Lots to Look At

 Market

The capital markets feel very good these days, why doesn’t the rest of the world? In my opinion that’s because capital markets doing well are not the same as feeling well. The point is the broad indexes have gone from technically oversold to technically overbought, separate from the surrounding uncertainties which are likely to become more of a distraction in the near term. The good news is that many of the stocks that showed renewed vigor did so as the broad indexes deferred the uncertain realties surrounding them in favor of companies with strong balance sheets, sound management, globally diversified product reach and clear need within current economic cycle. While the broad indexes improved, although they remain in negative territory for the year, favorable performance of the cyclical growth stocks, in keeping with the traditionally strong spring and summer months, helped with the improvement, while remaining well under the 52 week highs themselves. Companies such as Apple (AAPL), Nvidia (NVDA) and Amazon (AMZN), all up recently over 20%, are all still at least 10% under their 52week high. As we enter the end of the first quarter of 2022, the earnings data that will flow into the markets could be the trigger to resume the momentum of those names, as long as the broad indexes take a technical pause in the meantime.

Economy

The current domestic economic condition continues to show uneven growth, last week New Single Family Home Sales declined 2%, followed by a decline of 2.2% for New Orders for Durable Goods which saw a large drop in commercial aircraft orders. In keeping with other data referred to in previous comments weakness, even slight, was reflected in today release of the first revision (usually 2-3) of 4th Quarter 2021 Real GDP, which dropped slightly lower from 7.0% to 6.9%, still leaving 2021 in the 5.5% growth range, the strongest annual GDP in decades. On Friday the Bureau of Labor will release monthly Employment data which is expected to reflect continued growth in Non-Farm Payrolls (est. 490K) and a further decline in the Unemployment Rate (3.8% to 3.7%). This will clearly keep the Fed on track to raise rates a second time at their next meeting on May 3-4th. Lastly, concerns are rising on Europe’s economic health as threats of cutting off Natural Gas and increasing supply chain problems, both stemming from the Ukraine conflict and too much dependence on Russia and China, the latter currently in a broad Covid lockdown that is interrupting trade.

External Events

The uncertainties of battling inflation and the ongoing war in Ukraine are moving into distraction territory, as neither has a predictable solution, but also because new uncertainties are entering the picture. One such uncertainty is the potential of the yield curve inverting. What this means essentially is when the 2y Treasury Note trades at a yield higher than the 10yr Treasury Note. The outcome is usually a recession, but that’s where the confidence stops. Recessions coming from inversions can transpire as much as 19 months after the occurrence. I still hold on to the opinion that inflation will likely slow on its own, maybe not killing inflation, but certainly stalling it. Future rate increases would impact credit card debt, which could impact the consumer. Rising mortgage rates could also take money out of the pockets of consumer. Likewise on May 1, the end of a 2yr freeze on paying installments on college debt could result in nearly 200 billion dollars leaving the consumer market. This is being met by the current political debate on raising taxes and giving more cash away. Maybe a better idea is to focus on employment participation and keep wages rising, currently up 4.7% in 2021, and already up 3% in 2022. Put more money earned in the pockets of the consumer; labor growth may slow but greater discipline may also ensue and inflation will feel the pinch of both. 

Overall, although technically overbought, I’m not sure how much the broad indexes can decline, and I’m more comfortable with expecting a pause in the strong rebound that we’ve recently experienced. In part, even with the indexes weakening, the investments we own should perform comparatively better and opportunities should prevail.