Things you need to know
– The FED has spoken – will investors listen or continue to ignore the message?
– Stocks churned yesterday and are attempting to move up this morning
– Oil – falls further as inventories build….and the dollar remains strong
– Gold & other precious metals under pressure because of the strong dollar too.
– Try the Marinated Pork Chops
Again, I’ll say it – Hello???? Anyone home? Investors/Traders and Algo’s got little to NO confirmation that the FED has any interest in slowing, stopping or cutting rates anytime soon….In fact – the FOMC mins released yesterday at 2 pm revealed little to nothing new about the latest ‘FED Think’….and corroborated the idea that rates are expected to continue to go up and remain up for longer…..and what that means is this
THE FED IS IN NO RUSH TO CUT RATES
So, can we get off that horse now? Is there anyone out there that thinks the FED is about to pause and then pivot in the late summer / early fall of 2023?
And to be sure – the fed fund futures market reflect just that……the rate index that is linked to the June FED meeting is now reflecting a 5.3% level……(which is 75 bps MORE than where we are right now) – which means what? It means that we can expect 3 more 25 bps moves up – think March, May and June! (Although there is a 25% probability being priced in for a 50 bps move in March) And to add insult to injury – the futures market is now pricing in a higher peak rate – taking it to 5.5% up from 4.9%. I guess we will get a mea culpa from Jeffrey Gundlach? Remember – he told us to ignore what the FED was saying that ‘they didn’t know what they were doing and that investors need to pay attention to the bond market. That rates would peak out at 4.9% and then be lower by year end…’ How’s that working?
The funny thing is that investors are paying attention to the bond market and the bond market is saying that we can expect higher rates….and we saw that on Tuesday…when the indexes ‘came under pressure as bond prices fell and rates rose – with the 10 yr. kissing 4%….the algo’s went into a tail spin, cancelling inline bids (leaving a void in demand) while ramping up sell orders (creating a rise in supply) –with this year’s favorites getting whacked…..as investor psyche got challenged. You see, it’s not that complicated – it’s really Econ 101 – It’s all about Demand and Supply and what that does to prices on a short term and long term basis….
So yesterday – the back and forth in trading continued to reflect the changing mindset as investors parse stronger AND weaker eco data, stubborn inflation in the parts of the market that matter to you and me and comments by many if not all Fed members about where rates are going. Add in the comments from some of the biggest investment banks – (that talk their books) and you have ongoing confusion for investors. While it wasn’t more of the disaster we saw on Tuesday – it wasn’t a resounding vote of confidence either. At 4 pm – the Dow gave up another 90 pts, the S&P lost 7, the Nasdaq gained 14 pts the Russell added 6 and the Transports lost 92 pts.
All of this has caused investors reassess the landscape and that has led to a steep jump in bond yields….taking the 10 yr. yield up sharply…..going from a low of 3.36% on February 2 to 3.95% yesterday…..a 17 % increase in the yield. We saw short duration bond yields (6 month and 1 yr.) pierce 5% on Tuesday – do you realize the last time we saw that was in June 2007 – at the start of the GFC (Great Financial Crisis) when financial markets around the world collapsed and then circled the drain. By December 2008 rates on those bonds plunged to zero and then remained there until late 2015 only to surge up to 2.2% before collapsing again when covid swept across the globe – going back to zero until the start of 2022 – when JJ drew the line in the sand – committing to ‘undo’ the inflation that he and the FED members were mostly responsible for. I say mostly – because the Bidens didn’t help the situation….but let’s not go there right now…..
Do I need to remind you that when the CPI pierced 2% back in April 2021 – the level that was supposed to signal a change in policy (but somehow didn’t) – he, along with a parade of other bankers told us ‘not to worry, that they had this, that it was a temporary blip’ – I think the word was ‘Transitory’? All while they continued to stoke the fire, keeping rates near zero while continuing to buy mortgage backed securities to ‘help stabilize the housing market’. Inflation ran from 1.6% in March of 2021 to 9.1% by July of 2022. Does that ring a bell to anyone? And so, here we are…..the gains in the S&P that began in November of 2020 – when the S&P was trading at 3550 ran until January 2022 – topping out at 4800 (a 35% gain) – got wiped out in the next 10 months….as confusion over monetary policy and fiscal policy weighed on markets and investor psyche. Interest rates went from zero to the current level of 4.25%- 4.5%…. All while many cried UNCLE – begging the FED to stop the madness…. but they didn’t and apparently are not going to anytime in the near future….and so, it’s time to reconsider how you put investment dollars to work.
And low quality, sexy names, would not be one of the places that I would consider…I think the environment remains antsy but that does not mean there are not opportunities to put money to work in the equity markets, it just means you might have to consider remaining a bit more defensive in nature. I’m still in the overweight the STPN (Stuff the People Need) camp. So, big, boring but beautiful US mega cap names, that are good divvy payers and grow their dividends are just one place to start….And you can find those in almost every sector out there…. You can then complement that core portfolio with some of the names that have gotten clobbered (but remain key to a portfolio) to add alpha to your performance.
And we’ve seen just that so far this year…..Semi’s, Disruptive Tech, Communications, Consumer Discretionary have all proven to be those complements that I refer to….I wouldn’t though, be chasing anything – you see how fast the mood can change and patience is a virtue.
Yesterday saw a bit of a rebound – slight as it was – in those sectors that took it on the chin on Tuesday….Consumer Discretionary, Communications, Basic Materials, Housing, Retail, all showed slight gains while the rest of the market continue to digest the beating they took on Tuesday.
Oil got punched in the face again yesterday falling $2.50 or 3.3% to end the day at $73.85…..The API (American Petroleum Institute) reported that US crude and fuel inventories rose by 9.9 million barrels – vs. the expected 2.1 million barrels – stoking worries about demand. In addition the rising dollar isn’t helping oil move up….as a rising dollar will put pressure on all commodities while analysts remind us that additional cuts by Russia – beyond what they already promised coupled with China’s reopening will tighten supplies and that will help support prices. This morning – oil is up 65 cts at $74.60. Expect to hear the Saudi’s any day now opine on what they want oil prices to be. We are now at the lower end of the recent trading band where I think it will find support once again.
The dollar index remains up….trading at $104.57 – up 3.7% since early February and likely going higher on the back of what we learned yesterday about future FED moves. And that will continue to be a small headwind for oil as well as gold, silver and other precious metals.
As noted above bonds continued to fall sending yields up…. the 10 yr. now kissing 4%, the 2 yr. kissing 4.7% while shorter duration 3-month bills are kissing 4.8% and 6 month bills piercing 5%. Yesterday saw Mortgage Apps fall by 13% on top of the 7.7 decline in the prior week….30 yr. conforming mortgages are now 6.6% for someone with a 730 – 750 credit score with 20% down….and only going up as rates go up…so do not expect a bounce in housing prices this selling season that is now under way.
This morning US futures are attempting to push up – taking the FED minutes in stride….….….Dow futures +90, S&P’s up 20, the Nasdaq ahead by 110 and the Russell up 7. Eco data today includes Chicago Fed Survey – exp of -0.25, and the Kansas City Fed Survey of -2, 2nd revision to 4th Qtr. GDP at 2.9% unchanged, Initial Jobless Claims of 200k – up slightly over last week, Cont. Claims of 1.7 mill also up slightly over last week.
European markets are up…. about 0.5%. They are also taking the Fed minutes in stride….Eurozone CPI came in as expected to no surprise there.
The S&P lost 7 pts to end the day at 3991 after trading as low as 3976 and as high as 4017. I am still rooting for S&P 4000 to hold…..so it remains the key level to watch… Futures this morning are trying to push higher…so this remains a critical juncture…. I still think Mikey Wilson is wrong….about where stocks are going….(down 26%) but I remain in the camp that we will see continued volatility ahead until we get some calming in the economic macro data points. Could we see lower prices in the next week? Sure, but I am not forecasting a hurricane.
NVDA a fan favorite is soaring this morning…up 8% ($224 bid in the pre-mkt) on the back of better earnings, better guidance and better AI mania – positioning themselves smack in the middle of the game….price targets for the stock going up at all the investment banks…Piper Sandler takes it to $275, JPM takes it to $250 and Needham takes it to $270….expect all of the others to chime in later today.
In the end – stick to the plan…Don’t’ chase stocks, buy them on pullbacks….complement your longs with some downside protection – doesn’t have to be complicated. Stay focused on the end game. Call me to discuss.
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
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Herb/Balsamic Marinated Pork Chops
Preheat your oven to 400 degrees.
Start with 4 / 6 pork chops on the bone…. thin or thick cut – whatever you like. Rinse and pat dry. Set aside. In a bowl – add olive oil, balsamic vinegar at the ratio of 1:1.
Next add dried rosemary & thyme and fresh basil. Season the chops with salt and pepper. Marinate the chops in the oil/balsamic mixture for at least 1 hr….(You can prepare up to this point the day before and leave marinating in the fridge overnight.)
When ready – place the chops in an oven proof grill cast iron grill pan. Sear on the stove – for 2 mins and then cover tightly and place chops in the oven with the marinade….cook for 10 mins then flip and cook for 10 more mins….Now depending on the thickness will determine your time….thinner chops will require less time – capisce?
Remove cover – and turn on the broiler…..broil chops to create a bit of a crust – flip and repeat…. Be careful not to dry them out. (You can also do these on the grill if you choose)
Serve this dish with roasted smashed potatoes and a green vegetable like French cut green beans – steamed and dressed with a dab of butter and s&p. As usual also serve with a salad of Boston lettuce, arugula, red onions, cucumbers and tomatoes.
Buon Appetito
