Things you need to know.
– Markets churn as we approach the long holiday weekend
– No eco data today, but tomorrow will bring us the monthly NFP report
– Recent slowdown in eco data suggest coming ‘stagflation’
– Bond market is forecasting a longer deeper recession.
– Try the Lasagna
**I am not writing a note tomorrow or Monday…. I will be travelling to NYC on business. Expect my daily video to be live from different parts of the city next week….…. Let me take a moment to wish everyone a happy holiday – whether you celebrate Passover or Easter…..makes no difference. It is about the time you spend with your family and friends. It’s about the food you prepare and the way you share it with those you love. There is nothing more intimate than cooking and sharing your home with friends and family. Thank you for letting me be a part of your life.**
Take good care….
ADP revealed a ‘slowdown’ in job creation….145k vs. the expected 210k new jobs in March…. coupled with the slowdown in the JOLTS report coupled with weaker manufacturing PMI’s is pointing to a slowing economy with still stubbornly high inflation….. and THAT is suggesting that we are moving into the next phase of an economic cycle…. – Stagflation….
Now for those of you who are unaware or were not alive during the last bout of stagflation in the last century (mid to late 70’s) – let me enlighten you….It ain’t pretty. Stagflation is the combination of slow growth, high prices and high unemployment. Let me repeat that – Slow Growth, High Prices (inflation) and High Unemployment. So you say – High prices – check, slow growth – maybe and High Unemployment – not yet…. with unemployment at 3.6% near all-time lows – how can anyone suggest that stagflation is on the horizon? Simple – keep your eyes on that data point….watch as it suddenly surges….the same way inflation ‘suddenly’ surged in April 2021….going from 1.6% to 3.1% in one month…..or a 94% increase in 30 days…..if unemployment surged by 94% in one month – it would go from 3.6% to 6.8%…..Now, I am not suggesting that is what’s going to happen, I am just making the point that IF it did – that’s what it would look like….
Look – it is widely known….economists and analysts have predicted that unemployment has to have at least a 5 handle on it (or a 40% increase) , if the FED is going to be successful at taming inflation….Cleveland FED President Loretta Mester – told us two days ago that she sees rates moving further into ‘restrictive territory’ before they pause….St Louis’s Jimmy Bullard sees rates going to 5.6% before HE sees a pause, Neely Kashkari seconds that emotion…..as do the other cast of characters that make up the FED….The only one we haven’t heard from lately is San Fran’s Mary Daly…..Anyone care to guess why not? Come on, you know……think…. does SVB ring a bell? Does complete regulatory failure mean anything to you? She is now the poster child for regulatory failure….and needs to go….but that’s another story…..
And so, stocks continued to churn and move lower…the only index that gained ground was the Dow – which added 80 pts or 0.25% – but remember – the Dow is only 30 stocks out of the more than 4k publicly traded companies……and while it is ‘legendary’ it no longer (and hasn’t for a long time) adequately reflects the state of the US economy….which is why we always talk about the broader S&P 500, the Nasdaq and the Russell – which is why many asset managers ‘benchmark’ themselves to those broader indexes…..You don’t really hear anyone talk about benchmarking themselves to the Dow….just doesn’t make sense – unless of course your portfolio IS the Dow.
These other indexes are much more reflective of the state of the union….and they ended the day lower….The S&P lost 10 pts or 0.25%, the Nasdaq lost 130 pts or 1%, the Russell gave back 18 pts or 1% while the Dow Transports lost 111 pts or 0.8%.
We have now gone from bad news is good news to bad news may in fact be bad news……we have gone from being preoccupied about another banking crisis to focusing on the risk of recession (which is what we should always have been focused on – but they do a bang up job of trying to tell us not to worry about it….) …..and what that will do to the consumer and corporate profits….we’re going from banking turmoil to an economic slowdown…. Something that should NOT really be a surprise at all…. What did everyone really think was going to happen…. after 13 yrs. of stimulation and zero interest rates? I said this before and I’ll say it again….it took us 13 yrs. to get here, anyone who thinks we are getting out of this in 12 – 16 months, needs to go back to school and study Econ 101, 201 and 301…and then let’s have a conversation.
Now look – the positive here is that a weaker economy is showing that the FED is making progress and that rate hikes may be nearing the end…..the May 25 bps hike appears to be the last hike for now…and then we move into the pause mode….and I think we remain there for the balance of the year UNLESS inflation heats up again…. I do not see the FED cutting rates at all this year. There are some that suggest if inflation continues to ease then the FED will cut rates and I say – WTF are you thinking? The FED can not cut rates right now….a cut in rates would stimulate the economy and force inflation higher….and btw – If the FED was going to cut rates – that would also mean that the economy has circled the drain – and the ‘soft’ landing has turned into a ‘hard’ landing and in this case – contrary to what we have been taught – hard is NOT good….so be careful what you wish for…. 😊
The concern now is causing treasury prices to rise (and yields to fall) -as investors move into the ‘safety trade’ – many asset managers now telling clients that with a slowdown more likely, investors need to consider opportunities in the bond market….I would say – the slowdown was ALWAYS likely….they have been telling you that for more than a year now….the FED has made it abundantly clear that a slowdown was always the goal….the only question was how bad is it going to be….I was never in the soft camp – in fact – I kept screaming about how using soft and landing in the same sentence was a mistake…but whatever…..it is what it is and we are where we are…..
Now we saw bond yields spike – when the whole FED Pivot story was gaining ground only to see yields come back in as the reality of tougher times ahead begin to sink in. The 2 yrs. is now yielding 3.75% – down from nearly 5% only two weeks ago….that’s a 25% decline in yields….the 10 yr. is yielding 3.29%! Down from 4% – and that is an 18% decline…..and all this means is that money is moving into bonds as investors prepare for more volatility……and yes – the bond market is still inverted….it’s going on 14 months now…..which only means that the recession will be that much more difficult. I mean come on…..let’s be honest….Stop with the ‘maybe it’s coming’ and lets go with – ‘get ready because it IS coming’ (if not already here….)
So now, it’s about building a portfolio that can weather the storm…and that means pulling in on some risk and moving into the big boring but beautiful names that will provide shelter in the storm – They are boring, they pay good divy’s and they give you exposure to the equity markets. (A theme I have been pushing for more than a year).
Enter stage left – the Big, boring, beautiful sectors that I speak of…. –Utilities, healthcare and consumer staples…..….which are always considered safe havens…..and talk about boring – Can it get any more boring than a utility? The XLU – S&P Utility ETF rose by 2.6% yesterday……Healthcare – XLV gained 1.7% while Consumer Staples – XLP added 0.5%…. Energy – XLE – which is always in the news lately – was also a winner yesterday…rising 1.5% as Oil continues to trade above $80/barrel and will most likely move towards $90/barrel as spring turns to summer….
The losers? Anything TECH! Isn’t that interesting – because at the end of the quarter in March – investors were scooping UP anything TECH in order to ‘dress up’ their portfolios going into the new quarter……Yesterday – the XLK lost 1.2%, Semi’s lost 1.7%, Disruptive Tech lost 3.5%, Artificial Intelligence lost 2%, Cybersecurity lost 1.5%….these were ALL the names that surged during the first quarter – rising double digits – and most of them better than 20%….and they will be the first place that traders and asset managers go to – to raise capital to redeploy…when the S**t hits the fan….
Other sectors that will not respond kindly to stagflation also saw selling pressure….Homebuilders – XHB lost 1.5%, Airlines – JETS gave back 1.5%, the OOTO – which is the Direxion Travel and Vacation BULL 2x levered ETF fell by 2.6%, Retail – XRT down 2.2%, Consumer Discretionary – XLY fell by 2% etc.….
But let’s be honest – everything will suffer under stagflation – it’s just that some sectors will suffer more….but again, if you have the guts and the staying power – the price adjustments that could come – would represent a longer term opportunity…so remember what I say – no need to go all in at one time….build you cash position and then strategically take advantage of the coming sales….stick with the biggest names in each sector, the most liquid ones…..do not get yourself tied up in obscure, illiquid names….do your homework, know your risk profile, know your time horizon, understand what you are buying and why you are buying it, make sure the fundamentals are what they say they are….listen to the guidance, pay attention to the trends….do not overtrade your investment account….It is NOT a day trading account. Talk to your financial advisor…..this is what he/she lives for….In the end – Chaos creates Opportunity.
Eco data today includes nothing that is going to drive the action…Initial Jobless Claims of 200k and Continuing Claims of 1.7 mil. It will be tomorrow’s NFP report that will force investors/trader and algo’s to wait until Monday to respond…What will it say? What will the unemployment rate do? I think it ticks up but there are some out there that think it moves lower – going from 3.6% to 3.4% and if it does that – then expect the markets to begin to expect MORE rate hikes past May….If it ticks up to say 3.7% – then it gives the FED cover to say – one more hike and then we pause….
This morning US futures are flat….Dow futures up 6, S&P’s down 2, Nasdaq down 40 and the Russell up 2. We are 6 hrs. away from the long holiday weekend….do not make any bets based on what happens today…. Enjoy your holiday…
European markets are flat to just a bit higher…..Up about 0.25%. the Europeans have a long, long weekend….as they have tomorrow and Monday off. (Good Friday and Easter Monday) – so they can’t react to our NFP report until Tuesday….if they react at all….
Gold which rocketed higher earlier this week – remains higher – this morning it is trading at $2,035…..betting that the May rate hike will be the last….which does NOT mean that June or July brings a pivot and cut, it just means that they pause…..It is also the ultimate ‘store of value’- gold is gold…period….In any event – we are now in the $2000/$2100 trading range….and IF the economy continues to weaken and the FED pauses…then gold has more to go….so sit tight and enjoy the ride.
The S&P closed at 4090 down 10 pts….…..Remember – we are in vacation/holiday mode ….Passover and Easter – so volumes will decline while moves can be exaggerated…..Asset managers placed buy orders below current levels and sell orders above current levels to take advantage of any outsized moves while they are away – the rest of the action will be driven by the trading community. I suspect that there is plenty of demand at the trendline at 4025 while supply is plentiful at 4200.
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 i
s 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
Easter Lasagna
It’s’ Easter in an Italian house……. So, start with the lasagna….
Making the Lasagna – Now you can do it two ways – you can buy the lasagna sheets and boil them first strain etc…or you can use the Lasagna sheets that you take – no mess, easy to work with – Barilla ‘Oven Ready’ – they are great…. You also need – Fresh Ricotta, shredded mozz and Fresh Grated Pecorino Romano and your homemade tomato sauce and meatballs.
Begin by removing 6 meatballs from the sauce – and put them in a large bowl. Now with a fork – smash the meatballs, add in 3 spoonful’s of fresh made ricotta cheese, a ladle of tomato sauce and a handful of shredded mozz. Mix well.
Next in a glass Pyrex rectangular dish – put some sauce on the bottom of the dish – now line up the lasagna sheets all in one direction – say lengthwise. Now put a layer of the meat on top of the lasagna sheets – add some sauce (do not drown). Now place the 2nd layer of lasagna sheets side to side – criss crossing the first layer. This is the way you build the lasagna. Repeat with the meat and sauce and then add another layer of lasagna sheets in the original direction – repeat with the meat and sauce – capisce?
(Now you will need to smash more meatballs and add the ricotta and mozz as you go along – so you have to make sure you have enough meatballs. You need at least 2 lbs. of meat to have enough meatballs to smash and use.)
For the final layer (4 layers are usually enough) top with some tomato sauce and shredded mozz. Here you can also sprinkle some fresh grated pecorino Romano. Cover with tin foil and place in the oven to bake at 375 degrees for 25 mins. Remove the tin foil and bake for another 5 – 8 mins just so it browns a bit. Remove and let sit for 10 mins before cutting and serving.
Buon Appetito
