May 3, 2022

Lazy, Hazy, and a Little Crazy

 “The only thing I know, is that I know nothing” – Socrates

I’m back in the office and although I’ve been aware lot has taken place for the time being I’ll continue spending the most time avoiding the narratives of the experts and just focusing on the tangible technical's. From the viewpoint of casual observation, the most I can say about the decline the broad indexes have experienced recently is there is always a good reason to be a little skeptic until the overall condition of the markets are oversold, which is where we find ourselves today and hence the scent of correction is beginning to take hold and it feels like a good time to pay attention and move slowly.

Markets

In the past month the Fed has made some comments that were construed to be aggressive. Battling inflation is no joke and I’m old enough to remember when the Fed Funds rate was over 10% designed to bring the economy down and inflation with it. Flash forward to today, the same rate is 1%, and we’ve gotten mixed economic and inflation data that suggests a peak in inflation may be closer than we think. Why am I saying this? Because the markets appear to be responding to the algorithmic narrative of the end of global economic growth as we see it. Hence, the markets keep experiencing weakness that, in my opinion, has more to do with no buyers than too many sellers.  Don’t get me wrong, I still see the broad indexes caught between improving short term technical conditions that could set the stage for a corrective rally in stocks, but without the recovery of the long term technicals, the positive price activity, in my opinion, will likely not be enough.

Economics

The economic data over the past week and half has been in line with the mixed data that brought the first quarter GDP to negative. The ISM Non-Manufacturing Index and Nonfarm Productivity data both showed slowing activity. This led to an increase in economic forecasts of impending recession. However, the next piece of data last week were the Consumer Price index (CPI) and the Producer Price Index (PPI) which came out plus 0.3% and 0.5% respectively. The numbers were less than previous month over month numbers suggesting that inflation pressure might be peaking. However, the same economist forecasts expected more, therefore any good news was off the table. New data this week saw a comfortable increase in Retail Sales which rose .09% in April. However, upon closer look much of the increase was in building materials, autos and gas, non-store retailers, restaurants and bars all pretty much expected and to some degree suggests some opening of supply disruption are occurring.  This is likely to keep the Fed on track to focus aggressively on Inflation, but with the stronger dollar on their side, any additional positive data coming out of the inflation indexes would be market positive. 

External Events

The battle over inflation, what is, where it originates and how to fix it are the main topics of economic concern. Partly because inflation can be felt by most Americans, and not just at the gas station. The problem with  navigating the narrative is that it seems to forget one small feature of  the kind of inflation we are experiencing. Namely, in my opinion, that the inflation indicators are could likely peak in 2022, although how long they take to come down is less important. This is because the price increases that have been experienced in everyday life, are likely here to stay whether or not the inflation indicators decline. Various industries have had a tough time coming through the pandemic and the replenishment of balance sheets is not something they’re going to give up easily. For this reason, there is substance to the predictions of a coming recession, but for now, the likelihood of some surprises coming from future corporate earnings and a slow and steady retreat from the economy and employment, recession is still a way off, perhaps not until 2023. In the meantime, the markets can see some continued recovery, including volatility, and welcome careful focus on opportunities. And while the worst of the recent decline may be behind us, the potential for a strong rebound is still a bit hazy.


April 28, 2022

Covering or Recovering

 Markets

It’s a little of both, but the markets are not being friendly. Not just because of inflation, or war in Ukraine or the increasingly aggressive statements coming from the Chair and Board members of the Federal Reserve. In fact, the market is being unfriendly because it’s failing to make any sense. This week’s opening with enough of a decline to justify a rally in the broad indexes at the latter part of the week, the broad indexes not only have room to be more oversold, but no advancement on the current condition of long term technicals is showing any improvement. As we enter the end of the week, the S&P 500 is still lower on the week, and today’s release of earnings from Amazon (AMZN), AbbVie (ABBV) and Apple (AAPL) could change that. Overall, better earnings have proven the analysts wrong once again, although some ambivalent guidance has offset some of the good news and returned volatility to markets. The volatility has helped us take advantage of adding to our current strategies.

Economics

The big news this week was today’s first release of the recent 1st Quarter 2022, which came in with an annualized decline of -1.4% far lagging the economist expectations of +1.0%. Needless to say, the mess was blamed on net exports, but that is easily explained in the recent surge in the value of the US Dollar. Does all this suggest a coming recession, not in my opinion. The data we’ve been tracking has been consistently choppy. This week saw New Single Family Home Sales declined 8.6% in March. Also, this week saw New Orders for Durable Goods, led by autos, computers, electronic products and equipment, rise 0.8% in March, and while commercial aircraft was an offset, defense aircraft saw a pickup.  Worth noting, we are also entering the late spring and summer months that has already suggested a strong rebound in domestic and international travels, and, as expected, a pickup in consumer activity. In the middle of all of this, various Fed Presidents from around the country are weighing in the need to remain alert, which has been enough to fuel the recent rise in Treasury rates, and subsequently brought the hammer down on the broad indexes. This month has seen the 10yr Treasury rise from approximately 2.45% to 2.95%, prompting the pundits to interpret that the Fed would be raising rates over 2% at the next three meetings. No other aspect of the current economy, or inflation, which are moving targets, cannot be forecasted on the bond market alone. As mentioned in this commentary before, the bond market doesn’t need the Fed to confirm a trend, but neither does it need the Fed for rates to back pedal. The overbought condition of the 10yr and 30yr Treasuries has been seeing some yield softening from its overbought condition. In my opinion, this will continue until it’s time to go up again, just as equities are doing this week.

External Events

Any implications that the GDP and economic data nor the current spate of better than expected earnings are good measures of an impending recession. There will eventually be a recession, but in my opinion, it’s still too early to make the kind of portfolio changes the market sectors have suggested.  For now, the impact coming from inflation, and what the Feds response will actually be on May 4th and 5th, it’s worth being patient. This is because while the news cycle on the war in Ukraine and its impact on commodity prices has moved a bit to the background, its impending resurgence is a good reason to stay alert as well. Same can be said for Washington, where nothing is coming out (for a change) and with impending fall elections due to gain some traction, in the meantime, as the markets try to recover, enjoy the ride.


April 18, 2022

We’re Almost There, But

Markets

The broad markets continued their expected declines last week into oversold territory, it’s still too early to get bullish, for now, optimism should suffice. The caution is simple, the short term technicals are showing an increasingly oversold market, but the overall technical condition has been damaged this year and will require more than just a pause in momentum, or a poor earnings season. I think it’s still up to the Federal Reserve’s expected increase of financial interest rates, and the ongoing conflicts in the world, led by the war in Ukraine. Once those uncertainties become clearer, the markets will have a steep climb to reach a level from which a more convincing rally lies ahead.

Economy

Another challenge that we’ve discussed here has been the unevenness of the economic condition. Higher interest rates to battle inflation are never to be taken lightly, and as the narrative speculated about coming recessions, that’s to be expected too. Last week Housing came in as expected, neither slower nor faster, but that number could seem some definite head winds as mortgage rates rise in sync with the current rise in US 10yr and 30yr Treasuries, to 2.9%, 3.0%, respectively to levels not seen since 2018. All on the back of recent inflation data showing the Consumer Price Index (CPI) and the Producer Price Index, (PPI) rose 1.2% and 1.4% in March and annually 8.5% and 11.2% respectively. Personally, although unlikely, I would like to see the Federal Reserve aggressively increase rates 1.0%, but no lower than .50%. The week ended with a slightly lower than expected Retail Sales number of .05% vs .06%. Today, Industrial Production increased a strong .09%. All this strengthening activity on the back of Real GDP coming in at 5.5 in 2021. However, in the two years ending with the 4th quarter of 2021 the annual rate was 1.6%, which is closer to the 1.5% which is actively being tracked by the economist community. Uneven has been a natural occurrence because of the pandemic, in my opinion, a more even growth rate appears to be happening, and with the Fed set to raise rates more than 2% this year, 1.5% to 2.5% shouldn’t slow the economy too much. While some of the impact of inflation may have slowed consumption during the traditionally active Easter holiday, in my opinion, activity should increase as the weather warms up. At that time, traveling domestically and internationally should warm up as well. Overall, my early expectation, is more consumption this year will eventually slow down next year, much more like a pending rainstorm, rather than a hurricane.

External Events

The Federal Reserve knows that inflation is too high to ignore. I still see more external events affecting inflation, such as continued supply chain disruptions and the recent lockdown in China adding the breadth of the disruption by impacting its commanding lead in export of consumer electronics, data processing technologies, clothing, textiles and medical devices. War in Ukraine is still mostly affecting fossil fuels, all factual events with a wide range of unintended consequences keeping the uncertainty real. As long as that condition prevails, cash on hand, with an eye on increasing exposure in consumer staples and services, healthcare biotech and services and select technology companies. Particularly those that have suffered this year because of short selling speculators, including Hedgefiends and Pindudes. This is because those companies still have products and services in demand, admirable balance sheets, and a clear vision with a strategy to take a huge bite out of the future.