Things you need to know –
– Stocks back off…. What will the FED do? Pause? Pivot? Or Raise?
– It’s a big week for earnings….20% of the S&P to report.
– Oil falls on supply/demand conversation…. OPEC + to meet tomorrow.
– Inverted yield curve – don’t be ridiculous – it means nothing!
– Try the Spaghetti Arrabiata
So, the upcoming FED (ECB and BoE) central bank meetings this week are causing heartburn for investors and the markets……(something we have been concerned about and have been talking about for weeks now.) Investors, who have taken the markets higher all of January are suddenly growing cautious as the week began, sending stocks lower on Monday and lower again in what appears like more weakness on Tuesday morning. At the closing bell on Monday – the Dow was lower by 260 pts or 0.8%, the S&P lost 52 pts or 1.3%, the Nasdaq down by 230 pts or 2%, the Russell gave up 25 pts or 1.3% and the Transports coughed up 326 pts or 2.25% and it appears that the weakness is spilling over to today….at 5:30 am – US futures are once again pointing to a lower open – with futures off another 0.3% – 0.5%.
Now to be sure, it is more than just the central bank meetings, it’s the weakening macro data, it’s mixed earnings, it’s stubborn inflation, it’s all the hawkish talk from global central banks – so, let’s figure it out.
Like I said yesterday – in the midst of all the economic and earnings news due out this week – there are TWO macro data points that will move markets this week. The first was the FED meeting on Wednesday, followed by the ECB and BoE on Thursday and then there is Friday’s NFP (Non-Farm Payroll) report that is expected to show a gain of 185k jobs as well as an UPTICK in the unemployment rate – taking it from 3.5% to 3.6% – not a big move by any stretch, but it IS a reversal in the trend……leaving many to suggest that this is the beginning of continued increases in the unemployment rate in the months ahead….something that the FED has been trying to manage for months now and something that every analyst out there says has to happen….the ultimate level is up for debate with some suggesting we can manage a soft landing – by slowly raising rates and controlling the job losses to ‘reasonable’ levels – think maybe 4%…. and others out there saying ‘ain’t happening’….the FED has to push rates higher – if they are realistic about taming inflation and that means that the unemployment rate will have to hit something with a 5 handle or worse yet a 6 handle. And then there are those that say the FED is going to raise rates by 25 bps tomorrow and pause and ultimately pivot, while others (myself included) say NOT. I suspect that Fed Chair JJ (Powell) is going to raise rates by 25 bps and then continue to tell us that ‘at the moment’ the FED sees more increases in the months ahead….I see – 25 bps in March and then 25 more in May before they ‘pause’ with NO pivot in 2023.
And THAT is what is concerning investors at the moment….now to be fair – none of this is new at all….this has been the ongoing conversation….and the Pause/Pivot crowd has convinced the algo’s and some investors that the end of an aggressive FED is near…and so – the markets have managed to race ahead – in my opinion – race ahead of itself……The indexes are all in positive territory – with the Nasdaq – the worst performer in 2022 – being the best performer so far in 2023…and that speaks right to the pause/pivot conversation…. If you believe that the pause/pivot is coming soon then you are more of an aggressive buyer, if you believe that the pause is coming but the pivot is not – then you are more of a patient investor……maybe trimming some positions on strength while buying/adding to positions on weakness. And so, the market goes….
In the end – we will likely see JJ ‘re-emphasize’ and ‘re-iterate’ the idea that while inflation is trending lower – they are NOT done yet…rates need to get to 5% – 5.25% at the least before they consider pausing (they – the majority – have told us that in no uncertain terms while a minority of members are calling for 5.25% – 5.5%) ….and that means rates need to go up 75 bps more before any pause….so do the math and consider how we get there. We can do 1- 75 bps move (not happening), we can do 1- 50 bp and 1 – 25 bps move (not happening) or we can do 3 more 25 bp hikes – happening. Why? Because 3 smaller moves DOES give him the ability to change his narrative in March IF the economic data points confirm further (quicker) weakness in the model….…. think – CPI, PPI and PCE’s all declining at a quicker pace while unemployment increases at a quicker pace than is currently expected.
Of the 11 S&P sectors only one was higher yesterday and that was Consumer Staples – XLP up 0.1% while Energy – XLE, Tech – XLK and Communications – XLC led the way lower…down 2.3%, 1.9% and 1.6% respectively…..and this makes some sense – since these three sectors have been solid performers so far this year….with Tech and Communications up 9.5% and 14.5% coming into the day yesterday.. Energy – which was 4% so far this year, was lower yesterday on other issues – think supply/demand and the upcoming OPEC + meeting tomorrow…. Energy is not responding to the same data that the other groups are responding to….just fyi.
So, in the end – investors need to make a decision and go with it….it’s the algo’s that will cause the chaos and volatility in the markets, but that then presents opportunities for the longer term and shorter term investor.
In the end – let’s be clear – it is the idea that the Fed will overshoot and send the economy into a deeper recession than necessary….and while I do not want to see that happen, I am not sure it isn’t going to happen. Remember – the FED and every other central bank around the world has been stimulating their economies for more than 13 yrs.…. recall this all began during the GFC (Great Financial Crisis) of 2008/2019 and then again during the covid pandemic of 2019-2021. Now I say the GFC of 2008/2019 because the FED nor the gov’t ever stopped stimulating the economy via handouts, zero interest rates and mortgage bond purchase program since then…..so, stop the narrative that suggests this is a ‘recent’ issue vs. a longer term issue – so anyone that thinks this is going to be over in 12 – 20 months should rethink that idea…… just sayin’….
Now earnings are also in the spotlight and yesterday we heard from 6 companies…. And we had 1 miss and 5 beats…but today is going to bring us 30 more reports…..including GM (beat by a wide margin) and quoted up 4% – they are also buying a 9.9% stake in Lithium America’s – LAC and this is quoted up 7.7%) , XOM – Also a significant beat, Revs up more than expected too but not as much as analysts ‘expected’….(think CVX style) and traders are taking that down by 3%…..(just like they did to CVX). Look for results from UPS, MCO, PSX, PHM, MCD, IP, PFE (in line – stock quoted down 3%), SYY and CAT (misses)- post the close look for AMGN, SNAP, AMD, MDLZ, EA and more.
Oil which came under pressure yesterday – is under further pressure this morning….down $1 at $76.81……The headlines saying that global supply will now outstrip global demand, that China’s reopening is not going as expected and that OPEC+ will not announce production cuts this week……Ok – let’s go with that because tomorrow the headlines will contradict all of this…. Remember – the Saudi’s have an $80 average number in their heads….so if we see oil continue to trend lower – expect the Saudi’s and OPEC + to make some noise….and threaten to control the supply side of the equation…. We have not pierced the trendline support at $77.72 and could see this latest move take oil to $75 ish…before it stabilizes….in the end – I am a buyer of energy on weakness – because I see higher 2023 prices as we move through the year. Recall – street estimates suggest average prices anywhere between $89 – $95/barrel.
Gold fell yesterday along with stocks as investors suggest that the FED will remain aggressive. Remember- part of the rally was because the FED was supposed to be more dovish/less hawkish – but that does not appear to be the case – so trader types hit the sell button to lock in some profits after its move higher in January…..I continue to like gold and would use weakness as an opportunity….and expect that when the pause comes gold will resume its climb higher…
Treasuries remain inverted so there is nothing new to add here….other than the idea that some academic (Marshall Blume- Of Wharton fame) is trying to tell us that an inverted yield curve does NOT suggest a recession is coming – never mind that every recession we have had since the beginning to time has been preceded by an inverted yield curve…but he is convinced that he sees something that the rest of us do not…. Good luck with that……but I guess, he is a Wharton professor – so you can’t question it. Capisce?
Like I said – US futures remain weaker still….it’s now 7 am…and futures still suggest a lower open – although not as dramatic as it was when I started writing this note….Earnings are trying to change the focus – but it is what it is……and the FED will announce tomorrow.
Do not expect today’s macro data to change the direction or narrative.
European markets are all a bit lower – markets across the region down about 0.8% across the board. Eurozone GDP was better than expected – it grew by 0.1% vs. the -0.1% expectation but was down from the 3rd qtr. of +0.3%. German retail sales also lower for December and they are also dealing with a busy earnings week. Remember – Thursday brings the ECB and the BoE both expected to raise rates by 50 bps.
The S&P closed the day at 4017 – down 53 pts…. just kissing the trendline….and managing to remain above it…. suggesting support…..but if this morning’s weakness persists – we will breach it on the opening…..which then leaves us to see what happens next. Will the algo’s go into sell mode (think technical break) or will they attempt to retake the trendline in a vote of confidence? My gut says only if JJ changes the narrative…..something I do not see happening – but even if it fails my sense is that there is plenty of support down to the 3950 range.
Remember, you are a long term investor – build it and stick to the plan….trying to pick tops and bottoms is NOT what you do….it’s about building that strong foundation….dollar cost averaging into it and reinvesting all the divvy’s (unless of course you need the divvy’s as income…if not -put them back to work). Don’t’ be afraid to buy your names on weakness (as long as the weakness is not a fundamental shift in the sector or the name).
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
Spaghetti Arrabiata
By now you know that Arrabiata – is the Italian word for angry… And how appropriate for today… this sauce is simple to make and gets it anger from the red chili pepper… You can serve this with any type of pasta you want – but spaghetti or linguine is best.
You will need: olive oil, onion, garlic, red wine, sugar, crushed red pepper (or chili peppers if you want hot, hot, hot), lemon juice, oregano, s&p, crushed tomatoes, tomato paste and chopped parsley…
Bring a pot of salted water to a rolling boil.
In a large pot (or deep sauté pan) on med-hi – heat up olive oil and garlic… sauté a bit – but do not burn – 3 mins or so… now add sliced onion and sauté until soft – like 5 mins more. Next – add 1/2 cup of red wine, 1/2 tbsp. of sugar, fresh squeezed lemon juice (about 1 tbsp.), oregano, bit of tomato paste and a 28 oz can of kitchen ready crushed tomatoes (not in puree – just crushed tomatoes), crushed red pepper (or crushed chili pepper if you prefer) – bring to a boil and then reduce to simmer and cook for 15/20 mins…
Add the spaghetti to the boiling water and cook for 8 mins or until aldente – strain – reserving a mugful of the pasta water. Return pasta to pot and add back about 1/4 cup of the pasta water to re-moisten. Stir… Now add pasta directly into the sauté pan with the sauce – toss well – add a handful or two of grated parmegiana cheese and serve immediately in warmed bowls. Enjoy with a nice bottle of Brunello di Montalcino. Always have extra cheese on the table for your guests.
Buon Appetito
