Things you need to know.

–        The versus of life – Que Sera, Sera!

–        Stocks ended higher – thanks to GOOG and MSFT.

–        Will this week bring the same enthusiasm?

–        Stocks & Bonds continue to thrash around as they try to interpret the next FED move.

–        More Earnings and lots of Eco data.

–        Oil & Gold hold steady.

–        Try the Seared Halibut in Orange/Lemon Butter Sauce.

“When I was just a little boy, I asked my mother what will I be? Will I be handsome? Will I be rich? Here’s what she said to me Que sera, sera. Whatever will be, will be. The future’s not ours to see. Que sera, sera, what will be will be….” Doris Day – 1956 – The Alfred Hitchcock film – “The Man Who Knew Too Much.”                      

The three verses of the song progress through the life of the narrator—from childhood, through young adulthood and falling in love, to parenthood—and each ask, “What will I be?” or “What lies ahead?” The chorus repeats the answer: “What will be, will be.”  Wikipedia

And so – you ask – What will it be? What lies ahead for the markets?  And to answer that question – we must consider what lies ahead for earnings, for the FED, for inflation, for the conflicts in both the Mid-east and Ukraine and the brewing conflicts in the South China Sea – Taiwan) …Taiwan)…And so – in the words of DD- Que Sera, Sera…..

On Friday. -stocks and bonds ended the day on an uptick as the Mag 7 came to the rescue…. the gains amplified after GOOG and MSFT reported ‘blow out numbers’ and offered robust forward guidance…. The demand for AI and Cloud services is making all types of headlines. (That’s about all you need to know….) At the closing bell – the Dow gained 1545 pts or 0.4%, the S&P up 52 pts or 1% , the Nasdaq surged by 316 pts or a whipping 2%, the Russell added 21 pts or 1%, the Transports (as has been the case) bucked the trend higher and got slammed – falling 126 pts or 0.8% while the Equal Weight S&P jumped by 9 pts or 0.2%..

The advance came despite the fact that the latest PCE deflator report (the FED’s favored inflation gauge) revealed what we already know…. inflation remains sticky!  It continues to advance on a m/m basis while declining ever so slightly on a y/y basis…and while they will tell you to focus on the y/y read (because it fits their story), it is the m/m reads that we need to concern ourselves with – because that data point dictates what is happening NOW, in our everyday lives…and what we know – is what many of us feared – inflation remains stubborn and somewhat HOT.- Period.  

The idea that the FED will cut multiple times in 2024 is all but a dream – holding rates steady is the best we can hope for – while the possibility of a rate HIKE is a NIGHTMARE.  And while the odds of a hike rate slim – they are NOT zero – why?  Because the m/m numbers have turned UP (3 months in row now – and that is starting to make a trend). 

The darkening outlook for any rate cut has managed to push bond yields UP -with the 2 yr. kissing and piercing 5% a couple of times now over the past week…this morning – bonds have settled down a bit and yields have backed off – the 2 yr. is yielding 4.97% while the 10 yr. is yielding 4.62%….The TLT and TLH – 2 popular bond ETF’s though continue to struggle – remaining down 10.7% & 8.4% respectively ytd.  The broader AGG index – iShares Aggregate bond index which includes ‘investment grade’ US treasuries & corporate bonds along with MBS, ABS & CMBS is (in my opinion) a better way to give yourself bond exposure that is not nearly as concentrated as the TLT and TLH – and that is evident by its performance this year – so far only down 3%.

Shorter duration bonds remain well into the 5.45% (annualized) while 12-month CDs pay you nearly 5.5%.  You see – the bond market is WAKING up to the idea that inflation is NOT going away anytime soon and that is keeping rates ‘higher for longer’ and that continues to cause volatility for stocks….leaving some investors to opt for ‘safety’ and ‘no risk’ while others view the draw down in stock prices as a long term opportunity.  But then I say that TLT is down 10.7% ytd – So, how can that be ‘no risk’?  I say ‘no risk’ because if you have moved your money into actual US treasuries – you don’t’ care what they are doing on a daily basis – you bought them for the coupon and safety…you are not trading the bonds, so any loss in the bond during its life is irrelevant to you (paper loss – not a realized loss) – because you are NOT selling them.  Once they mature – you have gotten all the payments and 100% of your money back – Capisce?  In the end you lost nothing (other than maybe an opportunity cost – but that’s another story!)

The VIX, which had been trading in a 12/14 range (relatively complacent) – has steadily risen – trading as high as 21 last week – (on the day that the mkt got smacked) – up nearly 60% – only to end the week at 15.40. Yes, below the spike up, but still ahead of where it was for 3 ½ months……. And remember – the VIX is the fear index – so it is all about what investors/traders feel and the recent rise in the VIX suggests that fear is building….  The VIX is now UP 17% ytd while the S&P is up 6.5% ytd (down from +10.7% in early April) – when FEAR started to build.

In the end – the aging economic cycle and stocks that are facing renewed headwinds make Doris Day’s – 1956 classic a fitting analogy for today’s commentary…. Recent volatility aside, stocks have performed incredibly well over the past 5 months…. with the S&P (total return) gaining about 25% off the October lows through Friday, while also posting the best 1^st quarter since 2019. Demand for stocks is being driven by the continued momentum for some of the Mag 7 (think AI), but also by a broadening appetite across the other sectors. 

The official S&P GRR (Group Ranked Returns) vs. S&P Sector ETF’s  shows us that Communications is leading the pack – up 17% ytd, followed by Energy + 14%, Financials + 8.4%, Info Tech – + 8.3%, Industrials + 7.6%, Consumer Staples + 5.8%, Basic Materials + 4.4%, Utilities + 4.4%, Health Care + 2.5%, Consumer Discretionary + 1% while Real Estate is this year underperformer – falling 9%

Now it is the broadening of performance that is the bullish indicator, even as the markets have come under pressure due to renewed upward pressure on inflation, escalating global conflict and the realization that the FED has become less supportive of ‘multiple interest rate cuts.  As the last few weeks have demonstrated, investors are a bit ‘edgy’, so I say – find some shelter in the storm…and at the moment that is the solid earnings season that we are in. 

The first quarter earnings season really kicked into high gear last week. – 37% of the S&P reported results – and that now brings us to 50% of the total index having reported – 81% of those results are beating the estimates (vs the usual 74%) and the magnitude of those beats is running at a healthy 7.8% (this vs. the usual 6.5%) ….and do not dismiss the fact that the stakes remain high….Valuations were  stretched (maybe a little less so now) despite an overall climate that continues to  challenge corporate profitability. Navigating these challenges will be key if markets are to regain their footing and investors are to feel less ‘fearful’ – but as Doris’s day sang – Que sera, sera! 

At this point, with half of the S&P having reported, the view is that this earnings season has once again been better than expected. As of early April, consensus expectations were for flat 1Q y/y earnings growth and 3% y/y revenue growth, representing a substantial decline from the mid-single digit growth rates in 4Q.  As of Friday, the data and consensus expectations are now suggesting a 4% earnings growth and 4% y/y revenue growth.  – And that ain’t so bad – given all of the concerns that are swirling around us. All in, the solid fundamental performance we are seeing does provide the long-term investor with some shelter from the storm – but do not become complacent – sticking to your plan and remining disciplined continues to the way forward. 

Oil continues to trade in the mid 80’s…currently $83.60, while Gold tested lower (2300) and bounced – this morning gold is up $7 at $2354 – something we have discussed ad nauseum.  While both of these commodities are sensitive to monetary policy – they are also very sensitive to global politics – and I ask – do we need to go there right now, or do you guys get it? I suspect oil remains in the $80/$90 range and Gold remains in the $2300/$2400 range.

This morning – it is a new day…US futures are UP (on the back of the strong week last week)- Dow futures + 35 pts, the S&P’s up 6 pts, the Nasdaq up 40 pts and the Russell is +2.  This will be another week of a lot of earnings, key economic data and the Federal Reserve – FOMC meeting….

Eco data includes: Employment cost index – +1%, Conference board consumer confidence, ADP employment – +180k jobs, S&P Manufacturing PMI of 49.9 (slightly contractionary), ISM Services PMI of 52 (expansionary),  Construction Spending +0.3%, ISM Prices Paid (think inflation), and on Wednesday we get the FED rate decision – by now we know they are NOT cutting rates and on Friday we get the all important NFP report and that is expected to show an increase of 250k new jobs….Avg Hourly earnings m/m +0.3%, and y/y of + 4%. Unemployment is holding steady at 3.8%.

Earnings due from such stalwarts as AAPL, MCD, KO, AMZN, DPZ, CAG, MMM, PYPL, LLY, AEP, APD, and a bunch more…

European markets are mixed…. Spain -0.5% while the UK is up 0.5%.  Investors there will focus on more European earnings as well as our FED policy statement on Wednesday – as many there will use that as an indication of what the ECB & BoE may say at their next meetings.

The S&P closed at 5099 – up 52 pts. I continue to believe that we are in the 4950 (support)/5120 (resistance) trading range.  And while it feels like the market wants to push higher – I am still in the camp that we will test trendline support at 4950 before we test resistance at 5120.  But this week could prove me wrong…. Investors need to see ongoing better earnings and better guidance to continue if we are going to break up and through 5120. 

Keep your powder dry for now…. Let this volatility settle down…. stay the course with the names you own, unless the fundamental story has changed – your cash is earning 5+% – as long as you have it in an interest-bearing account.  

As a long-term investor – you need to eliminate the noise and focus on the plan. Discipline is key.   As a short-term trader – all you want is the noise – you need to decide who you are.  Call me to discuss.

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.

Seared Halibut in an Orange/Lemon Butter Sauce

Halibut is a great fish to cook with. It is a white fish, flaky and takes to any number of dressings. Today –we are going to sear it in a little butter/oil and then roast in the oven until tender. When serving – you drizzle some homemade Orange/Lemon Butter. Sound good?

For this you need:  2 lbs. of Halibut, butter, olive oil, s&p.

For the sauce you need:  Fresh squeezed lemon juice, fresh squeezed orange juice, shallot, white wine, butter.

Begin by adding the juice from the lemon and orange to a saucepan and reduce by half over med heat – set aside.

Preheat the oven to 400 degrees.

Season the halibut with s&p.

In a sauté pan – heat up a dollop of butter and a splash of olive oil – when sizzling – add the halibut and sear nicely until golden brown on both sides. Remove and set in a roasting pan and place in the oven for 15 mins (or so).

While this is cooking… find another saucepan… add in a half a stick of butter – when melted – add the sliced shallots and sauté. Now add about three quarters of a cup of white wine and cook until reduced by half. Turn the heat to simmer… add a tbsp. on butter and whisk – when incorporated, add another tbsp. of butter and repeat – continue for 2 more tbsps. Now slowly add in the citrus juice and mix well.

This looks great on a bed of spinach. Place the halibut on top and then spoon the sauce over the top.  Serve with your favorite white wine.

Buon Appetito