Things you need to know.
– Chaos erupts on Wall Street – Stocks plummet.
– Chaos erupts on Capitol Hill – Kevy gets kicked to the curb.
– Treasury yields surge again…. the 10 yr. yield is up 20% since Aug.
– The VIX – fear index – pushes higher.
– This is not the time to panic……
– Try the Spaghetti Fini with Leeks and Pancetta
Rinse and repeat……the intensifying bond selloff sent treasury yields surging (again) while igniting a new round of selling in equities – Yesterday’s selloff has now taken the Dow into negative territory for the year, joining the Russell – which went negative last week. The losses were broad and seen in almost every corner of the market……with the exception of the utility sector which has gotten absolutely crushed over the prior 6 trading days….so investors appeared to find some value in the group. But like I said yesterday – It is a (xxxx) show……10 yr. treasuries rose by double digits AGAIN on Tuesday…. the 10 years now yielding 4.795% up nearly 12 bps……The 30 yr. jumped by 14 bps!!! And is now yielding – get ready….4.92%……Just fyi – the last time the 30 yr. was teasing these levels was April of 2006 – September of 2007 – just prior to the complete meltdown known as the GFC – The Great Financial Crisis……. The 2 yr. jumped by 5 bps ending the day yielding 5.150%. It is the sudden push higher that has caught investors off guard….and like I said – when the markets get anxious – the path of least of least resistance is down.
And so, stocks got WHACKED…. I mean really whacked…. the Dow fell 517 pts intraday before rallying a bit into the bell to end the day down 431 pts or 1.3% – this key index is now negative on the year…. down 0.4%. The S&P – was on its way to test the 200 dma at 4200…..but found support at 4216 – which is interesting because it’s not really a level that should have been defended (4200 is)– ultimately the S&P closed at 4229 down 1.4%…..the Nasdaq lost 250 pts or 1.9% – which honestly is about time that they take some of the air out of that group….the Russell fell 30 pts or 1.7% taking that index down 2% ytd….While the Transports gave back 115 pts or 0.8%.
The dollar pushed higher as well…..rising as much as 34 cts to kiss a high of 107.35 before settling in at 107.08…..Remember – the next target is 108…..This morning the dollar index is a bit lower – as it appears to be digesting the spike higher……Currently – the dollar index is down 18 cts at 106.81.
Now on Monday – it was Utilities that got smashed down 4.6%, Yet they were the only stocks that bucked the trend yesterday and rose by 1.2%….but remember – they took 13% out of the group in 6 trading days -…between last week and Monday this week – suggesting that some investors are sniffing around for bargains….as they sift through the sale rack……. Yesterday it was Consumer Discretionary that took it on the chin….down 2.4% – which is not nearly enough….….it is still up 22% on the year……and remember – we are talking about Consumer Discretionary stocks, not Consumer Staple stocks….Discretionary stocks are things you ‘like’ to have not ‘need’ to have…..which is curious – especially if the economy is expected to hit some rocks in the road….I would imagine that people will be buying a lot less of the things they ‘like’ to have…and more of the things they ‘need’ to have….think food, detergents, soaps, Q-tips, shampoo, bleach, Downy, dental floss, trash bags, – you get the picture right? Tech lost 1.7%, Disruptive Tech down 2.7%, Semi’s – 2%, Cybersecurity -1.8%, Robotics and AI down 2.8%…
Then the Financials got punched in the face falling 1.6%, Communications lost 1.3% – another group that is still up 35% ytd…so expect to see that sector hit the skids if the mood goes from anxious to panic….Real Estate down 1.8%, Consumer Staples -0.7%, Healthcare off 0.9%, Basic Materials down 0.3% and Energy down 0.1%.
And again…what is all of this selling telling us today? Get ready for ‘normal rates’ – forget everything you learned over the past 12 yrs about 0 rates….…you see – rates at 5% are not ‘not normal’……in fact ask any baby boomer and you will realize that 0% or even 2% rates are the ones that are ‘not normal’….5% rates are in fact historically ‘normal’. But now – the market needs time to adjust and investors need to time to reacquaint themselves with history……The recent pullback is a bit shocking, but you have to understand– the recent surge in rates has happened at lightning speed….….10 yr. rates were 4% on August 1st….so in 11 weeks we have seen a 20% increase in 10 yr. rates while we have seen a 15% decline in bond prices…….something that is never supposed to happen….they are bonds (think type B personality) – not NVDA or TSLA (think type A personality) – there is nothing ‘sexy’ about them – they shouldn’t have such dramatic moves in such a short period of time….. – But it is what it is…. for now.
It also tells you that rates are going HIGHER – I am still in the 6% terminal rate camp…..which is up 50 bps from here……It’s also telling you that the big mega cap divvy paying stocks – that are supposed to offer a shelter in the storm – (think consumer staples & utilities) – cannot keep up with the 5.5% yield in short duration treasuries or even the 4.68% yield in the 10 yr.
In a nervous environment – investors do not want to own stocks just to collect a 3% or 4% divvy – if they are going to risk losing the capital in the process….so what happens – nervous investors all run for the door -ALL AT THE SAME TIME and boom…..down we go…. You are starting to see some of the talking heads on the street advocate for holding cash…. rather than buying stocks….in fact Double line’s Jeffrey Gundlach (well-known type B – BOND trader) told investors on Tuesday it’s ‘T-bills and Chill’.
Now let me remind you – there is nothing wrong with cash…. No one gets fired for holding cash when you can collect 5%…….but equity buyers ARE alive and well…. (They have to be – if not who would the sellers be selling to?). It is the buyers – in this situation – who are in control….you see – the sellers need the buyers….so the buyers get to price stocks…they get to say – “No, I’m not interested in paying $50 /sh any more….If you’re quick, I might pay you $48…and if you think about it too long, I’m dropping my bid to $47”. Do you see how this works? They create anxiety among the sellers, allowing them to take advantage of the anxiousness creating long term opportunity…..(And btw – it’s the same in the bond market, the real estate market, the retail market – just think about the coming ‘after Christmas sales that see retailers slash prices by 50% to get it out the door – You can see the people lining up outside the store to take advantage of the sale…..it’s the same mentality…..)
But before you go bitching and complaining about the buyers – consider what happens when the tone changes…. then it’s the sellers who are in control, right? When the buyers get anxious – the sellers turn the tables and become the ones who control prices…. Teasing the buyers by cancelling their offers and raising the prices… All you have to do is remind yourself about what happened in the housing market over the past couple of years…. A seller – whose house was worth $500k, put it on the market for $600k (because the housing mkt was HOT) and sold it for $800k…. None of the sellers complained when that happened – did they? I didn’t think so….
Which is why I say – don’t go lighting you hair on fire….don’t go and panic – unless of course you own crap…..If you have a well thought out plan and portfolio all you need is a strong stomach….delete the noise, watch what happens and when stocks you own become dislocated ONLY because of anxiety (not because of a fundamental change) – then swoop in…..be strategic, put money to work….remember what Uncle Warren says –
“Risk comes from not knowing what you are doing – be greedy when others are fearful. (Translation – buy the right stocks when they are throwing them out the kitchen window).
As you can imagine the contra trades all did well yesterday…the VIX (fear index) lunged ahead – ending the day up 12% but not before teasing + 16%…. The VIXY – the FEAR etf – gained 9.3% (nice) while the SH, PSQ and DOG gained 1.4%, 1.8% and 1.3% respectively. If you got long the SPXS (the triple levered S&P Short) you were up 4%.
Now add in the stronger JOLTS report from yesterday and all that tells you is that the job market remains HOT…something that JJ does NOT want to see….and that number suggests that we can expect ongoing upward pressure on wages – again something JJ does NOT want to see. We have the ongoing UAW strike (higher wages) and today we are going to see hundreds of healthcare workers take to the streets – striking for higher wages as well…… Be sure you understand the concept of Wage/Price spiral inflation – that is a throwback to the late 70’s – when this happened the last time…. higher wages, force higher prices which force higher wages – do you see the circularity? Do you see the position JJ put us in because rising prices in the spring of 2021 were transitory? Oh boy…. don’t make me go there…. I haven’t finished my coffee yet…can you imagine when I do?
We are now just 4 weeks away from the next FOMC meeting….and before we get there, we will have plenty of new data to add to the list…. The most important being the CPI and PPI due out next week and they are expected to be elevated – the key will be if they are even higher than the expectation….
US futures this morning is churning…. The Dow up 32, the S&P’s up 2, the Nasdaq is down 8 and the Russell is flat…..Investors not only have to deal with the economic data points but now we have to deal with the stupidity on Capitol Hill….Republican Congressman Matty Gaetz – tossed a hand grenade into the House chamber last night…..he along with 7 other GOP members – jumped the fence and saddled up with he Democrats to throw House Speaker Kevin McCarthy to the curb…….so to be clear – it was 208 Democrats and 8 Republicans that voted to oust McCarthy by a 216 to 210 vote leaving the House without a speaker for the first time in history…. handing the Democrats another victory…. Because now – Matty Gaetz and the other 7 Republicans are beholden to Hakeem Jeffries. They have succeeded in neutering the GOP…. This action alone is THE reason for absolute term limits for the whole group. Again, while this will not price stocks in the long term, it will create drama….and drama creates opportunity.
Eco data today includes Services PMI’s of 50.2 and 53.5 respectively…. Mortgage Apps and ADP Employment – which is expected to show a gain of 150k…. along with Factory Orders and Durable Goods.
In any event – we remain in a seasonally weak time of the year…. (Sept/Oct) so don’t stress, stick to your plan, keep putting cash into the ‘cash account of your long-term portfolio’ and then we can take a look in a couple of weeks.
European markets which all ended down more than 1.5% yesterday are struggling to advance this morning…. Stocks across the region are trying to shake off weaker eco data as well as rising bond yields. German bunds yielding 3% while bonds from the Mother Country (Italy) are yielding 4.8% (10 yr.) to 5.27% (30 yr.)
The S&P ended the day at 4229 – down 59 pts – this after testing as low as 4216……Keep your eyes on 4200….it is a KEY level…..a test there should hold, BUT if it doesn’t then the algo’s will go into overdrive and send wave after wave of sell orders….that will cause the buyers to do what? Step aside….and let prices fall further…. because in the end – “the price is what you pay, value is what you get” and lower prices for quality stocks -creates longer term value – Capisce?
We are closer to 4200 (support) than we are 4385 (resistance). Anxiety is up, stocks are down, yields are up, bonds are down, inflation is up, while sentiment is down. There is chaos on Capitol Hill and a hippie like NY judge slapped Donny with a gag order – now that’s funny and speaking of Donny – he is now in the running to replace Kevin McCarthy…. Now, how hysterical is that? I mean you can’t make this stuff up…. Who would ever believe that this is the state of affairs in the US?
Remember – as a long-term investor you need to eliminate the noise and stick to the plan – even when it feels uncomfortable …. the most important thing you can do now – is not panic….
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
Sources: Bloomberg, CNBC, Reuters, Wall Street Journal
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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, which may not necessarily align with our firm’s standpoint.
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Kenny Polcari is the Chief Market Strategist for SlateStone Wealth. Neither Kenny nor the partners of SlateStone Wealth are compensated in any manner by the issuers of any securities mentioned in the publication.
Spaghetti Fini w/Leeks & Pancetta
Simple to make and it presents beautifully….
For this you need: Butter, olive oil, 2 medium leeks, chopped – trim the bottom and the top off and then use the stalk, s&p, chopped fresh chives the Spaghetti, diced Pancetta, heavy cream and fresh grated Parmegiana Cheese.
Bring a pot of salted water to a rolling boil.
On medium heat melt the butter and a splash of oil in sauté pan. Add leeks and cook, stirring occasionally until softened, about 4 minutes. Add diced pancetta – sauté for a couple of mins and then add in the heavy cream…. Cover and keep warm.
Add the pasta to the water and cook until al dente – maybe 8 mins…. Strain – always reserving a mugful of water. Toss the pasta into the sauté pan with the leek sauce and stir to combine. If you need to add a bit of water – do so now to keep it moist. Add chives, toss and serve immediately. I always like fresh parmegiana with any pasta dish…so always have that at the table for your guests to enjoy.
Buon Appetito
