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.


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