Seasonality.

If you had invested $10K in the S&P 500 every May 1st and sell every November 1st since 1957, your $10K is about $20K.  If you invested $10K in the S&P 500 every November 1st and sell every May 1st since 1957, your $10K is now about $300K.

 

 

The seasonally slow market period is now just two weeks away.

 

US Economy

 

  • The Treasury market selloff resumed this morning, with the 10-year note yield rising above 2.75%.
  • The long end of the Treasury curve (30yr – 10yr) has inverted for the first time since 2006.

 

 

  • S&P Global downgraded Russia to “selective default” as Moscow paid dollar-denominated debt coupon in rubles. By the way, the last time Russia defaulted on its foreign debt was in 1917.
  • Mortgage rates are now firmly above 5% as Treasury yields surge.
  • The US dollar continues to rally with yields and Fed rate hike expectations.
  • Increases in office vacancy rates in 2021

 

 

  • The percentage of Americans who expect to be worse off financially in 12 months hit the highest level in at least nine years, according to the NY Fed.
  • The market now fully expects a 50 bps rate hike in May.
  • Shippers see capacity improving with shipping rates from China beginning to moderate
  • However, the COVID-related lockdowns in China are likely to make the situation worse.
  • Consumer inflation reached a multi-decade high, with the headline CPI boosted by a surge in gasoline prices last month.

 

 

  • Outlook indicators plunged.

 

 

  • The March PPI report was just awful, coming in well above consensus estimates. The monthly increase in producer prices (2nd panel below) was the highest in years.

 

 

  • Price gains were broad, with the core PPI rising by over 9% year-over-year.
  • These days, companies like to tell customers that they must boost prices to cover rising costs. But that’s only part of the story. Business markups have been soaring, which should keep margins elevated.

 

 

 

 

 

The Fed

 

As we’ve written recently, the Fed has a decision to make.

The central bank can sacrifice economic growth – and importantly, stock prices – in an effort to fight inflation (by raising interest rates and pulling back on economic stimulus),

Or it can let inflation run wild.

The Federal Reserve has a go-to treatment for inflation – higher interest rates.

But that doesn’t come without consequences…

Today, the Fed – and by association, “We the People” – is in a “lose-lose” situation,. Depending on the speed and scale of the Fed’s planned rate hikes, the central bank could slow economic growth more than anyone wants.

The way I see it is that the Fed has two choices…

Neither choice is good.

It can fight inflation, or it can support growth and asset prices.

It can’t do both.

Judging from the price action and from comments from the Fed governors themselves, they’re saying one thing (without actually saying it)…

The Fed is going to fight inflation to sacrifice growth and stock prices.

The Fed is terrified of a 1970s-style inflation environment. And based on what Fed governors have been saying in public lately – inflation is the No. 1 priority, Lael Brainard keeps saying – that appears true. So at least there’s that.

It might be successful, it might not.

For one, what it’s doing isn’t necessarily good news for stock prices. And second, the Fed is acting far too late to avoid the consequences of possibly slowing economic growth in a big way – maybe into recession territory – at the same time.

Practically, CEOs are concerned today because of high inflation… continued supply-chain breakdowns because of the COVID-19 pandemic, and now the war in Eastern Europe… and also rising costs – like higher wages, which employees want, even though they still aren’t keeping up with inflation anyway.

 

The Inverted Yield Curve

 

Here’s a chart from FRED (the St. Louis Federal Reserve all things economic database), using the 10Y–2Y yields. This is the “tens and twos” spread traders usually watch.

 

 

We again see a pattern. You can vary the parameters, but the broad principle holds pretty well. Yield curve inversions precede recessions by anywhere from a few months up to two years.

 

Market Data

 

  • A majority of technical indicators such as market breadth do not point to a healthy market environment.
  • Similar to 2018, fewer stocks have participated in the broader uptrend over the past year.
  • Investors pulled a substantial amount of capital out of financials ETFs last week
  • Small caps continue to see outflows
  • REIT ETFs continue to see outflows as rates climb.
  • The largest transportation-focused ETF was slammed with outflows last week
  • Downside momentum in transport stocks is the most severe since the March 2020 crash.
  • Utilities, Consumer Staples, Energy, Natural Resources and Healthcare are leaders
  • Precious metals keep seeing fund inflows.
  • After ignoring rising real rates for weeks, growth stocks have taken a hit in recent days.
  • Cyclicals continue to lag defensive sectors.
  • Are markets too optimistic about earnings growth?

 

 

  • Will fund managers further reduce their equity allocations as they sour on economic growth?

 

 

Interesting

 

  • Most loved and hated global figures

 

 

  • Years of life lost due to obesity

 

 

  • Evolution of the alphabet

 

 

Quote of the Week

 

“Change your thoughts and you change your world.”

-Norman Vincent Peale

 

Picture of the Week

 

 

 

All content is the opinion of Brian J. Decker