Things you need to know
- 19 days and counting.
- Markets remain a bit skittish but did hold the trendline.
- Energy +30%, Financials – 10%.
- Transports are the best performers ytd.
- Oil down, Yields down, Gold down.
- Try the Lasagna Pinwheels.
Good morning.
So much has happened since I went skiing.
The action over the past couple of days reminds us how markets process information — fast, emotional, and often a bit exaggerated as investors, traders and algo’s ‘shoot first/ask questions later type of reaction all before reality settles back in.
Look – we are now 19 days into this latest middle east conflict – and global markets have not collapsed at all. They reacted initially as expected, stocks sold off and the S&P tested and retested its long term trendline (what did I tell you?) – representing a move lower by just 4.9% – since the conflict began. Hardly a disaster at all.
Now, yesterday started out strong and while the market did end the day modestly higher, it finished well off the highs seen earlier in the session, suggesting that investors are beginning to carefully recalibrate.
Look – the markets are doing what they always do – assess and price risk. But during periods of uncertainty – they assess and reprice that risk much faster. The knee-jerk reactions tend to reflect headline emotion rather than reality causing volatility to spike until cooler heads prevail.
At the end of the day – the Dow gained 46 pts, the S&P up 16, the Nasdaq gained 105, the Russell added 16 pts, the Transports added 200 pts, the Equal Weight S&P gained 40 pts while the Mag 7 added 151 pts.
Just for clarity — the two worst performers so far this year are the Mag 7, down about 7.1% YTD, and the Nasdaq, off 3.3% YTD. Much of that weakness has been driven by the narrative that the AI trade has run too far, too fast, prompting investors to question whether spending on AI infrastructure will slow or whether valuations had simply gotten ahead of themselves.
Now you all know my view on that — I do not subscribe to the negative AI narrative. If anything, the recent sell-off in technology looks more like a reset in expectations rather than the end of the story. And historically, those types of resets often create opportunities for investors willing to look through the short-term noise.
What might surprise some investors, however, is which sector has actually been the best performer so far this year — and that’s the Transports, up about 4% YTD, despite all the volatility in energy prices and the recent spike in oil. Under normal circumstances, higher fuel costs would be a headwind for transportation stocks, yet the group has shown resilience, suggesting that investors still see underlying economic strength in the US economy.
The S&P is down about 1.9% YTD, but the Equal Weight S&P is actually up about 2%, which tells us that the weakness has been concentrated in the mega-cap technology names rather than across the entire market. A theme I have tried to make clear and one that is confirmed by the action in the Mag 7 and Nasdaq.
The Dow is down 2.2%, while the Russell is up 1.5%, another indication that money has been rotating away from the mega-cap names and into the SMIDS – Small and Mid-Caps. And what all this tells us is that this hasn’t been a broad market breakdown — it has been a leadership shift. And those kinds of shifts happen regularly as investors rebalance portfolios and reassess valuations.
Now, of the 11 major sectors in the S&P – Energy is up 30% ytd*, followed by Utilities up 9.7%, Consumer Staples up 9.5%, Basic Materials up 8.3%, Industrials up 7% and Real Estate is up 6%. The other 5 sectors are lower – led by Financials down 10%, Consumer Discretionary down 5.9%, Tech down 5.2%, Health Care down 3.7% with Communications down 1.3%.
*Do not be surprised to see oil give back some of those gains at some point – the trader types are always happy to ring the cash register and if we get hit with a negative headline, investors will sell the outperformers first. And Energy is the outperformer so far this year.
The weakness in financials – stands out and can be attributed to a couple of factors – the yield curve, the uncertainty about the economy, regulatory pressure and credit concerns around private equity. With some analysts screaming ‘fire’ while others are calling for calm. But here’s the point – if the economy proves more resilient and the yield curve continues to normalize, financials could quickly move back into favor, because the fundamentals of the largest banks remain very strong. – so again, you need to ask – is this opportunity knocking?
Now all of this is unfolding as the geopolitical tension rises. Think – the conflict with Iran, the lack of unified support from some NATO partners, the conflict between Russia & Ukraine, the removal of Maduro and the volatility that those headlines continue to inject across asset classes. And that volatility has been showing up everywhere – think stocks, bonds, oil and precious metals as investors seek safety.
Eco data today includes 3 important things – Mortgage Apps – 10.9%. OK – not so good but recall the March 4th result was up substantially over the expectation – so for me, it’s a move back to the trendline.
We are getting the February PPI – Producer Price Index – and that is expected to be mixed. Top Line PPI m/m is expected to come in at +0.3% down from +0.5%. Ex Food and Energy m/m of +0.3% down from +0.8%. PPI y/y is expected to be +3% up from +2.9% and Ex food and Energy of +3.7% up from +3.6%. What they will point to are the y/y numbers because they fit the negative narrative…
And then at 2 pm – we will hear from the FED – and the market is expecting nothing, no change and no real forecasts because the reality is – there is way too much uncertainty now….Last week – I told you that the expectations going forward also point to declining chances of future rate cuts in June and in September – both months that many investors were betting on. What was a 55% chance of a rate cut in June is now just 19% and September – that has fallen to 22%.
The key point? Markets are adjusting to the idea that the Fed may have to stay patient longer than investors had hoped, especially if energy prices remain elevated and inflation proves sticky and that will put a lid on stocks until we get more clarity on energy.
Oil is down $1.60 – trading at $94.65…. News that Iraq is sending oil from their fields in Kirkuk thru the Kirkuk/Ceyhan pipeline that flows thru Kurdistan and into Turkey’s mediterranean port – bypassing the Strait altogether and that headline is being credited for the weakness. Iraq is also talking to Iran about letting their tankers use the Strait with no fear of retaliation. This highlights a delicate balance as Iraq tries to protect its oil while at the same time protect its economic stability.
Now gold — which has been on a tear — is cooling down. This morning it’s down $53 to $4,953, slipping below trendline support at $4,980. And while gold is still up about 14% year-to-date, it is now down roughly 11.5% from the January high of $5,595, as traders begin to reassess the macro picture. Part of the pressure comes from the rising dollar and the possibility that interest rates may stay higher for longer.
So, while geopolitical tension continues to support the longer-term case for gold, the move lower is more about positioning and interest-rate expectations than a change in the broader narrative.
And that brings us to volatility. The VIX fell 4.9% yesterday ending the day at 22.37 – in a sign that the market is beginning to digest the news flow rather than react to every headline. The VIX is now down 38% off the recent high – post the launch of Epic Fury – suggesting that investors are transitioning from fear-driven trading to more fundamental investing.
So, what does all of this mean? It means the market is entering a wait-and-see phase. Investors are looking at three things very closely right now:
Whether oil prices continue to climb or begin to stabilize. What the Federal Reserve signals about the path of interest rates and whether economic data confirms a slowdown or continued resilience.
Remember – volatility around geopolitical events often creates short-term noise, but rarely prices stocks in long term unless it disrupts the global supply system in a sustained way.
European markets are higher…Spain up 1.2%, France up 1%, Italy up 0.9%, Euro Stoxx and Germany up 0.8% while the UK is up 0.3%. EU inflation data is due out later today and monetary policy decisions are expected from the ECB, BoE, Riksbank and the Swiss National bank on Thursday. Expectations are for no changes.
US futures are up! Dow futures up 220 pts, S&P’s up 32 pts, the Nasdaq up 150 while the Russell is up 11 pts. The action both in Europe and the US is about the price of oil (coming down) even as global markets remain on high alert.
The S&P closed at 6,716 up 16 pts. Recall that on Thursday I said –
“My gut says a test of the long term trendline is next – we almost kissed it on Monday (the 9th), and we will attempt to kiss it again (maybe Wednesday?) – the KEY? It has to hold…”
In fact – we kissed it on Monday (the 16th), and it did hold….and that is a positive. We are now smack in the middle of the long-term trend line at 6,604 (support) and the intermediate trend line at 6,840 (resistance).
At this stage, markets appear to be pricing more uncertainty, not a catastrophe. And that distinction matters. Expect trading to remain choppy as investors navigate the headlines and position themselves ahead of what the FED (JJ) might say and how the Iran conflict might end. But underneath the volatility, the market continues to do what it always does — constantly assess and reprice risk, and as it does that, there is always an opportunity somewhere.
Call me at 561-931-0190 and let’s talk about whether the risk in your portfolio actually matches your tolerance — because this works both ways. You may be taking too much risk… or not enough to reach your goals.
Take good care,
Kp
[email protected]
Source: Bloomberg, CNBC, Reuters, Wall Street Journal
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Lasagna Pinwheels (For Easter)
This is simple to make and so good for you.
For this you need: Fresh make lasagna sheets, sliced ham, provolone cheese, Bechamel sauce, and fresh grated Parmegiana.
Start by making the Bechamel sauce.
Now – lay out a sheet of the fresh lasagna. Spread the bechamel sauce all over it.
Next – put down a slice of the boiled ham and then cover with the sliced provolone cheese, and another layer of the ham.
Then add some grated parmegiana and then roll the lasagna sheet to make a ‘log’.
Take a baking dish and spread some bechamel on the bottom.
Cut the log into 3 equal parts and place it in a baking dish. (on its side, not flat down). Continue until you have filled the baking dish.
Now – spread some more of the bechamel sauce on top. Cover with foil and place in the oven. Bake at 400 degrees for 30 mins. Then uncover. Turn the oven to broil and broil it for just a few mins (maybe 5 max) – to take on a golden color – careful not to burn.
Serve immediately… You can thank me later.
Buon Appetito.