Things you need to know.
– The Bull run comes to an end…. As if that means anything at all.
– Stronger US eco data fuels speculation of more rate hikes
– BoJ surprises investors and becomes MORE hawkish – stocks take a punch.
– The 10 yr. yield surges up and thru 4%
– Next week – we get more TECH earnings.
– Try the Simple Steamed Lobster w/drawn butter.
And the 13 day ‘historic’ bull run (which I think is nothing but drama) for the Dow came to a crushing defeat on Thursday…..stocks which wanted to go higher in the early morning – finally succumbed to the pressure of it all at about 1:30 pm…..A stronger 2nd qtr. GDP, better Pending Home Sales, a strong Durable goods report, and a stronger Retail Inventory read all suggesting that the FED has managed a soft landing despite the fact that the FED has pushed rates to the highest levels in 22 yrs. and that was good but it only fueled speculation that the FED is NOT done raising rates (remember – JJ has to see the eco data weaken – not strengthen) – which led to surging bond yields. The 10 yr. went from 3.87% to more than 4% while the 2 yr. went from 4.85% to 4.93%. Then toss in the rumors that the BoJ was about to let their rates rise MORE than expected (hawkish) and that caused the late afternoon angst.
So, let’s think about this…. Could it just be that investors are tired, and the rally ran out of steam? Yes. I mean the look at the chart – the Dow is up 6% over the last 13 days – which is a substantial move for this index…in that short a period of time. Could it be that the strong eco data suggests that the FED is not done raising rates? Yes. And then – could it be that early afternoon rumor that the BoJ was going to ‘tweak’ their YCC (Yield Curve Control) MORE than the expectation be the reason for the late day sell off? Yes.
The issue here is higher yields in Japan (they are currently at -0.5% / +0.5% but the overnight move essentially allows them to tolerate a 10 yr. bond with a 1% yield – which means they raised rates by 50 bps without really saying it. These higher yields could see Japanese investors repatriate cash (bring it home). How would they do that? They would sell US, European and Australian bonds and equities. And why is that an issue – because Japanese investors are the BIGGEST foreign holders of US assets, and they are pretty big in Europe and Australia as well. So if they ‘repatriate’ their cash that would put pressure on our assets as they would become sizeable sellers of those assets….and here is where I call BS……While we may see some of that – there is no way that these Japanese investors are taking all their money and going home with 0% rates…come on? Really? And by the way – there is no way that they are selling all of their US assets…. But the issue is that the BoJ SURPRISED the markets by making a bigger (more hawkish) move –but this too shall settle down – stopping the histrionics. And btw – aren’t we hoping for something to shake the branches to see how many leaves fall off the tree? I know I am…. what about you? And WHAT DID WE REALLY SEE? The markets did not CRASH….
The Dow fell 240 pts or 0.7%, the S&P lost 30 pts or 0.6%, the Nasdaq lost 77 pts or 0.5%, the Russell gave up 25 pts or 1.3% and the Transports gave up 213 pts or 1.3%…..Hardly anything to write home about and hardly anything to change your plan….All of the US indexes are higher by double digits with the exception of the Dow which is up 6.5% ytd.
We are now halfway thru earnings season….and we have not been disappointed…..in fact we have been more surprised than not….81% of companies reporting have beaten the (lowered) estimates while offering better forward guidance…I do not expect this to change during the second half of the reporting season….which doesn’t mean we won’t see the market back off nor does it mean that we won’t see the market push higher….but what it does mean – is that you need to remain dynamic….rebalance if you must or just allocate new money to other sectors that have not outperformed….thereby also ‘re-balancing’ your portfolio. Capisce? As a long-term investor, it is not your job to try and pick tops and bottoms – you are trying to build a strong portfolio that will weather the storm (if we have one….).
Eco data today is all about the Core PCE deflator – the FED’s favored inflation gauge – so what will that tell us? PCE m/m is expected to rise by 0.2%, y/y of +3%. Core PCE m/m is expected to be up 0.2% while y/y is expected to be up 4.2%. All of these numbers are better than last month IF they come in as expected and that is exactly what the markets are looking at. In any event – unless they are substantially better – I do not think it changes the story at all. This one data point is not going to suddenly cause a shift to pause…. We are going to have to see all of the eco data weaken over the next 8 weeks to see a shift from the current higher rate narrative to a pause narrative.
In addition – watch for Pers Inc and Pers Spending +0.5% and +0.4% respectively. Employment cost index of +1.1%, and the U of Mich sentiment survey at 72.6.
Now – what did stocks do? Well, the Dow rose 82 pts or 0.2%, the Russell rose 14 pts or 0.7% and the Dow Transports gained 441 pts or a whopping 2.75% – Now the S&P gave up 1 pt (which is nothing) and the Nasdaq lost 17 pts or 0.1%
Of all the 11S&P sectors yesterday – only one was up (unless of course you consider the contra trades a sector!). The best performer yesterday was Communications…XLC + 0.8% and you can thank META for that…. Recall I told you that META makes up 25% of that ETF and yesterday – META was up 4.4%…. enough to carry the whole index. The SOXX _ Semiconductors were also higher – + 1.8% ahead of last night’s INTC’s report…which was better than expected! They finally turned a profit! Imagine that. INTC is up 6% in the pre-mkt. The contra trades were winners…PSQ + 0.3%, SH + 0.6%, DOG WAS UP 0.7% and the VIXY (Fear Index) shot higher by 5.5%.
The worst performer – Real Estate – XLRE -2.1%, and Utilities – XLU -1.7% (think higher rates hurts utility yields).Utilities spin off about 4% yields….after yesterday’s action – bond yields in this country are expected to go higher….so if you are concerned about equity prices but want guaranteed yield – you’ll take money out of Utilities and put it into bills and bonds that are yielding in the mid 5’s (shorter duration bills) and high 4’s (2 yr. bonds). Financials –XLF also took a hit – falling 1.2%, Consumer Discretionary – XLY lost 1%, Staples – XLP, Healthcare – XLV, Energy – XLE, Industrials – XLI, Basic Materials – XLB and Tech – XLK all lost less than 1%….
US futures are up – bouncing after the ‘hit’ they took yesterday…. Dow +50, S&P’s +15, Nasdaq +110 and the Russell up 7 pts….6 companies have reported so far…. CNC – beat, ARCB – missed, AON and AVTR – missed, CVX beat while XOM missed…still waiting on CL, PG, NEWL, TROW and a few others.
European markets are lower…. as the week comes to a close. Earnings and central bank policy decisions weighing on investors as the final bell approaches. While the BoJ policy decision yesterday was seen a ‘an issue’ – there is not any panic about it today…. At 7 am – all markets across the zone are between -0.3% and +0.1%. Nothing dramatic.
The dollar index surged higher yesterday to end the day at 101.77 but has retreated just a bit today – and is trading at 101.612…..The sense is that if they FED does nothing – then the dollar should weaken, but the recent action suggests that that is not the case….Oil is holding steady at 79.90 while gold took a hit yesterday on the back of those rumored (coming) rate hikes trading back at $1980/oz…. that was a $30 hit…. This morning it stabilized and went up $7 at $1992. Remember – I am not in the camp that the FED is done…I am expecting rates to continue to be pushed higher.
The S&P ended the day at 4537. Down 30 pts. Futures are looking up this morning…on what feels just like a knee jerk reaction to the pressure from yesterday. I have been saying that I think the mkt is tired….and I still do….I still expect it to back off, but will not complain if they push it up – why, because I’m invested and I’m invested in the names that are moving….Tech, banks, consumer staples, SMID’s, communications and value..
Yesterday I said do not get lulled into a sense of ‘never never land’…. because ‘never never land’ does not exist… At some point – investors will recognize it is stretched and that it needs to take a breather…and it will, but that will give the long term investor a gift….You should not be chasing names that are running away….there are plenty of other options and opportunities that will balance out and stabilize your portfolio for the longer term. Patience is a virtue and investing is a ‘long game’….
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
“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. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of Kace
Simple Steamed Lobster W/ Drawn Butter
Going to the beach so it’s time for lobster…. this one is the simplest of all lobster dishes…. just steamed/boiled with drawn butter outside at the picnic table with the ocean just behind you….
For this you need a 1 1/2 lb. lobster per person, plenty of butter, cole slaw and corn on the cob.
Using the turkey fryer – fill the pan with water and bring to a boil. Drop the lobsters in the water headfirst – once the water starts to boil again count 8 mins for the first pound and then about 2 mins for every pound after…. In the meantime – melt the butter and place it in bowls to be shared. Once the lobsters are done – remove and present on a large platter and allow your guests to help themselves. Have the nut crackers on the table to help crack open the claws to get the meat out. Separate the tail from the body, remove the fins…using your thumb – push the tail meat out and enjoy….
Buon Appetito
