Things you need to know.
– I told you this was a seasonally weak time of year.
– The US economy remains strong, bonds under pressure sending yields even higher. 5% riskless is now the norm…. giving stocks a run for the $
– Try the ‘Not your Kid’s Mac & Cheese
In case you missed it…….The US economy continues to show strength, the labor market remains strong and inflation expectations remain front and center………So, the bond market came under pressure as selling intensified and that sent Treasury yields higher…..– the 10 yr. now yielding 4.307%, the 2 yr. is at 4.912%, the 3 & 6 month bills are yielding 5.5% and 5.51%, 12 month CD’s will give you 5.5% (all riskless trades and all offering opportunities to lock in attractive rates), Mortgage rates are now averaging 7.37%, and stocks? They continue to get beaten up…. In fact, they got kicked in the groin (UGHHHHH!) yesterday…. ….as morning turned to afternoon the selling intensified and by 4 pm – all the indexes got whacked. The Dow lost 290 pts or 0.8%, the S&P gave up 34 pts or 0.8%, the Nasdaq lost 158 pts or 1.2%, the Russell lost 22 pts or 1.1% while the Transports gave up 165 pts or 1%.
Investors/traders and algo’s suddenly now recognizing that 19 x’s forward earnings in a RISING rate environment might just NOT be what the dr. ordered……the Dow is now down 3.25%, the S&P is off 5.1%, the Nasdaq & Russell are both down 7.6%, and the Transports are off by 6.2% – from their most recent highs…again – this is not out of line….this is not a reason to change your mind….but it is a reason to make sure you are comfortable with being a bit uncomfortable.
Again, a 10% decline would be considered ‘normal’ in regular trading….so the indexes are still acting normal…but we all know that individual names can already be in correction territory – that would be a > 10% move lower….META -12%, AAPL -11%, MSFT – 12%, TSLA – 27%, F – 24%, NVDA – 10%, and those are just the front page names….
Now look – what did I tell you in July? I told you that we were entering a usually ‘weak time of the year’….I defined that by saying that I expected it to be Aug/Sept/Oct…..and so far – that is what we are seeing….which is why I continue to tell you to be patient……Aren’t you glad you weren’t one of those FOMO buyers? Aren’t you glad that you stayed in the game, you reinvested your divy’s and you added new money to the underperforming sectors in your portfolio vs. the ‘sexy’ stretched names in your portfolio?
Where did we see the most weakness yesterday? Consumer Discretionary – XLY -1.7%, Tech, XLK -1%, Communications – XLC -1.2%, Home Builders – XHB – 3.6%, Airlines – JETS – 1.5%, Disruptive TECH – ARKK – 2.4%, Semi’s – SOXX -1% – are you seeing this? What do all of these sectors have in common? They are all up more than 15% ytd with some of them up more than 30%…. And so, yes, it makes sense that that is where investors/trader and algo’s go to get money. We also saw real weakness in the healthcare SUPPLY industry after Blue Cross Blue Shield of CA said that they would drop CVS’ pharmacy benefit manager in order to work with AMZN – CVS fell 8%, CI -6%, GDRX – 5%. The weakness here was driven by a specific news event and NOT necessarily by rising rates, but the negative tone in the market surely did NOT help.
Now, while there was RED across most of the board – – we did see some interest in some other sectors…. Again – coal and natural gas stocks saw buyers (think BTU, CRK, ARCH, CEIX, & SXC). Energy/oil names saw buyers (think XOM, CVX, SU,), the XLE +1.2%, and one of my favorites – APCX saw buyers – rising 19%. Nothing specific yesterday – but there have been ongoing press releases over the past month detailing their growth…. In fact, I did highlight in my conversation with Charles Payne yesterday on Making Money. He also highlighted my first hoopty – which brought me back to 1977…. You can find it here:
https://www.foxbusiness.com/video/6334083880112
Now look – Analysts, strategists and some economists are ‘sharpening their calculators’ and adjusting equity models to reflect rising interest rates as well as higher rates for longer…. The idea that the FED is readying to CUT rates has now been taken out of the model (for now) – although our friends at Goldman do think that they will begin to cut rates in April of 2024….which is just 7 months from now (to be fair – it is an election year)…..which makes zero sense to me….I mean – look – the FED is still in ‘raise’ mode….and then once they finish raising – the will be in ‘hold’ mode – so in my opinion – an April cut ain’t happening….UNLESS of course – the bottom falls out….and that doesn’t appear to be happening (yet) and if it does – it will be ugly…..….Now, we know that the FED always goes too far….they did it with low rates – well beyond what they should have, but JJ was positioning himself for reappointment – so he needed to keep rates at zero to satisfy Lizzy Warren, Bernie Sanders and Joey’s economic team….even as inflation surged from 1.6% to 9.4% – telling us ‘not to worry, we got this’…. And now – many believe that they will do it on the other end – they will continue to raise rates until they break the system – although JJ does not think it will break……Right! How’s that working?
Now Futures this morning are down again…Dow futures down 43, S&P’s down 7, Nasdaq down 45 and the Russell down 1. Now look, do not be surprised to see us try to bounce but then back off again as we move into the end of the day and the end of the week….they pummeled stocks into the bell on Wednesday and then again on Thursday……Today is Friday and the weekend is coming….My sense is that we could see the same type of action today……and if they should rally them – then watch what happens next week.
Next week brings us lots of eco data as well as the annual retreat at Jackson Hole that features central bankers from all over the world. JJ will speak on Friday morning – so expect all kinds of speculation all week about what he will say, how he will say it and what he means both on the face of it as well as ‘between the lines. After Wednesday’s FOMC mins – I don’t see how he can change the narrative, I don’t see how he can say, we are done raising rates and you can expect us to cut rates early in the new year…THAT is not happening….
On the economic front -we will get the Philly Fed Services Activity (defined as non-manufacturing), Existing home sales that are expected to be down 0.2% (I suspect it will be lower), Richmond Fed Manufacturing Index, Richmond Fed Business Conditions, S&P US Manufacturing and Services PMI’s, New Home Sales – expected to be UP 1.4% (remember home builders have a way of enticing and accommodating new home buyers….giving them FREE upgrades, and possibly better mortgage rates – something that existing home buyers don’t get). Look for the Chicago Fed Activity, Kansas City Fed Manufacturing Activity and the Kansas City Fed Services Activity.
The PCE – which is the FED’s favored inflation gauge is not due out until the following week – August 31st to be exact….so – that data point will not be publicly available when JJ speaks…but he knows how it is trending….(You don’t think it’s a total surprise, do you?). I am really curious how it factors in the rise in energy/gas prices in July and August – because oil is up 24% and gasoline is up 40% in that time period…so let’s see how they ‘bury’ that data point!
Oil is still trading at $80.40 – nothing really new there…you know the drill. The Dollar index is trading at 103.40 – no change and Gold is trading at $1924 – which is up $9 after the bruising it endured yesterday – falling $17 to end the day at $1918.
European markets are lower…. all market centers down about 0.6%….as investors there also consider what is going on…. bonds which have been under pressure – like they are here – are seeing some buying today – as investors consider that maybe the selling is just a bit overdone…. and that is causing yields to back off a tiny bit. But no matter, the fact is that investors across the zone are still dealing with the risks of entrenched inflation – just like we are….and so, I suspect the volatility in both stocks and bonds will continue.
The news out of China continues to paint a picture of despair….now there is a new player in the default space….Evergrande – the Chinese Real Estate giant has filed for bankruptcy protection in the US bankruptcy court – using Chapter 15 as a shield….Chapter 15 allows for NON-US companies to shield themselves from creditors while they figure it out….Hong Kong down 2%, China down 1.2%, Japan – 0.5%, South Korea down 0.8% and Taiwan down 0.6%. Australia bucked the trend and ended the day flat.
The S&P ended the day at 4370 – down 34 pts…. We breached short term support earlier this week…which leaves us in the 4290/4450 trading range (intermediate support and short-term resistance). Now to be clear – everyone of the indexes have now breached short term support and all remain in lower trading ranges defined by intermediate support and now short-term resistance…. We want to see them test intermediate support and hold. We want to see them shake the branches a bit to see who falls out. So, for the Dow that would be 34,020, the S&P – 4290, Nasdaq – 13,055, Russell – 1,840 and the Transports 14,847.
Again – do not make emotional decisions, get comfortable with being uncomfortable. If you are anxious – put new money into treasuries or just leave it in the money market fund that is paying you 5%. There is no reason to have to do anything until it feels comfortable for you.
Reach out to discuss – always happy to engage.
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 Capital Advisors.”
Not Your Kid’s Mac & Cheese
In anxious times like this – you need comfort food – something that makes you feel warm and fuzzy…. – and what is better than a plate of Mac and Cheese….and this is not Your Kid’s Mac & Cheese
For this you need: 2 c of whole milk, 3 ½ c of water, 1 lb. of elbow macaroni, 8 oz of American cheese – shredded, butter, 1 tsp of Dijon mustard, 7 oz of gruyere cheese – shredded, 2/3 c of breadcrumbs, olive oil, s&p and fresh grated Parmegiana cheese.
Turn the oven to broil – so that it’s ready for you.
Bring a pot of salted water to a boil – Add the milk. Now add the macaroni and reduce heat to medium low and cook for about 6 mins…. or until aldente… (You do not want mushy pasta). The pasta should suck up the water and milk…. (If it doesn’t – then you used to much, but just strain it off)
When cooked – add the shredded American cheese and mustard – stir constantly until cheese melts – should be no more than 1 min or so…. Take it off the heat and now add in the shredded Gruyere mix just to distribute – and then put it in a buttered Pyrex dish and then cover.
In the meantime – add the breadcrumbs to a frying pan and a dollop of butter – cook over med heat until the butter melts – remove from the heat and add the fresh grated parmegiana cheese…….now spread the breadcrumbs over the mac and cheese and place under the broiler (middle rack) – just long enough to toast the breadcrumbs…. Remove and serve…. Yum.
Now – go back to the macaroni – stir and transfer to a serving platter. Sprinkle with the toasted breadcrumbs and serve. Yum.
Buon Appetito
