Things you need to know
- Stocks churning as investors reconsider the outlook
- Dollar continues to push higher
- Oil holding onto $80/barrel – Will Joey release reserves?
- Big retail week – How will the consumer perform?
- Joey to sign the 1st infrastructure bill
- Try the Limoncello
Stocks rose on Friday ending the week just slightly higher – while performance for the week was slightly lower…. By the end of the day the Dow added 180 pts, the S&P added 34 pts, the Nasdaq ahead by 156 pts, the Russell up 3 and the Transports added 52. The 10 yr. treasury yield rose to 1.58% up from 1.45% the prior week. While we don’t talk about it a lot – the yield on the 2 yr. note – which is more sensitive to a change in monetary policy – it rose to 0.522% as expectations continue to rise of a possible rate hike in June. Oil ended the week at $80.70 while the Dollar index continued to climb – having broken out of resistance at 94.50 pushing higher to 95.10 and on its way towards 98 as discussed last week.
Tech and Communications sectors the best performers up 1.2% and 1.4% respectively. Energy and Utilities were the only two sectors that finished lower – down 0.2% and 0.06%. Electric Vehicles were all the rage last week with the IPO launch of Rivian – RIVN taking the crown…. rising 65% from the IPO price in its first week of trade.
TSLA did not have a good week – falling 17% as investors reallocate some money to this newest player in the space….Others will tell you that TSLA fell by that much because Lonnie sold some $6.9 bil worth of stock….Please….do not fall into that trap….Lonnie sold stock to pay a tax obligation….he sold less than 2% of his holdings and still owns $170 billion worth of stock…..the $6.9 billion dollars represents just 3% of the total weekly trading dollar volume of stock….so again- I ask – do you think that Lonnie’s sales is what caused TSLA to lose 17%?
Think about new competition, think about a stock that ‘might be’ a bit overdone on the upside… The stock is up 80% ytd and was up 58% in this quarter alone…. a 17% pullback for a name like this is not a reason to set the place on fire at all and if rates begin to rise – look for this name and other highflyers to come under even more pressure so get ready for some revaluations to hit the tape.
Investors are now beginning to struggle with the reality that the narrative is not the narrative that we’ve been told. On Wednesday, we learned that consumer prices are rising at a 30 yr. high – 6.2% annually – and that is causing many to reconsider the whole ‘inflation is transitory’ argument.
Suddenly – analysts and strategists that were in that camp, are no longer sure that the story holds. Fed futures markets are now pricing in a 70% chance of a definite rate hike in June followed by 2 more before the year is out. Tapering – which was announced 2 weeks ago as expected – was formally launched on Friday – with the FED confirming that they will begin to withdraw $15 billion a month beginning this week.
So the argument that tapering and interest rates increases are mutually exclusive – sounds great, but is in reality not so mutually exclusive…..you see – Jay did say that the tapering and higher rates would not happen in concert with each other…….but once the tapering is complete in June – if the schedule is what they tell us – the word is that an increase in rates is sure to follow….and if the macro data in the next couple of months remains as strong as it is – we run the risk of increasing the pace of tapering so that we complete it in April or May – allowing for a rate rise even before June. (Not an odd on favorite but a reality just the same). Now, I know that is aggressive, but so in inflation…. And that is what the market is NOT expecting – at least not yet…. Press Secretary Jen Psaki telling reporters that ‘the administration expects inflation to cool in 2023’! 2023? I guess the question really is – what happens to inflation then in 2022? Minneapolis Fed President – Neely Khashkari telling us that the ‘Fed shouldn’t overreact to the elevated inflation even as it causes pain, because it is likely to prove temporary’ – ok then it’s resolved…. there apparently is nothing to worry about.
Toss in the chatter about who will be the next FED chair in February and you have even more uncertainty surrounding the markets. Now, Las Vegas still has Jay Powell in the lead, but Lael Brainard is gaining support and is now being openly discussed among the paparazzi……giving her nomination increased exposure in the public square. Now, while no one thinks her possible nomination would be a disaster – many are wondering if NOW is the right time to change the ship’s captain…. Talk of leaving Jay at the helm and elevating Brainard to Vice Chair is also part of the conversation – but will that satisfy the left? Probably not….so let’s see how much control Joey has.
Pressure from the left – think Lizzy, Bernie et al – is leaving Joey in a tough position…..and the odds are rising that Joey can’t control them….as evidenced by his continued push to pass the $4 trillion ‘build back America’ bill….Oh right – you thought it was $1.7 trillion….well sports fans – think again……The Wharton School estimates that the bill will really cost nearly $4 trillion if it passes in its current form – the CBO has yet to opine on it – ….but we won’t really know because as Nancy reminded us – ‘we have to pass it to find out what’s in it’…..
Fed supporters continue to push the idea that this too shall pass and remain optimistic that the economy can overcome the swift pace of inflation – causing some investors to go all in. once again Calls for S&P 4800 by Christmas remain the most optimistic…and that would represent another 2.5% higher from here…. Not unachievable by any stretch and if that were to happen – the S&P would have returned more than 27% for the year. I suspect that the FED will continue to push the current narrative until Jay finds out if he is in or out…. Once that decision is made public – then I think that is when the narrative changes from ‘we have it under control’ to ‘Houston, we’ve got a problem’.
This morning we wake up to a mostly better performance in Asia – China economic data revealing that Retail Sales rose by 4.9% – better than expected and Industrial Output also grew by 3.5% – again beating the estimates. Japan’s GDP declined by 3% – much worse than the expected decline of 0.8%. In the end – the markets mostly rallied as central bank support does not appear to be going away.
In Europe – the markets are beginning the week on a cautious note…as investors there search for direction…. taking in the latest Fed announcement and continuing mixed economic data around the world. Flash estimates of Eurozone Consumer Confidence are due out this morning and Flash estimates for 3rd Qtr. GDP for the Eurozone are due out tomorrow. At 5 am – European markets are hovering around the flat line.
US futures are UP (4 am) – Dow futures are +7, S&P’s up 4, Nasdaq ahead by 27 and the Russell is up by 2. It is a big week for retail earnings…WMT, TJX, HD, LOW and TGT all reporting… Note that most of these names are near their highs ahead of the reports……. Talk is that they too will all beat the estimates and the consumer will prove to be resilient – as demand for products continues to outpace supply of products. Watch for what the C suite says about this and what is happening with wages. How many times will we hear the word ‘inflation’ in their quarterly statements…. Remember – the US consumer is 70% of GDP….so this week will be telling….
Eco data today – Empire State Manufacturing…exp of 22…not a market mover at all. Biden to sign the 1st infrastructure bill today as he pushes for the build back America bill next. Expect this to steal the spotlight as he tries to divert the conversation away from inflation.
Bitcoin is trading at $66k and Ethereum is trading at $4750.
The S&P closed at 4682 – the action will be driven by retail earnings and the Retail Sales data due out tomorrow. Expectations are for those reports to show strength in the consumer…. But in the end – investors will be paying close attention to the supply chain and inflation narrative….and what that means for monetary policy in the new year.
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Take Good Care
Chief Market Strategist, Consultant
Is an Italian liqueur mainly produced in Sorrento along the stunning Amalfi Coast? It is used as an after-dinner drink to soothe your stomach after a delicious meal. It is kept in the freezer to be consumed ice cold.
For this you need: A doz lemons, liter of vodka, 3 ½ cups of water and 2 ½ cups of sugar.
Using a vegetable peeler or a zester – remove the outer skin of the lemons. Take the lemon zest and mix with the vodka. Cover tightly and leave it to sit for one week at room temp out of the direct sunlight.
At the end of the week – mix the water and sugar in a pan and bring to boil – and let it boil for 15 mins so that it gets syrupy…. **do not stir*** After 15 min turn off the heat and let it cool.
Next – combine the vodka with the syrup – then strain it thru a sieve to get out the zest. Seal and let sit for another two weeks at room temp. After two weeks – place in the freezer and let it chill. Once chilled you are good to go.