Things you need to know
- Portfolio managers went on a buying spree to dress up their windows for month end statements
- Substantially oversold names were the biggest beneficiaries
- Different FED members all attempt to soothe investor concerns – but did they succeed?
- Earnings continue to impress – UPS crushes it and GOOG after the bell
- Try the Pork Cutlets wrapped in Prosciutto
And the buy the dippers came back strong…. the window dressing that I discussed yesterday – was alive and well…. stocks rallied hard all day long and by the time the closing bell rang both the Nasdaq and Russell proved to be the winners -both rising better than 3% ….and that makes the most sense – right? They are the ones that have come under the most pressure and the ones that offer substantial upside – Names like PYPL +5%, ARKK +9%, TLSA +10%, AMZN +4%, TDOC +9%, and SPOT +13.5% (much of that being credited to the Joe Rogan apology post the Neil Young and Joni Mitchell saga – which I think is baloney – but that’s another story), SHOP +10%, PLTR +8%, NVDA +7% – and the list goes on, much of the stunning moves a direct result of these same names coming under pressure over the past 4 months as the great re-pricing continues – re-pricing that is directly credited to the coming expected moves by the FED and other central banks.
But if you think that the volatility is over…think again and while we may see a bit more upside – I, still think that we must test the lows, put in on January 24th – the day the market felt like it was convulsing…and the day that there was lots of internal damage done to the markets. That being said – making a bottom is a process and is not done in one or two days….In any event – by the time the bell rang – the Dow advanced by 406 pts or 1.2% , the S&P gained 83 pts or 1.9%, the Nasdaq surged by 470 pts or 3.4%, the Russell gained 60 pts or 3% and the Transports ended the day higher by 235 pts or 1.5%.
All kinds of contradictory commentary coming from all ends of the spectrum…. Over the weekend – there were massive splits on the direction of interest rates and what the FED may or may not do. Minneapolis’s Khashkari says that a spring pause is not out of the question, while Atlanta’s Bostic says that a 50-bps rise may be in store for March. Kansas City’s Esther George chimed in with this commentary
“You always want to go gradually, in the economy. It is in no one’s interest to try to upset the economy with unexpected adjustments. But I do think that the FED is going to have to move deliberately in its decisions to begin to withdraw accommodation.”
San Fran’s Mary Daly – a known dove chimed in saying that the FED is not behind the curve and that it needs to remain ‘data dependent, gradual and not disruptive’
But in the end – the message from these 4 FED members was simple – they will back interest rate increases that do not disrupt the economy – as they try to soothe investor nerves….and that was seen as more dovish rather than hawkish.
Now remember – Esther George, and Jimmy Bullard are voting members of the FOMC – but Khashkari and Daly are not, so their opinions carry less weight in the context of the broader conversation but do not discount how the FED will use their voices to plant the seeds and create the conversation. Now this is all aside from what the big investment banks keep saying…. which is that we can expect anywhere from 4 – 7 rate hikes in 2022…. which could mean that we see the FED move on rates at every meeting through the end of the year…. totaling potentially a 1.75% move in fed fund rates if we have 7 – 25 bp moves.
In the end – it was a good day for stocks…. but for the month – it was a different story…. the Dow lost 3.3%, the S&P down 5.2%, the Nasdaq down 9%, the Russell lower by 9.6% and the Transports gave back 7%. But that is over now, and it is a new month filled with new data points and continued speculation about the next move which will be tied directly to the new environment which will mean tighter liquidity and lower growth. As such – we need to prepare ourselves for both lower returns and higher volatility and that has been the dominant theme in my commentary for the past 3 or 4 months.
So, let us move forward – understanding what it is and what it will be so instead of rehashing the argument – volatile markets and a hawkish FED – let us make 3 points that I expect will characterize what’s ahead.
Markets have moved lower very quickly in the past month, so some stabilization/reversion to the mean can be expected (oversold conditions support a bounce – which is what we saw on Friday and yesterday)
I do not see signs that the current market weakness is suggesting an acute case of economic weakness (yet), which might allow this correction to be shorter and shallower – but if the FED does become more hawkish than what the market expects then I reserve the right to change my mind. And the market is now expecting five hikes….as per the Fed Fund Futures.
I remain in the camp of value overgrowth for at least the first 6 months as we navigate the road ahead. Investors should expect this choppy, low-return environment to continue as this new phase of tighter liquidity is just beginning.
Market action is not bad enough yet to spark the Fed to pivot to a more accommodative stance – although Khashari did say it was possible – but high inflation does put the Fed between a rock and a hard place. Are they stabilizing markets or are they fighting inflation? Are they willing to let the broader market correct even more? What is their pain point? 10%, 15%, 20%?
Markets can still bounce and even reach new highs in this new environment if earnings remain strong, but it is likely things will get worse before they get better. Many indices and are flashing signs of being “oversold”, supporting this bounce that we are seeing…. but the pace, size, and volume of the bounce will tell us a lot about what is next…… If the bounce is rapid, with a surge of buying volume, you could see this as a sign that investors are eager to get back in…. possibly supporting a move back to prior highs. However, if the bounce is tepid and with low volume, this could be a sign that investors lack urgency to increase their exposure and could even be more inclined to sell into coming rallies.
The Put/Call ratio reveals a surge in demand for downside protection but has not reached levels seen in prior major lows…..While it is up from late December, it is not as high as it was during the Covid meltdown in 2019….but it is something to keep your eyes on….and this can also be seen by looking at the VIX (fear index) – which spiked in mid-January but has since retreated a bit – suggesting the fear experienced by investors is waning – supporting this move higher…..but is still elevated and could easily turn higher again causing stocks to test lower.
Another way to see this is in demand for safety…. think Utilities – XLU – 3% ytd and Consumer Staples – XLP – 1.4% ytd (vs. the broader mkt) – both sectors I have also been commenting on as a place to store some cash during the storm and while the ytd returns are negative – they are ‘less’ negative than the broader market.
Ok – this morning – US futures are under some pressure…. with the Dow down 40 pts, the S&P down ten, the Nasdaq off by 38 pts and the Russell down by 7 pts. Russia/Ukraine continues to simmer on the back burner and that is driving oil even higher…. with WTI now trading at $88/barrel – with predictions of a swift spike to $100 if the confrontation turns into a reality.
The 10 yr. treasury is now yielding 1.78% as it continues to churn right here…. but the next move is up – the market action will be determined by just how swift that move up is.
Eco data today includes: Markit US Manf PMI of 55, Construction Spending of +0.6%, ISM Manf of 57.5 – all bullish reports if they come in as expected. Tomorrow brings us the ADP employment report with expectations of an increase of 184k new jobs…while Friday brings us the NFP report. (Which the administration is already positioning itself for a ‘weaker’ report – trying to spin a negative as a positive.)
Earnings will continue to drive the micro commentary – as we expect results from about twenty names…. this morning we have already seen beats from TECH, ST, SWK, ENTG, UPS, and PHM. After the bell – we will get results from GM, SBUX, GILD, AMD, PYPL and the mother of them all – GOOG.
European markets are all up about 1% this morning…. Monetary policy decisions are due out from the BoE and the ECB and that will help shape investor reactions this week. Earnings will continue to drive the individual action while the Russia/Ukraine situation will continue to drive the geo-political conversation. Eurozone GDP slowed in the 4th qtr. – rising only 0.3% – causing some concern for what the ECB will say. At 7 am – the FTSE is +1%, CAC 40 + 1%, DAX +1.1%, EUROSTOXX +1%, SPAIN +1.2% and ITALY +1%.
Bitcoin is trading at $38,500 and Ethereum at $2,750 – both up a bit over yesterday but remain in a cautious pattern. Bitcoin is in the $30k/$43k trading range…. while Ethereum is in the $2300/$3300 range. – I am doing nothing now, not adding or subtracting until I see more clarity.
The S&P closed at 4515- rising 83 pts or 1.9% sending it up and thru long-term resistance at 4436. It is now in the 4436/4570 range…. I am still in the camp that we must test the lows put in on January 24th….4,222 before this is over…. Just to be clear – there has been a lot of technical internal damage done to the markets, so it will thrash around until it gets clarity. The FED holds the key right now, what they say does matter, but it will be what investors HEAR that will drive the action.
Take Good Care
Chief Market Strategist, Consultant
kpolcari@slatestone.com
Pork Cutlets Wrapped In Prosciutto
For this you need: Pine nuts, Raisins – plumped in hot water and then drained, capers – rinsed and soaked in cold water, finely grated Grana Padano Cheese, chopped flat leaf Parsley, butter, chopped garlic, s&p, pork cutlets (pounded thin), prosciutto, s&p.
Pre heat the oven to 475 degrees.
Chop the nuts, raisins, and capers and mix well. Add in the grated cheese and parsley – set aside. Season the cutlets with s&p.
In a non-stick pan – melt some butter and sauté the garlic over med heat… Now add the seasoned cutlets and cook for no more than 2 mins per side. Now remove from heat. Next dress each cutlet with the nut/cheese mixture – roll it up and wrap in a slice of Prosciutto di Parma (you can use a toothpick to hold it together). Place in a baking dish and top with a touch of butter. Bake in the oven for 10 mins and remove.
Serve immediately with a tossed greens – simple – Arugula & spinach dressed with s&p, oregano, squirt of fresh lemon, touch of olive oil.
Buon Appetito.
