Things you need to know –

–         Stocks continue to push lower as investors reconsider FED policy.

–         GOOG continues to get hammered over the BARD rookie error.

–         Micron joins a long list of companies announcing RIF’s.

–         Try the Bucatini

The axe continues to swing as more and more companies announce layoffs Micron the latest to announce a 10% RIF (reduction in force) while suspending any bonus for 2023 and they join – DIS, Yahoo, Zoom, Dell, PayPal, Affirm and Fox Corp as these companies use the ‘weakening economic environment’ as a reason to clean house.  The FED continues to hint at even higher rates (now teasing something with a 6 in it) all while the media continued to dissect Joey’s speech on Tuesday. 

The algo’s continued to punish GOOG for making a rookie mistake as they take the stock down another 4% (leaving it down 11% in 2 days) after the BARD debacle, Lyft reports an ‘unexpected’ loss (which is just dumb because what were they thinking, did the C-Suite NOT know it was coming?  Expedia repeats that error).  The SEC reaches a $30 million settlement with Kraken forcing them to stop offering ‘crypto staking services’ escalating the enforcement campaign against the cryptocurrency industry, AND the Chinese Balloon was in fact carrying ‘spy tools and other equipment to gather ‘intel’ (Are you really surprised?) and all this caused stocks to end the trading day lower…. the Dow lost 250 pts or 0.7%, the S&P gave up 36 pts or 0.9%, the Nasdaq lost 120 pts or 1%, the Russell lost 30 pts or 1.4%, and the Transports gave back 330 pts or 2.1%.

In the end – what this suggests is the ongoing volatility that we have been talking about for months now….is causing investors/traders and algo’s to reconsider the narrative leaving them unconvinced (at the moment) that the rally we have seen is going to be able to power through what is becoming a bit more anxious.  Yes, the labor market has been strong and that has proven to be a problem for JJ and this strength is now causing some to ‘listen’ to what JJ is saying vs. what they want him to say.  Rates will continue to rise – albeit at a slower pace, yet still rise, until they get to what the FED considers the terminal rate (neutral) – at that point – the FED will hold them there – throwing water on the idea that the FED was going to start cutting rates in the late summer/early fall of 2023…. In fact – on Wednesday, NY” s Johnny Williams hinted that rates would stay elevated for a ‘few years’ notice he did not say a ‘few months’, he said years and that is very different than months.  The question now is – what is the new terminal rate?

Recall that Bloomberg story that identified someone (or some institution) that is making a fairly substantial wager on where rates are headed….making a very big bet that terminal rates (neutral) will reach 6% by September – which is 75 bps higher than what the FED originally told us was neutral and is 125 bps higher than where we are currently….………and if that comes true – this bet will pay off to the tune of $135 million IF the fed tightens until September.

Look – there is a lot going on, and we have been stimulating the economy for 13 years….- remember, this ‘rub and tug’ of the economy began in March 2009 – when the S&P traded at 666 down from the September 2007 high of 1576 – a 60% decline during the GFC (Great Financial Crisis) – the FED slashed rates and announced the first of what would become a string of Quantitative Easing programs…each one a bit more dramatic as global central banks tried desperately to prevent a global financial Armageddon…..Did you forget that?

Then in late fall/early winter 2018 – they announced the start of tightening…and stocks plunged by 20% between October and mid- December causing many on the street to cry real tears – interest rates were in the 2% – 2.25% range in October and went to 2.25%- 2.5% range by December and then Covid hit, and the world stopped and the FED slashed rates to 0% – while the ECB went negative. 

And this stimulation remained in force thru 2022  – even as inflation surged up and thru 2% in April of 2022 – the FED still didn’t change the program…they all told us how it was transitory and how it forced them to remain ‘accommodative’ thru year end 2022.  .  Many on the street calling them out, telling them to wake up….as inflation surged ever higher………How’d that work out?  So now, we are where we are, inflation is near 40 yr. highs, the costs for stuff that people need – food, shelter, energy, utilities, healthcare have surged while some of the stuff that we don’t need declines….

Bonds – after having contributed nothing to the investment equation are now yielding more than 4+% (short duration) and that is causing some investors to consider ‘rebalancing/reallocating’ investment dollars….and that my friends continues to cause angst for the stock market.  Toss in the slowing economy, declining current earnings and declining projections for 2023, after a tough 2022 that saw stocks decline significantly, an inverted yield curve for 11 months now, out of control gov’t spending,  and you have at best an ‘antsy’ environment. 

Oil – which has been stuck in the $72/$82 range for months now, is once again kissing $80/barrel – this as we expect the China reopening to increase demand and overnight, we learned that Russia is cutting supply to fight the price caps imposed upon them for invading Ukraine…and this is helping to send oil up again – up 2.1% this morning at $80. Remember – many are now calling for a $92 average price for oil in 2023 with others seeing it go to + $100. 

Investors – trying to overlook all of this have gone on a shopping spree in early 2023, scooping up some of the biggest losers from last year and all you have to do is look at Cathie Woods’s ARKK funds…..Last year she lost 70% and so far this year she is up 29%…..which sounds good, (but she still needs to gain 200% to get to even….just fyi).  Other sectors that have benefitted from investor enthusiasm include Communications, Tech, Semi’s, Airlines, AI, Metals and Miners – all fine sectors in a recovering economy, but if the FED continues to hammer home higher rates then look for even these gains to become muted….The most recent Atlanta FED report shows that the ‘sticky inflation’ number remains elevated and this is another issue for the FED….Sticky inflation tends to be come entrenched in the economy…something that JJ has told us he is concerned about….and it usually becomes entrenched in the stuff we need…everyday items….and that will cause stress for consumers.

And then we have the FED’s balance sheet – at $8.5 trillion  – still well above where it should be and well above where the FED said it was going to be…and that is because they can’t shrink it fast enough without disrupting the economy and causing market instability………yet, no one wants to discuss this at the moment….I guess, if they don’t then it doesn’t matter….  Yeah, let’s see how that works out. 

This morning US futures are lower again….Dow down 145, S&P’s down 30, the Nasdaq lower by 150 and the Russell down 9.  US treasuries under pressure sending yields higher, causing some investors to add short duration treasuries to their portfolios and that is taking money away from the equity markets.  Additionally – more hawkish FED speak may finally be hitting home….causing the pivot crowd to reconsider that thought…..

Eco data today is all about the U of Mich surveys…..Sentiment is expected to be 65, 1 yr. inflation forecasts is expected to go to 4% up from 3.9% while the 5 yr. expectation remains at 2.9% ( but you know how I feel about that….useless). 

Next week brings us the all-important January CPI read on Tuesday….and the m/m number is expected to be +0.5% UP from last months’ -0.1%…..suggesting that inflation is more stubborn than many expect.  The y/y number is still expected to be moving lower at 6.2% vs. last month’s 6.5%…. PPI is due out on Thursday and that is also expected to show a m/m read that is +0.4% up from last month’s -0.5%….while the y/y number declines to 5.4% down from 6.2%.  In addition, we will get retail sales, factory data, building permits, housing starts and leading economic indicators that are expected to be -0.3%. 

I remain in the camp that the earnings recession we have been talking about hasn’t been fully realized yet and that investors – while wanting to be optimistic – are just a little bit ahead of themselves…which is why I keep saying – If you are invested and you have a well-designed/balanced portfolio then there is no need to chase anything….if they want to take the market up – let them…enjoy the ride….patience really is a virtue and buying stocks on a pullback is better than chasing stocks in a ‘FOMO’ dynamic…. 

The S&P closed the day at 4081 – down 36 pts and now below the 4100 century mark…..While we are still holding well above S&P 4000, I continue to think we will test it again in the next couple of weeks where I think it will hold…and if it doesn’t’, I suspect a test of the December lows would then become the target – 3850 ish….…I am happy to let names I like come to me….rather than chase them higher…. Large cap/mega cap multi-nationals that are good divvy payers come to mind…. In addition, mid cap and small cap sectors on a pullback. 

Remember – build a strong foundation…. dollar cost average into it and keep reinvesting all the divvy’s is the plan…. Buy 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

The market commentary is the opinion of the author and is based on decades of industry and market experience.  SlateStone has conducted reasonable due diligence on the contents, however, no guarantee is made or implied with respect to these opinions, and the information provided is subject to change without notice. This commentary is not intended to be relied upon as authoritative or as a recommendation or advice,  nor should it be construed as an offer, or the solicitation of an offer, to buy or sell any financial product, or an official statement or endorsement of Kace Capital Advisors.  Please consult with your financial advisor for your specific situation.

Kace Capital Advisors is a paid promoter for SlateStone Wealth, please see further disclosure here  and refer to SlateStone’s Form ADV for further disclosures and information about SlateStone Wealth

Bucatini in a Sweet Orange Pepper Sauce

1 lb. of Bucatini, Vibrant Orange bell peppers – washed and sliced thin, diced onion, garlic, olive oil, s&p, fresh basil, hot red pepper (optional) and plenty of Pecorino Romano Cheese.

This is simple.

Bring a pot of salted water to a rolling boil.

In a large sauté pan – heat up the olive oil, sauté the sliced garlic, now add in the diced onions and sauté until translucent. Now add in the thinly sliced orange peppers and sauté until soft. Season with s&p.  When done – run 3/4 of it thru the food processor to blend. Return to sauté pan and set aside.

Cook the pasta al dente – maybe 8 mins… strain and reserve a mugful of water. Toss the pasta into the sauté pan and turn heat to med – mix well – adding in some of the reserved mug of water.

Now add the fresh basil – some hot red pepper (opt) and plenty of cheese. Toss and serve.

Enjoy!