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Batman, Superhero, Portrait, Profile, Bruce Wayne, Hero

Things you need to know 

  • Holy Smokes Batman!  Nasdaq now in official correction territory
  • Stocks continue to come under pressure as confusion reigns about coming FED policy
  • Oil up on demand and geo-political pressure in Russia and the Mid-East
  • 10 Yr. Treasuries now kissing 1.9% and going higher
  • FOMC meets next Tues/Wednesday
  • Try the Linguine Tri-Colore

Smash, Bang, Crack, Ka-Boom, Pow!  (Batman and Robin – late 1960’s!)  Do you remember those fight scenes?  And the characters – the Joker played by Joey Biden – because now he is ‘funny’, The Penguin – played by Jimmy Bullard, The Riddler is hands down – Jay Powell, Mr. Freeze is Joey Manchin – do I need to explain? The Mad Hatter is easily played Nancy Pelosi, while Egghead is Chucky Schumer – as he attempts to change the rules of the Senate to force a win by the Dems and Cat Woman – I think that could be Kirsten Sinema.

Stocks got banged around again yesterday…. the Dow off 340 pts or 1%, the S&P’s down 45 pts or 1%, the Nasdaq lost 166 pts or 1.15% – putting it even further into correction territory now down 11.6% from the November highs, the Russell lost 35 pts or 1.6% – leaving this index just 4% from being in a ‘bear market’ while the Transports gave up 70 pts or 0.45%.

10 yr. Treasury yields ended the day yielding 1.86% – a stunning 40% increase since the beginning of December and will need to kiss 2% – which is another 7% rise from here before these calms down…Why?  Because stocks will continue to get beaten up and my sense is that between here and 2% -we could see the bottom fall out….so when we hit that ‘big round number’ it should cause investors in a range of asset classes to take a second look, catch their breath and then recognize that the FED is NOT going to suddenly change its mind and is committed to fighting the ‘transitory inflation’ that they assured us was nothing to worry about.

I mean look – yesterday Joey gave Jay the power to do what he must to fight inflation – saying in his 2-hr. speech that ‘it is the FED’s job to fight inflation’ – which to me means that he is not going to try and pressure the FED to remain accommodative and allow the FED to take rates higher.

But if you have been paying attention to what we’ve been talking about – none of this should be a surprise at all.  Stocks were ‘overvalued’, have been overvalued, and will remain overvalued until we get more clarity from the FED.  Remember what I have been telling you – this is nothing more than a math problem…. if you change the inputs then the answer must change….so when inflation was 1.6% and interest rates were 0 and 10 yr. treasury yields were 1.4% – then valuations on a range of assets (think stocks, startups, real estate, cryptos, NFT’s, …) all surged.  But when inflation is 7% (on its way to 10%) and rates go from 0 to 1% (on their way to 2+%) and 10 yr. yields go up 40% in 4 weeks with no end in sight – then valuations have to ‘re-price’ (lower).  Why is any of this confusing?  It’s 6th grade math.

Ok, look, yes – the recent volatility is all about the recent pace of inflation – which is getting worse by the month, it is about the lack of clarity from the FED about the pace and increment of any rate rise – and I say this because they were very clear about the direction and pace of any change in policy for most of 2021…. controlling the narrative and keeping everyone at bay.  Then suddenly, when it became clear that the macro data was NOT what they thought it was, when they suddenly eliminated words and thoughts from monthly statements, when they had Jimmy Bullard – who was not a voting FOMC member come out and be the mouthpiece – telling us in late November that the FED needed to be ‘more aggressive’ they needed to end the taper sooner and that they needed to reduce the balance sheet and do this all at the same time – is when the tone changed.   And what exactly does ‘roll off the $9 trillion balance sheet’ really means to investors, I mean – what does it really mean to Joe Q Public?  Why should they care?

This is when they started to lose control of the narrative… Suddenly all of the other FED members started to sing the same song…..all you have to do is look at any of the charts…..they scream “we are behind the 8 ball and are losing control of the conversation” leaving some of the biggest investment banks in the country to drive the conversation…which is confusing, because there is an inherent conflict of interest there….

They enlisted their friends at Goldman to drop the bomb….and then JPM to drop more bombs…. Then we get the start of earnings season and forward guidance – the banks were the first out the door and while many are beating on the bottom line – it is the nuanced guidance and commentary that has caused some investors to run for the door. The XLF down 6% in one week while JPM is off 12%, GS down 15%, C – 6%, BAC -8%.   Suddenly, it’s a mess – everyone is talking about 4 – 8 rate hikes in one year with increments of 25 bps to 75 bps. And then you want to know why stocks are taking it on the chin?   Come on Man!

Now, I still think it’s 3 increases totaling 1% this year – Not sure what 2023 looks like, but all I know is that you can expect more…. Period.

Now this doesn’t mean at all that you should panic and run for the door – what have I been telling you for months now?  You need to have this conversation with your financial advisor, you need to re-weight your portfolio to be more defensive, you need to not chase so many of those ‘sexy high valuation’ names right now – and you need to consider more value names as you add new money to your portfolio.  In fact, the Value trade – SPYV is only off 0.9% ytd while the Growth trade – SPYG is down 8.4%.  Energy and Financials which are also names I have been suggesting are outperforming…. XLE up 15% ytd while XLF is still up 0.5% (even after the recent pullback – a pullback that for me presents an opportunity).

Industrials are down 1.1% but that pales in comparison to the worst performers – the XLK down 8.2%, ARKK down 22%, Consumer Discretionary down 7.5%, Healthcare down 6.5%, Real Estate down 8.6%, and Basic Materials down 3.5%.

Oil – continues to push up and is now trading at $86.79/barrel on its way to $90/barrel as demand surges….…all while Joey told us yesterday that he is doing all he can to find available sources of energy to help stop the surge…. Oh boy…. are you gonna make me go there right now?  Add in the geo-political unrest in Europe and the Mid-east and you have a recipe for higher prices – this as we go from winter to spring and spring to summer….

Eco data today includes initial jobless claims of 225k, cont. claims of 1.56 mil, Philly Business Survey of 19 and Existing home sales which are expected to be down 0.5% – my guess is that we could see a bigger drop.  30 yr. mortgage rates for conventional loans are now trading at 3.7% – up from 3% just weeks ago and only going higher….so expect housing to hit a brick wall and begin to pull back as well.  Again – it must, it’s a math problem…. interest rates go up, prices must come down to balance out affordability…. $500k at 3% is $2108/mo while the same mortgage at 3.7% is 2300/mo – a 10% increase in the cost of carrying the home…Capisce?  At 4.5% the cost goes up by 20% to $2533/mo.

And the earnings story will continue to steal the spotlight – along with the complete dissection and fact checking of Joey’s speech yesterday. 

US futures are up this morning….…. the Dow up 118 pts, the S&P up 21 the Nasdaq up by 120 and the Russell ahead by 7 pts.  This should also not surprise you after the recent beating those stocks have taken, but do not go all in, keep your head on, pick your spots and pick high quality stocks that can perform and outperform in what is sure to continue to be a volatile environment.

Next week is the FED meeting – so get ready…. the market is pricing in an announcement of 4 hikes in 2022 – each one 25 bps.  So, any change in that thinking will cause investors/algo’s and traders to react.  I think and hope that the first move will be 50 bps – only because THAT might shake the branches a bit more causing weaker investors to fall out….and then maybe we get the flush….

European markets are mixed…. Inflation across the UK is at 30 yr. highs, all eyes on earnings and on central banks…German Bunds now yielding just over 0% which is a huge positive, considering how long they have been negative.   At 7 am – European markets are all trading around the flat line at -0.2% to 0.4%.

The S&P closed at 4532 – now piercing its intermediate term trendline at 4576…. The S&P is now in a 4425/4675 range……It should find some short-term support right here at 4500 – the lows of December.  So much now will depend on what we hear next week and the tone of what we hear and the urgency of what we hear….so sit tight
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Take Good Care

Chief Market Strategist, Consultant

Linguine Tri-Colore

This is a classic dish….
For this you need:  Small cherry tomatoes, capers, sliced olives, parmigiano reggiano cheese,
bread crumbs, extra virgin olive oil

Slice cherry tomatoes in half. Put them in a roasting pan – season with s&p, olive oil, capers some olives and cover with parmigiano and bread crumbs.  Put in the oven at 400 degrees for 15-20 minutes.

While this is happening bring a pot of salted water to a rolling boil.  Add the linguine and cook until aldente.  Strain – saving a mugful of the water.  Remove the tomatoes from the oven and mix with the linguine.  You can add a bit of the pasta water to moisten.  Have extra cheese on the table for your guests.

Buon Appetito.