Things you need to know –

–         Stocks were on fire in January!

–         Is the Fed about to throw water on it today at 2 pm?

–         More earnings and more macro data today

–         ECB and BoE will report tomorrow.

–         Try the Orecchiette w/Sweet Sausage and Roasted Cauliflower

Well – we are through the first month of the new year…and stocks (along with a range of other assets) appear to be on ‘fire’ – think Bitcoin +40% and Bonds up 3.5%…..the Nasdaq rising by 10.68% for the month – the Tech ETF up 9.25%, Semi’s – SOXX +16%, Communications – XLC up more than 14.75%, the Russell and Transports fighting for second place up 9.7% and 9.4% respectively – small cap growth – IJT up 7.3% while mid cap value – IJJ is up a whopping 11.5%, individual transportation names helping to pull that index higher – FDX + 12%, DAL + 19%, UAL + 29%, ODFL + 17%, ….the S&P added 6.1% while the Dow Industrials trailed all 4 of these – rising by only 2.8%.  European markets also up nicely with Italy taking the lead up 12.8% followed by Spain + 10.5%, Eurostoxx up 9.9%, France + 9.4%, Germany +8.7% and the UK up 4.4% – It was an amazing month on a number of levels…..

The FED along with the ECB and the BoE – are all expected to remain hawkish – sending rates higher – but that has done little to temper the tone of the markets.  Investors appear to be looking through the next 2 – 3 months and betting that hawks will turn to doves and rate rises are about to pause and then pivot – and yesterday’s Employment Cost Index only added fuel to that argument…..this index rose by 1% – down from the 1.2% last month – and this ‘suggests’ that wages are cooling….which suggests that the wage/price spiral inflation should begin to cool as well and that will help slow demand (I think that’s a bit pre-mature, I need to see more evidence of cooling wages before I concede) …..….and that excitement could not have been clearer yesterday….Investors/Traders and the algo’s took stocks higher – AHEAD of today’s FOMC statement….the Dow up 370 pts, the S&P up 60 pts, the Nasdaq tacked on 200 pts, the Russell gained 46 pts and the Transports added a whopping 500 pts or 3.5% .  Here is the rub though, the FED has been very clear – rates will continue to rise and they will remain higher for longer and rate cuts (or pivot) is not currently part of the narrative…..additionally, the higher stocks (and other assets go) the more difficult it will be for JJ to control (destroy) demand…..  The wealth effect of higher prices for a range of liquid assets is not helping to control the demand effect…..

Many now hoping that the old Wall St adage holds true – ‘As January goes, so goes the year!’ – We can only hope!  Now, like I said yesterday – while the inflation story is cooling and trending lower – Unemployment is still at historic lows, and we are adding upwards of 175k new jobs every month…..wage pressure while cooling somewhat has not collapsed and inflation is running higher than the rate of wage gains…so many American’s are still running short at the end of the month…..in the end – My sense is that investor expectations are just a bit frothy – allowing the markets to get ahead of themselves…..just a bit…..and again – I am a long term bull, not betting against American ingenuity….but I remain just a bit cautious still…..because the FED is not done yet and the balance sheet is still ‘bloated’ – at $8.5 trillion  – the ‘reduction’ not coming as fast as the FED told us it would – and that remains one of the wild cards……

What I find so interesting is that traders are betting hard that they are right and the FED is wrong….FED Funds futures suggest a 4.9% terminal rate (vs. the FED’s comments that it is closer to 5.25%) while they also predict not 1 but 2 rate cuts before the year is out – something the FED won’t even address – citing the ridiculousness of that thought process……. But, it is early in the game and so much can happen….This is exactly what makes it so interesting and dynamic….So, sit tight and remain awake….

That being said – you know me – I am not one to try and ‘time the markets’ at all, I push for investors to remain invested and take advantage of the opportunities presented, I don’t chase names just to say that I own them, I add to names that are arbitrarily dislocated due to short term reactions by traders and algo’s….MSFT is but one of the most recent examples of this…..recall the reaction by the algo’s and some traders….when they announced…they took the stock down hard – down 12 pts or 5+% to $230/sh… ….It’s ridiculous,  MSFT is a screaming buy….see my appearance with Liz Claman on the Claman Countdown on FoxBusiness

https://video.foxbusiness.com/v/6319248441112#sp=show-clips

But it was at that moment ‘dislocated’ (think algo’s) for very short term reasons…. nothing really fundamental changed for MSFT – so the sale that took place was an opportunity for the long term investor….MSFT has since recovered and closed last night at $247.80 – a 7% gain off of the short term disruption 5 days ago.

OK – so it’s Wednesday and there are some data points to pay attention to – Mortgage apps is NOT one of them…..ADP employment though, is…they are expected to show a gain of 180k jobs…a stronger number will suggest the FED remain on course – a much weaker number say sub 150k will give fuel to the fire for some – that the FED needs to pause….S&P US Manufacturing PMI of 46.8 remains in contractionary territory and that is good (as far as the Fed is concerned….)  Construction spending m//m of 0%, ISM Manufacturing of 48 (again contractionary) and ISM Employment – will it come in strong or weak? And then at 2 pm – we get the announcement….and it is not a surprise at all……rates are going up 25 bps….not 50 and not 75 and they are certainly not pausing….the reaction will be about what he says at the 2:30 presser…..expect the journalists to try and get him to sound dovish….they will ask the same question – 11 different ways to see if they get the same answer….it’s comical really…..In the end – until the labor market softens and until wage pressure soften and until demand softens – don’t expect JJ to cave or change his narrative…Period. 

Oil – has bounced off of its recent low of $76.55 and is trading at $79.30…..traders marking time until the Fed announcement and until they hear the latest news on US crude stockpiles – the API (American Petroleum Institute) reported that US crude stockpiles grew by 6.3 million barrels – slightly more than expected.….Additionally, we are all waiting for any word out of the OPEC+ meeting today…..the expectation is for OPEC+ to stay the course – not cut and not increase production…. WTI is trading in ‘contango’ and that means the ‘front end deliveries’ are trading at higher prices than later in the year deliveries and that suggests oversupply and lower prices ahead….Brent on the other hand is trading in ‘backwardation’ meaning that future deliveries are trading at higher prices and that suggests expected demand increases….so there you go…both points of view – up and down….where are you? Remember – street analysts are calling for oil to trade in the $85/$95 average range for the year – meaning that oil has to go substantially higher to make this prediction come true.

The US dollar index – DXY continues to trade in the 101/102 range – as it also awaits the FED move….dovish expectations are forcing the dollar lower or at least keeping it right here….a more hawkish FED will see the dollar rise….and that should put pressure on a range of commodities – oil being just one.

Gold is also holding steady at $1945/oz….it too awaits the FED decision

Treasuries – remain inverted….is there anything else to say?  3 month rates yielding 4.5% while the 2 yr. is yielding 4.2%….the 10 yr. is yielding 3.48%….

US futures are down as the month begins…Dow futures down 135 pts, the S&P’s down 12, the Nasdaq lower by 14 and the Russell is down 5.  Everyone bracing for the FED commentary….well, maybe not bracing – that’s a bit dramatic, no?  Let’s be clear – no one should be surprised at all by what we are going to hear….rates are going up and they will remain up for longer.  Period – that’s the message……nothing more, nothing less….. But, the show is always fun to watch as they try to ‘trigger’ him and cause him to say the same thing 11 different ways….in the end – it is what it is….Rates are not going down and the FED is not pausing now or in March….May if we are lucky….and not even that is guaranteed.

European markets are all slightly higher…up between 0.1% and 0.6%..  Eurozone inflation on the top line appeared to slow more than estimates BUT the core measure remains sticky – (does that remind you of anywhere else????  Recall that last week’s PCE rose by 4.4% but when you added in Food and Energy it rose by 5% suggesting that the things that matter most to Americans remain elevated or ‘sticky’) ….And that stickiness in Europe is sure to heat up the debate at the ECB – where they are expected to raise rates tomorrow by 50 bps.

And it’s more earnings….but the truth is other than those that really miss – the focus will be on the FED….look for results from HUM, JCI, TMUS, MO, TMO, and after the bell – watch for META, MCK, COST, MET etc….

The S&P closed the day at 4076 – up 58 pts…and holding well above the trendline…..we are now close to kissing the next century mark – 4100….a level last seen in September of 2022.  We are about to see a golden cross happen – that is when the short term trendline pierces up and thru the long term trendline….and if that happens – it suggests further upside ahead….(technically) but the FED could disrupt it…..We will soon find out.    

Remember, you are a long term investor – build it and stick to the plan….trying to pick tops and bottoms is NOT what you do….it’s about building that strong foundation….dollar cost averaging into it and reinvesting all the divvy’s (unless of course you need the divvy’s as income…if not -put them back to work).   Don’t’ be afraid to buy your names on weakness (as long as the weakness is not a fundamental shift in the sector or the name). 

Take good care.

Chief Market Strategist
kpolcari@slatestone.com

Orecchiette w/Roasted Cauliflower and Sweet Sausage

Another simple yet delicious dish that you can make in about 45 mins.

For this you need: Chopped Garlic, cauliflower, onions, sweet sausage, s&p, olive oil, Fresh grated Parmegiana and the Orrechiette (little ear shaped pasta).

Preheat the oven to 450 degrees.

Toss the cauliflower in a bowl with fresh chopped garlic, olive oil and s&p. (just enough olive oil to coat – do not drown it)  Spread out the cauliflower on a cookie sheet and roast in the oven for about 30/40 mins.  You want it to just begin to turn golden in color.  Remove and set aside.

While this is happening – in a large sauté pan – add some oil, more chopped garlic and sliced onions…sauté until soft and translucent.  Now add in the sausage meat – (remove it from the casing) and brown nicely.  Season with s&p.

Bring a pot of salted water to a boil and add in the pasta – after you have removed the cauliflower from the oven.

Boil the pasta for about 8 mins – or until aldente.  Using a slotted spoon – add the pasta directly to the sauté pan with the sausage.  Now add in the cauliflower and mix well.  If you need to – add in a ladle or two of the pasta water.  Mix well and toss in a handful or two of the cheese.  Serve immediately – always having extra cheese on the table.  Enjoy a crisp, chilled white wine with this dish.

Enjoy!