Stocks surged higher all week and then sold off on Friday as investors/traders/algos took a breather, locking in some gains after seeing the indexes surge more than 3% each as “fear” over the coronavirus subsided. It reared its ugly head again on Friday, which makes sense as we went into the weekend. Market participants (mostly the trader and hedge fund types) unsure of “what we might hear” concerning new outbreaks, new deaths, and the extent to which this virus has now infected the world, decided that it was more prudent to take some money off the table and lock in the gains. In addition, there were other “data points” that set the tone. JPM estimates that first quarter Chinese GDP growth will be 1% (others expected to follow) while Germany’s Ind Production fell by 3.5%, the largest drop post the GFC (Great Financial Crisis). This all helped to set a negative tone, sending the algos running for the door. By the end of the day the Dow lost 277 pts or 0.94%, the S&P gave up 18 pts or 0.54%, the Nasdaq – lower by 52 pts or 0.54%. The Russell, by far the worst performer, gave up 21 pts or 1.23%.
During the week, while the virus continued to make its way across the globe and onto almost every cruise ship (it seemed), the markets did not seem to care very much. Oh yes, there were pockets of weakness: some tech (but not all), some leisure and travel (think airlines and cruise ships) and energy all got hit pretty hard, while other parts of the market surged higher. Most explained it away, ignoring the signs of even more fallout as most of China was preparing to return to work after that extended “holiday” week put in place to quarantine most of the country as they attempted to control the spread of the virus.
US economic data continued to be robust with Markit and ISM manufacturing and services PMIs continuing to show improvement, factory orders and durable goods were better than expected, mortgage apps strong. On Wednesday and Friday, we heard about US employment and those reports “rocked the house” showing gains of better than 225k new jobs created in the month of January (expectations were for ~160k new jobs). Last week also saw a range of analysts raise their price targets on TESLA (TSLA) sending that stock hyperbolic as it gained and additional 51% by Wednesday before backing off to close out the week with a 21% gain. This is on top of the 58% gain since January 2nd. All while Senators were debating the outcome of the House Impeachment articles as the Democrats continue to try and throw Donny out of office. Tuesday evening brought the State of the Union, where he delivered a fiery speech, causing Pelosi to rip up her copy in an act of defiance, causing another whole conversation about “decorum.” On Wednesday, as expected, the Senate voted to acquit and so the country will try to move on, whether or not that is possible is yet to be seen. But the market moved higher still, until the mood changed on Friday.
This week is another big week for the markets. Earnings are coming to a close (we will get about 60 reports). On Tuesday and Wednesday, the focus will turn to the FED and their outlook for the US economy and the direction of interest rates. On Tuesday, Fed Chair Jay Powell will begin the bi-annual two-day “Humphrey Hawkins” Testimony before both the House Finance Committee, Chaired by Maxine Waters (D-CA). On Wednesday, he will appear in front of the Senate Banking and Finance Committee, Chaired by Mike Crapo (R-ID).
Humphrey Hawkins, also called the Monetary Policy Report, is a bi-annual event (Feb/July) where FED Chair Powell submits a written report to congress and then appears before congress to discuss the conduct of monetary policy, economic developments and prospects for the future. In it will surely be a discussion of interest rates and where they might be headed in the months ahead. Expect all ears to be focused on this testimony, as investors/traders and algos all try to “read between the lines” and place bets on the direction of rates in the next 6 – 12 months. Remember, last week I told you that the market seems to be pricing in two rate CUTS this year (25 bps each) while Fed Chair Powell has indicated for rates to remain right where they are. Neither are going up or down (it is an election year and the FED doesn’t want to appear to be partisan). So you can bet that these two days of testimony will be watched intently. I suspect that by Tuesday afternoon, we will know what the answer is. The markets will respond in kind. Any hint of dovishness, watch for the markets to surge while any hint of hawkishness will certainly cause the algos to throw a fit, sending markets careening…
Other Economic Data
This week will also bring us the latest reading on the CPI (Consumer Price Index), a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is also known as the inflation rate. The expectation is for +0.2% month/month, Ex food and energy of +0.2% month/month while year/year expectations are expected to show 2.4% and 2.2% respectively, in-line with where it’s been but clearly showing signs of heating up. That may not bode well for this year’s testimony. Any signs of rising rates will cause the markets to have to re-price (think correct). Later in week, we will get Avg Hourly Earnings, Industrial Production, Capacity Utilization and Advanced Retail Sales.
Just an FYI, Capacity Utilization is another measure that speaks to the underlying rate of inflation. You see, it is the measure of the extent to which the productive capacity of a business is being used. It is defined as a percentage and anything over 80 suggests underlying inflationary pressures are building. This month’s reading is expected to be 76.8%, down from 77% last month.
Overnight, we saw most of the Asian markets back off as investor’s there monitor the potential impact of the coronavirus on the manufacturing sector. There are now 40,171 one cases with 908 deaths. Some businesses in China have once again extended the work stoppage as the virus continues to spin out of control. Factories are now being required to take extraordinary measures before being allowed to re-open. Tech companies are continuing to ask employees to work from home and not commute to work. China’s inflationary data for January showed producer prices rising 0.1% month/month while consumer prices rose 5.4% year/year, higher than the expected 4.9% increase.
By the end of the day we saw: Japan -0.60%, Hong Kong -0.59%, China +0.41% and ASX -0.14%.
European markets are mixed. Italy is slightly higher while the rest of the continent is under pressure. Elections in Ireland revealed no real winner from any one of the country’ main parties. In Germany, Angela Merkel’s hand-picked successor, Annegret Kramp-Karrenbauer (known as AKK), announced that she will NOT run for the top job, throwing the CDU Party and their economy into doubt once Merkel calls it quits in 2021. AKK is also giving up her leadership position in the CDU, setting that party up for a leadership contest, all to be formally announced later today. (AKK’s decision comes after the CDU made “nice” with the far right “anti-immigration” AFD party.)
As of 6:30 am – FTSE -0.23%, CAC 40 -0.23%, DAX -0.18%, EUROSTOXX -0.19%, SPAIN -0.03% and ITALY +0.20%.
US futures are mixed after being down much more overnight. Dow futures are -11 pts, S&P +1 pts, Nasdaq +11 and the Russell +1. There are no economic reports today so the focus will be on the virus, the potential implications on global growth, and what Jay Powell is expected to say. Even after Friday’s drop the S&P is closer to the highs than not. The trend line drawn from July 2019 highs does suggest we won’t hit resistance until 3390-ish. Real support is seen at the 3250 level. Anything else will keep us in the 3300/3350 range.
Oil which has gotten smashed this month, down 18% from the first of the year is finding support at $50/barrel. An article in this week’s Barron’s suggests that energy stocks may have finally hit bottom. Analysts now point out that low valuations and high dividend yields should make these stocks appealing to the “value investor.” Names like CVX, XOM, BP & RDS were all mentioned as some of the best dividend plays yielding between 4.7% – 7.2%. Recall, there are a lot of strategists (myself included) that think energy will be the dark horse in the race this year. This morning we see WTI down 18 cents at $50.18/barrel as they are still blaming the virus on weakening demand. Either way, it is good for the US/Global economy and the US /Global consumer as lower oil prices bode well for their pocketbooks. Last week, OPEC voted to cut production by 600k more barrel/day. While it was reported that Russia was on board, we later found out that maybe they aren’t, so the market and investors await.
Take good care.
40 Garlic Clove Pan Seared/Oven Roasted Chicken
Take a look at that! How good does that look? And it tastes just as good… It’s a simple yet delicious recipe to fix for dinner… Total time to prepare and cook – 1 hour 15 mins… max.
This dish was prepared by my baby brother yesterday and was so good that I had to share it…
For this you need: 1 whole cut up chicken – de-boned, Kosher salt, black pepper, 40 cloves of garlic (whole), white wine, sprigs of rosemary, mushrooms and baby potatoes (sliced in half), olive oil and butter.
Start by washing and drying the chicken pieces. Next – hit them with the Kosher salt and pepper, both sides. Set aside.
Turn the oven to 400 degrees.
In one frying pan – sauté the mushrooms – season with s&p. Set aside. Now in the same frying pan – turn up the heat and toss in the sliced potatoes add a dollop of butter. Sauté around for 10 mins – season with s&p… set aside.
In a large, deep, oven proof frying pan – add a quarter stick of butter and olive oil (like 2 times around) – turning heat to med high… add chicken pieces and brown nicely on all sides…
Now deglaze the pan with about 1 cup of white wine – nothing fruity and not chardonnay – He used a pinot grigio – bring to a boil and then add in the 40 cloves of garlic and some sprigs of rosemary. Now add the mushrooms and potatoes to the chicken and place in the oven – uncovered. Roast for 20 – 25 mins… Remove – and serve directly out of pan.
All you need with this is a tossed green salad, with tomatoes, cucumbers, red onions dressed in a simple fresh lemon juice and a good quality olive oil. Season with s&p and dried oregano.