Things you need to know.

–         Finally – they are paying attention!

–         Stocks did decline, but the pressure was less – just a repricing.

–         Bond yields rise – not unexpected

–         VIX rose as well, Oil continues to thrash around

–         Gold breached the next level of support – putting us in a new range

–         Try the Pan Seared Garlic Butter Rib Eye.

So, suddenly it appears as if the market is listening to what the FED is saying…and recognizing that 6 rate cuts was NEVER a reality (Hello?  Anyone home??) And all those traders that kept demanding multiple cuts are now being told to sit down and shut up. And the algo’s that followed along – Yeah, someone please pull the plug on them….because they only added to the confusion and chaos –  Stocks extended their losses on Wednesday  as it becomes clear that the FED will be in NO rush to slash and burn rates as the US economy continues to show resilience.  And this means that bonds should also continue to come under pressure…… – which only means that yields will continue to rise across the spectrum…. Which then means that stocks ‘could’ fall further. – (something I hope happens so that I can put more money to work……)

At the closing bell – The Dow gave up 95 pts, the S&P’s down 28, the Equal Weight S&P down 50, the Nasdaq down 88, the Russell lost 14 and the Transports gave up 110 pts.  In the bond market – the TLT – 20 yr. bond ETF fell by 0.2% and the TLH – the 10/20 yr. bond ETF fell by 0.3%…. leaving the bond market down 4.25% and 3% respectively ytd.

What I find interesting is that the rise in yields is not causing all kinds of panic in the Nasdaq market …that index is only off 1% ytd…but where we are seeing the pressure is in the SMID’s (Small and Mid-Caps) think Russell – which is down 5.6% ytd…along with the Transports – which are down 4.2% and the Equal Weighted S&P which is down 2.55%…and that suggests that the weakness is NOT in the Magnificent 7 – it is across the board…

Remember – SMID’s – by definition are small and mid-caps – are considered growth stocks – they are considered potential game changers – but the success rate works against them – because not all of them will succeed – thus the high volatility – their market capitalizations range from $250k to $10 billion….- and while that sounds fairly healthy – compare that to Large caps – which are defined as stocks that are between $10 billion and $200 billion and Mega Cap stocks that are worth over $200 billion – the Magnificent 7 are ‘Mega Cap’ stocks.  The Dow 30 are mega cap stocks – many of the S&P’s are mega cap stocks…. Capisce?

So, if you are now conceding – and are no longer ‘buying the rate cut story’ and realize that rates will remain higher for longer – then the growth stocks most affected would be the SMID’s…..I mean just look at what the SMID’s did in the final 8 weeks of 2023 – when 6 cuts was all the rage….they shot higher by 27% in 8 weeks….Now while the Nasdaq also benefitted  – it only rose by 20% during that same time frame.  But the minute the narrative changes – then the ones that rose the most will be the first to take the hit. – this is NOT rocket science….

Now that does not mean that the broader market will not come under pressure – it may – but the recent action just means that the euphoria that got baked into the SMID’s has to be repriced based on the latest narrative.  Which again supports my ‘make a plan, talk to your advisor and then stick to it….’ Idea.

Now – if you were paying attention to our conversation – here in the Morning Thoughts daily blog – you did not get caught up in it….You stuck to the plan and you executed – you participated when the market rallied, you reinvested your divy’s that were paid at year end – building your position (passively)  and you appreciated the ‘non-emotional’ guidance…..……and as a long term investor that is exactly what you need to do….Period.  Now, if you want to be a day trader – then toss all of that out the window and follow the herd….

The 2 yr. treasury rose by 14 bps to end day yielding 4.36%, the 10 yr. rose by 5 bps to end the day yielding 4.10%  and these rates of return in ‘secured/safe’ assets are interesting to a range of investors – at least for a portion of their portfolio….The older you are – it may take a larger portion – but it is what it is.

The VIX continued to move up…. ending the day higher by 6.8% to end the day at $14.79…this morning – it is backing off a bit and that should tell you that stock futures must be higher and not lower…and in fact they are….

Dow futures are + 45, S&P’s +14, the Nasdaq is up 100 and the Russell (smid’s) are up 10. It appears as if they pushed the rate story to the back burner and are now re-focusing on earnings…. Taiwan Semi – igniting a rally in the chipmakers this morning….…they told us that they expect ‘solid growth’ this quarter and that is sending everything in the tech space higher…. (Remember Taiwan Semi – supplies chips to APPL, NVDA) But all of them are on the move…. MSFT, AMD, ON & INTC and the list goes on….

And in a move that is really curious – BA – which has gotten slammed after its most recent debacle – just won an order for 150 – 727 Max 10 and Max 8 jets from India’s newest airline…Akasa Airlines…. I guess they don’t read the papers or listen to the news……  I mean at this point – you could buy a Russian plane from the state-run agency (United Aircraft Corp) and feel safer…. (www.uacrussia.ru).

Oil – which has been all over the place in recent weeks – is ricocheting between $70 and $75…..this morning it is up 20 cts at $72.70…….the move higher yesterday being credited to a strong OPEC forecast over the next two years……and the ongoing chaos in the RED Sea…..We now know that tensions are rising between Iran and Pakistan… – with Pakistan launching a strike into Iran in response to a bombing…This is after Iran launched attacks on Iraq and Syria as well – claiming to attack another terrorist group…….In the end – all this means is that the tensions continue to heat up in the middle east and it feels like it’s only one match away from exploding….

Gold traded lower yesterday – it failed to hold trendline support at $2030 – and it failed to hold the trendline at $2015 – ending the day at $2,006. This morning it is up $8 at $2,014 in what I think is just a bounce off a short-term oversold condition…. – we are now in the $1995/$2050 range.

Eco data includes Housing Starts – 8.7%, Building Permits +0.6% and the Philly FED outlook – which is expected to be down by 6.7%.

Earnings due out from KEY, TFC, NTRS – all missed. After the bell – look for COST & JBHT.

European markets are all UP by about 0.8%…….again, I think it is just a bounce of the recent weakness……ECB officials remain more hawkish (steady vs. cuts) than dovish – despite some improvement in inflation…. And I think investors in Europe are now agreeing that a premature move would be just that – premature.

The S&P closed at 4739 – down 27 pts…. we did trade as low as 4714 – so we have not tested the 4680 level…. a level that I identified as a must hold if we want to see markets settle down. A failure to hold at 4680 – opens up S&P 4600  which is not unreasonable and would not be a reason to hit your sell button at all….In fact  – you know how I feel….if the fundamental story has not changed – then when stocks go on sale – it is an opportunity to add not to sell.  4600 is still WELL within a normal trading range.

Take good care.

kpolcari@slatestone.com

Sources:  Bloomberg, CNBC, Reuters, Wall Street Journal

Disclosure: The content provided in this material is designed for educational and informational purposes only, and it is important to note that it does not constitute personalized recommendations. 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 Kenny Polcari or SlateStone Wealth.

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, which may not necessarily align with our firm’s standpoint.

While considerable effort has been invested to ensure the accuracy and dependability of the information presented, we must clarify that we cannot guarantee the accuracy of third-party information. Our usual sources for third-party data include channels such as Bloomberg.

Kenny Polcari is the Chief Market Strategist for SlateStone Wealth.  Neither Kenny nor the partners of SlateStone Wealth are compensated in any manner by the issuers of any securities mentioned in the publication.

Pan Seared Garlic Butter Sirloin

This is a simple dish to make and when served with roasted potatoes and a large mixed green salad – makes an easy weeknight dish.

For this you need:  butter, softened, 1 tspn minced fresh parsley, minced garlic, 1/4 teaspoon reduced-sodium soy sauce, 1 boneless top sirloin steak (3/4 pound), s&p.

Season the steak with s&p and set aside. Letting it sit for 15 – 20 mins.

Making some garlic butter – mix 2 tblspn of butter, the parsley, garlic and soy sauce.  Set aside.

In a ribbed skillet – add 2 tblspn of plain butter over med heat.  Next add the steak and sear on both sides for 5 mins – that should give you a med steak. If you want rarer, then cook for 4 mins per side and if you want more well done – then cook for 7 mins per side.

When done – place on a warmed plate and top with the garlic butter. Serve with roasted potatoes and a large mixed salad. Simple and so good.

Buon Appetito.