Things you need to know.
– Investors are either not listening or not paying attention to JJ.
– US macro data remains stronger than anticipated – the markets are now pricing a 50% of 2 more rate hikes… July and September.
– The dollar surges, gold declines, yet oil makes a small advance.
– Apple becomes a $3 Tril company in pre-mkt trading and that is igniting more excitement in TECH.
– Try the Tuscan Pasta Salad for the 4th!
** There will be no note on Monday….I’ll see you on Wednesday….Happy 4th. Take good care – Kp **
So investors continued to digest the ‘war on inflation’ and the fact that JJ has been clear…..…..he said it on June 14th, he said it on the 28th and the 29th all while other members of the FED offered their own opinions about what needed to happen as well. Rates are going higher….and higher…. The idea that we were at the top is now out the window. And if you weren’t onboard yet, you have to be now…yesterday’s economic data – Jobless claims and the GDP demonstrated that the US economy is alive and well…. The recession we have all been expecting remains at bay……Many analysts now saying it won’t arrive until early 2024……
Investors continue process the strength of the data and whether or not the FED can navigate that soft landing and they are coming up with both positive and negative implications….The positive part -stronger eco data…..strong labor market, unemployment near historic lows, building consumer confidence, strong housing (even in the face of rising mortgage rates) and you would think that is good right? Well, it is, and it isn’t – and it isn’t right now – because we have another issue…Sticky Inflation…. caused mostly by the FED but also caused by all the Biden spending projects that have been instituted since his inauguration. And as you know – one of the FED mandates is to control price ‘instability’ – otherwise known as inflation….and the stronger the economy continues to be, the more the FED will get pushed into the corner…. because the ‘core’ rate of inflation will remain elevated. JJ all but said this on Thursday while he was in Madrid…. He (they – the FED) is concerned about the stickiness and he doesn’t expect inflation to hit his 2% target now until some time in 2025! And THAT is what will cause him and the other central banks – think ECB, BoE, BoJ, RBA, BoC, SNB, NB to remain vigilant – which means hawkish, which means higher rates…. Capisce?
Now, you would think the markets should have been a bit more concerned about this, no? Well, yes, they should and investors should be concerned as well….but they keep taking stocks higher and higher – as if none of this matters…..which is where the disconnect is……but remember – we are also at the quarter end…..and so there is a lot of rebalancing happening…..rebalancing that I thought was going to see some pressure on the outperformers -think TECH….but amazingly – that is not what happened – I mean it kinda happened, but not to the extent I expected….…..It appears that asset managers are gonna go out with a bang!
By the close on Thursday stocks were higher (again). The Dow up 270 pts or 0.8%, the S&P up 20 or 0.5%, the Russell gained 23 pts or 1.25% while the Transports added 107 or 0.7%. Where did we see weakness – we didn’t but if you ask – What about the Nasdaq? It ended flat – not up or down, but flat…. which means there was an exact match between buyers and sellers going into quarter end.
The sellers of tech clearly reallocating that money into the broader market (note the S&P), the big industrial names (note the Dow), and the SMIDS (note the Russell), while the current buyers of tech are expecting another quarter of outperformance…which is where I disagree…..My gut tells me that the second half of the year will see more action in other sectors…...which is why I keep saying that any new money I am adding to the portfolio is not in tech, it is in Industrials, Financials, Healthcare, Aerospace/Defense, Consumer Staples, Value etc.….….and that will also rebalance my portfolio as I build up bigger positions in ‘non-tech’ names. See how that works? I am not saying I don’t like Tech, what I am saying is that I have enough exposure – so if it continues to outperform – guess what? I am not left behind…. I am along for the ride…but if those other sectors raise their head – I’m in bed there too. It’s called a diversified portfolio…And just in case Tech comes under pressure in the months ahead – I’m good with that too, why? Because tech isn’t going away….and any future weakness will give me an opportunity to buy more…. but it also depends on the names you own…. this isn’t a ‘passive market’, it’s a stock pickers market. Know what you own and why you own it.
Ok – Now, you also heard that all of the US banks passed the first phase of the stress tests…..that’s good and the financials (banks) were all higher yesterday, the XLF + 1.7% (leaving it down 2.2% ytd), the sector favorites all surging – JPM +3.3%, BAC + 2.1%, WFC +4.5%, the KRE (super regional banks) ended + 1.9% (leaving that group down 28% ytd….think SVB!). And while many of the regional names remain down double digits on the year – there are some investors that are finding opportunity – but buyer beware – there are still some concerns swirling around them – think commercial real estate loans….so the regionals are NOT for everyone…..In any event – watch as the big boys now make all kinds of stock buyback and divvy increase announcements (post the stress tests)…that should start today and that should continue to help them advance. Early indications are showing them quoted higher in the pre-mkt….
Treasuries sold off on the central bank news….as prices plunged, yields rose (as is always the case)…..the 2 yr. shot higher – ending the day up 15 bps to yield 4.86% and this morning the yield is even higher at 4.9% while the 10 yr. rose 14 bps to yield 3.85%. The 3 month is now yielding 5.35% while the 6 month is yielding 5.5%. And all this does is reflect the fact that we are going to see at least two more hikes….and that will prove to be the headwind for stocks but more specifically TECH stocks. Which is just a ‘warning flag’ not a panic flag, just a warning flag.
As expected, the dollar did what? Yes ma’am – it surged…. up 44 cts to end the day at 103.35…. which now has taken the dollar up and thru trendline resistance at 103.04…. leaving it to test the May high of 104.32…. And why did it surge? Higher rates…. will create more demand for the dollar by institutional investors and a higher dollar will put more pressure on the commodity complex – think Gold.
And in fact – gold got smacked – testing the long term (200 dma) trendline…at $1,897. As I said yesterday, I did expect this to happen, and I expect it to hold…. but if the dollar surges up and thru the May high – then all bets are off…. that’s where we could see it trade down to the March lows at $1855. I am watching this closely….it might be time to start dipping my toes…. (again).
Oil – while also a commodity bucked the trend…it rose 22 cts to end the day at $69.78 and this morning it is up again trading at $69.90. Remember – the Saudi’s are set to cut production by 1 mil bpd starting July 1st (tomorrow) as they try to manage supply. Additionally – the strong US macro data yesterday helped it to find support…..Look – oil is lower on the year….down 13% ytd…as so many expected a recession….and remained concerned about the broader global economy….the stronger dollar is not helping BUT the majority of the move lower has been about the global economy and the role that China plays in it….(which I think is overdone, because Chinese demand remains strong…no matter what they say….- Analysts use that Chinese weakness/strength argument daily….One day is weak, the very next day it’s strong…its ridiculous…) In any event – Oil remains in the $65/$72 range….and let me remind you – the Saudi’s are not happy about it.
US futures are UP as the sun rises over the Atlantic……The Dow up 100 pts, the S&P’s up 18, the Nasdaq ahead by 80 and the Russell is up 12. It’s all about the ECO data today…and specifically – the PCE – the FED’s favored inflation data point…..and that is expected to decline on the top line…..+0.1% m/m and +3.8% y/y….but the focus will be on the CORE rate and that is expected to remain ‘sticky’. Core m/m is expected to be +0.3% while Core y/y is expected to be +4.7% – which is the same as last month…and therein lies the issue…. In addition, we will get Pers Income and Pers Spending of +0.3% and +0.2% as well as the U of Michigan Sentiment Survey of 63.9. 1 yr. inflation expectations of 3.3% while the 5 – 10 inflation expectations remain at 3%. Neither of those are anywhere close to the 2% target. Just sayin’.
The next hurdle for the markets will be the start of earnings season…and that begins officially on July 14th….
European markets are higher as well…. all up by more than 1%. For the year – Italy has been the outperformer +20% ytd…. the UK – has been the huge underperformer only up 1% ytd. France, Germany, Spain and the Eurostoxx indexes are all up about 16%…. give or take a percent or two! Eurozone topline inflation data came in at 5.5% which is down – yet core inflation data rose to 5.4%……and that will keep the ECB on course.
The S&P ended the day at 4396 – up 20 pts….….…. and this morning it appears as if there is more excitement…futures are up…AAPL is trading at 190.99 in the pre-mkt…..blasting right up and thru $190.73 – the price it needed to clear to become a $3 Tril company, expect that to add to the ‘tech’ excitement…..……..The S&P appears to want to test the June highs of 4450…..which would be a 1.2% move from the close……something that could easily happen – especially since Apple will surely cause tech investors to ‘pile in’. In any event – it is what it is – and a well-diversified portfolio will carry you through to the end goal.
We could see more exaggerated moves today – as so many hit the road yesterday and last night…. Stick to the plan…Do not make emotional decisions. Give me a buzz if you want to discuss your plan or put a plan together for you.
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; however, no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of Kace Capital Advisors.”
Tuscan Pasta Salad
It is so easy to make and works well at any cookout. It is colorful, festive and delicious – best of all – it is mean to be eaten cold – complements any 4th of July celebration.
For you this you need: 1 lb. of Farfalle pasta, ¾ lb. of genoa salami – sliced into strips, 1 can of Cecci beans – rinsed and drained, 2 ½ cups of grape tomatoes sliced in half, 8 oz of sliced black olives, 2 ½ cups of rough chopped spinach, ½ of a sliced red onion, 2 cups of diced up provolone – not sliced – the block of provolone you buy – just dice it up into small bite size pieces and a jar of sun dried tomatoes in the oil.
For the dressing you need: 1 ½ cup of mayo, ¼ cup of white wine vinegar, ¼ cup of water, 1 tsp each of: Dijon mustard, sugar, kosher salt, black pepper, and dried oregano.
Bring a pot of salted water to a raging boil and add in the pasta – should cook for 8 mins…you want it to be aldente.
Make the dressing – combine all ingredients and then using a whisk to mix well. Set it aside.
While this is happening – prepare everything else. Get all the ingredients and combine into a large aluminum deep pan. When the pasta is done – drain – saving a mugful of the water…. put the pasta back in the pot and add a bit of the water to re-moisten. Once you have done this – then add the pasta to the big aluminum pan with all the other ingredients and mix well. Now add the dressing and combine well to coat it.
Cover and refrigerate until you’re ready to serve. This is always better if you make it a day or two in advance. Serve cold.
Buon Appetito
