Things you need to know.
– Stocks sold off! Bonds sold off! Yields Pierce resistance at 4.17%
– Gold steady, oil up, dollar up
– Investors reconsider the data and the next Fed move.
– Futures lower this morning…Stick to the plan.
– Try the Classic Lasagna
Good morning. For those of you who saw my morning video yesterday you would have seen that I was (home) at the NYSE – I hosted some business students from Gonzaga University, and I also appeared with Nicole Petallides on the Schwab Network. Here is the link to my appearance on ‘Trading 360’ yesterday.
https://x.com/SchwabNetwork/status/1848382254763958669
OK – Breathe! Because that is what stocks did yesterday….’they took a breather’ as investors/traders and algo’s tried to figure it out… They tried to figure out what’s next for stocks as we move thru a crowded week of earnings, they tried to figure out what the eco data is telling us and they tried to figure out what the next move will be by the FED – and by all accounts – it appears to be that just maybe the FED will do nothing at the next meeting…(did you see that 10 bps move in the 10 yr. that saw it test, pierce and surge thru trendline resistance at 4.17% yesterday?) Remember, we discussed this…I forewarned you…. I also said we would test 4.3% is short order…this morning the 10 yr. is yielding 4.21%…. Just sayin’….
In any event by the end of the day – the Dow gave back 345 pts or 0.8%, the S&Ps lost 11 pts or 0.2%. the Nasdaq gained 50 pts or 0.3%, the Russell lost 37 pts or 1.6%, the Transports gave back 194 pts or 1.2%, while the Equal Weight S&P lost 63 pts or 0.9%.
All of the indexes kissing the upper band on their RSI (Relative Strength) charts and that just suggests that stocks just maybe approaching ‘overbought’ territory….and so the pullback should surprise no one. All while we are facing about 20% of the S&P or 100 companies to report their 3rd qtr. earnings, but more importantly their forward guidance – that includes the 4th qtr. and into the 1st qtr. of the new year….
The only sector of the 11 S&P sectors to rise was TECH – XLK + 0.5% and that makes sense – as the Nasdaq index was the only index to gain….Real Estate got crushed down 2%, and that dragged the Homebuilders (XHB) down 3% – think that explosive move UP in the 10 yr. ……and the story yesterday was that the 10 yr. will test the 5% threshold sometime in the near future…
And you recall what happened the last time the 10 yr. kissed 5%? It was October 2023 – the S&P lost 7%, the Nasdaq gave back 9%, the Russell gave up 15%. The Real Estate sector – XLRE gave up 18.5% while the Homebuilders lost 17.5%.
Healthcare lost 6.5%, Consumer Staples – 13%, Financials -10%, Basic Materials -12%, Consumer Discretionary – lost 14.4%, Industrials – 10%, Utilities gave up 19%, Communications -9%, and Energy gave up 10%.
Down the chain – Semi’s gave up 17%, Metals & Miners -9%, Cybersecurity – 7%, Aerospace & Defense gave up 8%…. I could go on, but you get it, right?
Now – while it is ok to discuss what happened when rates rose it is important to remind you that when rates fell – all of these sectors rebounded strongly. Which again, speaks to the ‘don’t make emotional decisions – stick to the long-term investor’ plan. Talk to your advisor – create a well-diversified portfolio that will weather the storm.
So, what happened to bonds yesterday? Well, they sold them off, in fact bonds around the world sold off – as investors/traders and algo’s rethink the FED’s future pathway and the prospect of slower or NO rate cuts is upending the narrative. The TLT (20 yr. bond ETF) lost 1.75% while the TLH (10 – 20 yr. bond ETF) gave up 1.4%. The AGG (Core US Aggregate bond ETF and includes US treasuries and corporates along with the gov’t related ABS, MBS & CMBS)
ABS -Asset backed securities (loans, leases/receivables)
MBS – Mortgage-backed securities.
CMBS – Commercial mortgage-backed securities.
At the core – the weakness is a direct result of investors reassessing the outlook for FED policy. Investors and traders are now rethinking those ‘aggressive’ rate cuts…given the fact that the latest economic data remains robust and now some FED heads are raising the ‘caution’ flag – while others are still supporting the Full Steam Ahead approach – and the one that took the stage yesterday was San Fran’s Mary Daly….she is calling for more rate cuts (as if the data supports that), but remember – SHE is also the one that ‘missed’ all the ‘data points’ that led to the SVB (Silicon Valley Bank) crisis/disaster/debacle that rocked the markets and the banking industry in March 2023.
It is rising oil prices, its all the gov’t spending that both sides are promising and then it’s the supply of bonds that Janet will have to bring to the market, and it is the risk of re-igniting inflation that is suddenly causing angst in the marketplace.
The swaps market is implying a FED rate between 3.50%-3.75% while large asset managers are seeing rates in the 4.5%-5% range….so again, who is right? My friend Ed Yardeni – sees rates at 4.5% by early next year…. I love Ed, but I see 4.5% rates before year end. And that is what makes a market – buyers and sellers.
Now the VIX didn’t do much yesterday…which I found a bit surprising….it was up 7% by mid-morning but only ended the day up 1.9%…. suggesting that there wasn’t an overabundance of fear…. but this morning- the VIX is up 5% and US futures are down.
Dow futures – 185 pts, S&P’s down 27, Nasdaq down 125 while the Russell is down 17. And all this is, is a realization that some FED officials have indicated a preference for reducing rates at a ‘slower pace’ which might support no rate cut in November and a 25-bps cut in December (IF the data demands it). Now, the data – as far as I am concerned – is NOT demanding a November cut and if it remains robust -then guess what? We won’t (or shouldn’t) get a cut in December either…. leaving rates in the 4.75%-5.25% range – which btw, is well within normal. So, let’s not get our panties in a bunch just yet.
And do not discount the election…both sides are promising more gov’t spending, while one is also promising tax cuts and the other tax increases…so the markets are weighing the potential inflationary impact created by spending policies and the impact created by tax policy. In the end, the stock market and the bond market are pricing in higher prices (inflation) no matter who wins – so get ready for some price adjustments.
Oil – gained $1.10 or 1.6% to end the day at $70.50…this morning it is up another 0.8% at $71.12. All as markets track tensions in the mid-east while speculation runs rampant on the path of US interest rates. Stockpiles are always in focus…. crude supplies have been building for the past month…. but a new estimate is due later today and tomorrow. So, there is a lot of conflicting headlines – and that leaves oil in the $65/$72 range…Trendline resistance is at $71.50.
Gold continues to trade in a tight range. $2725/$2750….as it waits….for the next catalyst…..Remember gold responds to the dollar….now the dollar has risen for the past month and is up 3.7% – Gold should have givens some back on that move, but has not – because the move to ‘safety’ has trumped the move in the dollar….but that will correct itself once it is clear what the FED will do and what the results of the election are….if rates remain unchanged, gold should retreat, but if the election remains in limbo, gold will hold steady if not advance…So sit tight….
Eco data is all about the Richmond and Philly Fed surveys – neither will drive the action.
Earnings? There are a lot of them. Look for results from DHR (beat), GM, KMG, GE, PM, IPG, NSC, IVX, SHW, VZ, LMT, RTX, FCX, PHM, MMM, & MCO…and after the bell – look for STX, LRN, RRC, TXN, ENPH, BKR.
European markets are lower – it’s earnings, it’s rates and it’s the mid-east tensions…. markets across the zone are all down between 0.2% – 0.8%.
The S&P closed at 5853 – down 10 pts…. We will hear from Philly’s Patty Harker, ECB’s Christine Lagarde, Klass Knot and Robert Holzman, and the BoE’s Andy Bailey.
Now look – a pullback is imminent….we know that…..Trendline support is at 5662 – down 3.5% from here….hardly anything to get nervous about….but expect some to get nervous anyway….In any event – I would like to see us shake the branches a bit…..Why? Because it’s healthy for the markets to retreat to test lower, to test investor commitment.
In the end though, as a long-term investor – have a plan, be diversified, and have some cash on the side to take advantage of any weakness – and then don’t panic…be patient… Do not go and change your portfolio based on what you think might happen – politics do not in the long term set prices….it does though create short term chaos, which creates long term opportunity.
Successful investing is a marathon not a sprint. Click on the link to send me a message – I’m happy to discuss.
https://slatestone.com/contact-us/
Take good care.
kpolcari@slatestone.com
Sources: Bloomberg, CNBC, Reuters, Wall Street Journal
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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.
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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.
Classic Lasagna
Make your sauce, make your meatballs…. I have recipes for both –
You will need – the lasagna sheets that you bake, you need the sauce, and meatballs, fresh ricotta cheese, shredded Mozz, and fresh grated parmegiana or Romano cheese.
Making the Lasagna –
Begin by removing 6 meatballs from the sauce – and put them in a large bowl. Now with a fork – smash the meatballs, add in 3 spoonful’s of freshly made ricotta cheese, a ladle of tomato sauce and a handful of shredded mozz. Mix well.
Next in a glass Pyrex rectangular dish – put some sauce on the bottom of the dish – now line up the lasagna sheets all in one direction – say lengthwise. Now put a layer of the meat on top of the lasagna sheets – add some sauce (do not drown) and then set the next layer – in a perpendicular direction make another layer of lasagna sheets – This way you build the lasagna. Repeat with the meat and sauce and then add another layer of lasagna sheets in the original direction – repeat with the meat and sauce – capisce?
(Now you will need to smash more meatballs and add the ricotta and mozz as you go along – so you have to make sure you have enough meatballs. You need at least 2 lbs. of meat to have enough meatballs to smash and use.)
For the final layer (4 layers are usually enough): Lay the sheets in the opposite direction of the layer below. Now top with some tomato sauce and shredded mozz. Here you can also sprinkle some fresh grated pecorino Romano. Cover with tin foil and place in the oven to bake at 375 degrees for 25 mins. Remove the tin foil and bake for another 5 – 8 mins just so it browns a bit. Remove and let sit for 10 mins before cutting and serving.
Buon Appetito
