’t doing that, are we?
12 months from May 2022 (when it inverted and stayed inverted) would be May 2023….and 16 months from February (when it inverted for 10 mins) would be June 2023…..so my friends, I am making what I think is a safe bet and saying that we will get the official ruling sometime in early spring…after the FED takes us to the 4.75% – 5.25% range on the terminal rate (neutral). So, forget the idea of a ‘soft landing’ that is not happening, What the market is trying to figure out now is – How deep or shallow will it be?
Treasuries remain inverted, the 2 yr. rallied nicely sending the yield falling to 4.175%. The 10 yr. remained relatively flat – yielding 3.52% – closing the yield gap from 80 bps to 65 bps…but the important point here is that the curve is still inverted.
Oil continues to thrash around….falling by $2/barrel on Friday as the conversation centered around the demand destruction in ‘the face of a recession’. Oil ended the week at $74.25/barrel down from the week’s high of $77/barrel – after supply issues forced the price higher – so do you see the pattern – they talk supply issues and up we go and then then talk about demand issues and down we go….This morning, oil is rebounding a bit – Why? One guess…..and the Bloomberg headline says it succinctly…
“Oil Prices Bounce as China DEMAND Hopes Offset Recession Fears”
Simple right? Today, someone wants oil to rally, so they change the narrative….because I am not sure how it can be demand destruction on Friday and then be outsized demand on Monday…..And the whole China story – that’s getting tiring as well. And just wait – because this morning we are hearing about the 1st of 3 expected waves of new Covid 19 cases that are about to sweep across China after they ‘relaxed’ the lockdowns…..so get ready for more Chinese drama that will affect the daily narrative…Case rise, lockdowns begin, cases fall, lockdowns ease and the cases rise again – do you see what’s going on? Funny, but that is the only place in the world that is still reeling from chaos…. In the end – Beijing’s promise to revive their economy (increasing demand) and the need for Joey to replace the oil he took from the SPR will keep oil prices firm. At 5 am – oil is trading up 0.9% at $74.93/barrel. Leaving oil in the $70/$82 range.
Eco data this week includes – Housing Starts and Building Permits – both expected to be down, Mortgage Apps – down, Existing Home Sales -down, New Home Sales -down, 3rd qtr. GDP final – steady at 2.9%, Initial Jobless Claims up, Personal Income down, Personal Spending down, Durable goods – down, Capital Goods Ordered and Shipped – both down and the FED’s favored inflation gauge – the PCE is also expected to be down (but that would be the only positive).
GOLD – has been moving higher ever since the FED confirmed further tightening….This morning it is up 0.3% or $6/oz. It is now trading back above $1800/oz and remains in the $1740 – $1816 range.
Now – this morning – futures are teasing higher…. Dow futures up 72 pts, S&P’s +10 pts, the Nasdaq up by 28 pts and the Russell is ahead by 2 pts. It just feels like a bit of a bounce after two weeks of losses ignited by the most monetary policy commentary.
The headlines today will include how SBF (Sam Bankman-Fried) has now given up fighting extradition to the US – apparently the accommodations at the jail in the Bahama’s is not to his liking…I guess we must ask – what deal did he make with the FEDS and the DNC? And the second headline is the ‘informal’ Twitter poll that Lonnie Musk posted on Sunday evening. Should he quit as Twitter CEO or not? As of this morning – 16 million people responded with 57% saying ‘yes’ he should……and so, now what? Lonnie says he will abide by the results….but the poll doesn’t close until later Monday morning….so the votes are still coming in….and we know how quickly the results can turn…..especially when they find boxes of ‘uncounted’ responses. – I mean – you gotta laugh……..You can’t make this stuff up….
European markets are higher as well this morning – also on a bit of a bounce back after the beating they took too. At 5:45 am – European markets are up about 0.7% across the board.
The S&P closed the day at 3852 down 44 pts…. Piercing the trendline at 3863 to trade as low as 3827 before finding any support – recall I told you that if we broke the trendline – then the algo’s would kick in and go into sell mode while the buyers stepped aside and bingo….that’s what happened…we pierced it and boom….down we went.
It has now broken all 3 trendlines – leaving the next stop – should it go lower at about 3720 ish….So today is a key day….if we attempt to rally – we will hit resistance at 3930…..which puts us in the 3720/3930 trading range for now….We are now entering the final two weeks of the year….market moves will be exaggerated….in both directions….The holiday season has officially begun -Hannukah began yesterday and Christmas eve is Saturday. Kwanzaa begins on the 26th and ends on the 1st of January.
Any attempt to move higher in the Santa Claus type rally will most likely take us to S&P 4000/4100 ish. Continued declines could see us retest the October low of 3490.
Expect more year-end tax loss harvesting during this time which could dislocate some ‘finer’ names and provide an opportunity for the long term investor. Be ready to put more money to work in names you have researched and like. If not, then sit back and enjoy the holidays….
Remember – have a plan, stick to your goals, take advantage of DCA (Dollar Cost Averaging) in your long term account over time. Overweight the STPN (Stuff that People Need) which tend to be big, boring yet beautiful names that pay decent divvy’s. Staples, Utes, Healthcare & Energy. Complement and underweight that with other sectors that you like but may underperform going into 2023 …but are expected to outperform later in 2023.
Take good care,
Chief Market Strategist
kpolcari@slatestone.com
Butterscotch Clusters – A Holiday Favorite
Here is a personal favorite of mine – they are Butterscotch/Peanut clusters and are a Christmas/Holiday favorite…. My grandmother used to make these every year and every time I eat them – it brings me back to an earlier time… It was a tradition I used to do with my girls – when they were little – and it always brings me back to an earlier time. I made them over the weekend – you can find the picture on my twitter – @kennypolcari
For this you need – Nestle Butterscotch morsels, salted peanuts, and Chinese noodles…. (You know the crunchy ones).
Begin by setting up a double boiler – bring the water to a boil in the bottom pan so that the top pan is hot….. when ready add in the butterscotch morsels….stir until melted….now add in the noodles and the peanuts….stir to coat really well. When ready – remove from the heat and with a tablespoon – take scoops of the mix and plop them onto wax paper…..They will harden into clusters in about 10 mins….
They are so good…you wonder how you ever went without them.
Buon Appetito.
