Sep 26, 2022
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“But I do think that we’re going to do all that we can at the Federal Reserve to avoid deep, deep pain. And I think there are some scenarios where that’s likely to happen.” – Raphael Bostic
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You know it’s bad out there when a Fed official ‘thinks’ that the Fed will do all it can do to avoid ‘deep, deep pain’. Early on in the tightening cycle, Fed Chair Powell said that the Fed’s path to higher rates could result in a ‘softish landing’ for the economy. A few weeks later, he noted that the policy could be accompanied by ‘some pain’. Last week, the Fed chair told reporters that no one knows if this process will result in a recession. Over the weekend, it wasn’t the Fed chair speaking, but Atlanta Fed President Raphael Bostic had the comments above in an interview on ‘Face the Nation’. In the span of five months, Fed officials have gone from describing the impact of tighter policy on the US economy as a softish landing to short of ‘deep, deep pain’.
If there’s anything positive to say this morning, at least September has only a week left. Heading into the last trading week of the month, the S&P 500 has already shed 6.6% which ranks as one of the worst MTD performances heading into the last week of the month in the post-WWII period. The table below lists each year where the S&P 500 was down over 5% on the month heading into the last week of September along with how the index performed in the final week of the month.
In the 12 prior months where the S&P 500 was down over 5%, the final week of the month experienced a median decline of 0.44% with positive returns just 42% of the time. That’s hardly anything to get excited about, but it is also not much worse than the average performance for the final week of the month in all years since WWII (-0.34%). One thing you can probably count on is volatility. To close out the month. In 7 of the 11 prior years show, the S&P 500 was up or down at least 1% in the final week of the month. The most extreme downside move was 2.2% in 2002 while the most positive upside move was 7.8% in 2001.
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Sep 23, 2022
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“Price is what you pay. Value is what you get.” – Warren Buffett
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Down and down she goes, where she stops, nobody knows. Global equities are tanking this morning as interest rates surge at what, in some cases are unprecedented rates. In Europe’s STOXX 600, just 19 stocks are currently higher on the day, and the UK government’s 5-year gilt has seen its yield surge by nearly 100 bps this week alone. Over at least the last 30+ years, there has never been that large of an increase in the 5-year gilt yield in such a short period of time. Fixed-income markets around the world are caught in an upward spiral of yields that most of the traders trying to navigate them have never seen. Alongside the surge in rates, stocks are flushing, and while the magnitude of the decline is not as severe as the move in fixed-income markets, good luck convincing anyone to step up and buy on a Friday against a backdrop where the Federal Reserve is getting exactly what it wants. If today’s declines hold at 1% for the S&P 500, it will be the twelfth 1% to close out a week this year which would already rank as the sixth most since at least 1952 and there are still another 14 weeks left in the year.
With the 2-year yield surging another 7 basis points (bps) on Thursday and another 13 bps this morning, it is trading more than 2.5 standard deviations above its 50-day moving average (DMA). Since 1976, there have only been 288 other trading days where the 2-year yield finished the day more than 2.5 standard deviations above its 50-DMA, and six of those occurrences have been in the last nine trading days!
The 2-year yield is also on pace to finish the day at ‘overbought’ levels (more than 1 standard deviation above its 50-DMA) for 24 straight trading days. As shown in the chart below, though, overbought closes for the 2-year yield have been a regular occurrence lately, and there have been two other streaks this year that have lasted considerably longer. Maybe a better question is how often this year has the two-year yield not finished a trading day at overbought levels?
The answer to that question is less than 25%. Of the 182 trading days this year, there have only been 41 where the two-year yield closed the day less than one standard deviation above its 50-DMA. Flipping that around, the yield has finished the day at overbought levels 77.6% of the time. Going back to 1977, there has never been another year where there was a higher percentage of days that the two-year yield finished the day at overbought levels. The only two years that were even close were 1978 (72.7%) and 1994 (71.6%). There’s still a quarter of the year left, so this percentage could decline, but at the current pace, the pace of relentless increase in the two-year yield has been unprecedented.
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Sep 22, 2022
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“No one knows whether this process will lead to a recession.” – Jerome Powell
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Futures are modestly higher following a slew of central bank rate hikes around the world and a currency intervention from the BoJ. Jobless Claims were just released for the latest week and came in at 213K which was 4K below consensus forecasts. Continuing claims were likewise lower than forecasts coming in at a level of 1.379 million versus forecasts for a level of 1.418 million. While yesterday’s close at the lows was disheartening for the bulls, when you consider how the market has performed following positive initial reactions to the Fed this year, maybe the Fed day weakness wasn’t so bad.
Years before he became Chairman of the Federal Reserve, Jerome Powell received an undergraduate degree from Princeton, a law degree from Georgetown, was a partner at the Carlye Group, and even served as under-secretary of the Treasury for domestic finance. He’s not only extremely intelligent, but unlike many of his colleagues on the FOMC, he has real-world experience of how the private sector and financial markets work.
Given his experience, we’re sure Powell is familiar with the yield curve and how its shape impacts the economy. Specifically, when the curve inverts and short-term interest rates rise above long-term rates, it tends to slow down economic activity. While at the Carlyle Group and the private equity firm that he started after (Severn Capital Partners), he probably experienced these slowdowns firsthand and was able to make investments on good terms for his clients.
The Federal Reserve’s preferred measure of the yield curve is the spread between 3-month and 10-year US Treasuries, which still has a modestly positive slope at about 25 basis points (bps). Besides that, another widely followed point on the curve is the spread between the 2-year and 10-year US Treasuries (2s10s). As of yesterday’s close, the 2s10s curve inverted to the tune of 52 bps making it the most inverted it has been since 1982! It was nearly as inverted in April 2000, but back then the maximum point of inversion was 51 bps. Think about that for a minute. A lot of people – maybe up to half- reading this right now weren’t even alive the last time the 2s10s curve was as inverted as it is now! Looking at the chart below, since the mid-1970s, there has never been a period when the 2s10s yield curve was as inverted as it is now that a recession wasn’t just over the horizon.
Getting back to Chair Powell, at one point in his press conference yesterday, he responded to one question with the answer that “No one knows whether this process will lead to a recession.” Let’s get this straight. The yield curve is extremely inverted, GDP growth in the first two quarters of this year has already been negative, and forecasts for growth in Q3 have been steadily declining as we close out the month. All this is before the recent unprecedented round of 75 bps rate hikes have had the opportunity to filter through the economy, and yet the Fed Chair is unsure of whether the US economy is either already in or on pace for a recession. Now we know that it’s not a good look for a Fed Chair to forecast a recession as the base case scenario, but does he really believe what he’s saying?
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Sep 21, 2022
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“The worst of COVID may be behind us, but the economic challenges we face are no less daunting.” – Jane Fraser
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Despite some bellicose comments from Putin overnight regarding the war in Ukraine, futures are higher this morning as US Treasury yields are modestly lower and oil prices trade moderately higher. There’s also been some positive earnings news as General Mills (GIS) reported better than expected EPS and raised guidance, while Coty (COTY), a smaller company, raised Q1 guidance and sees full-year estimates inline with forecasts. You can read all you want into these early moves, but it’s likely to all be irrelevant by the end of the day after the FOMC rate decisions and Powell’s press conference.
The comments above come from the prepared remarks of Citibank CEO Jane Fraser in testimony to Congress today. Mid-term elections are just over a month away, so our elected representatives need some campaign soundbites. What better way to do that than bring a bunch of bank CEOs to DC in person and give them a good scolding? Anyways, the prepared remarks of Citibank CEO Jane Fraser and JP Morgan Chase CEO Jamie Dimon, who will say that “many Americans are being crushed by high inflation eroding real incomes, particularly from higher prices on gas and food,” don’t paint a very positive picture for the economy. Whatever happened to the roaring 20s we were supposed to have after COVID?
On the same day that bank CEOs present these dour economic forecasts, the FOMC will announce what is expected to be an increase of at least 75 basis points (bps) in the Fed Funds rate which would be the third straight increase of at least that magnitude. Not only that but Powell is widely expected to set the stage for more rate hikes to come. How much more in rate hikes that follow today’s meeting may depend on what the stock market does. In an article earlier this week, Nick Timiraos at the Wall Street Journal reported that Fed officials were unhappy with the market’s positive reaction following the July rate hike of 75 bps. Powell’s displeasure with the market rally was so intense that he scrapped his prepared Jackson Hole speech in favor of a more direct and forceful message that the FOMC would “Keep At It” and do everything it could to bring inflation down.
Powell got exactly what he wanted from the market following that speech as stocks have been cratering ever since. Minneapolis Fed President Neel Kashkari reinforced the Fed’s intent to get stock prices lower when he remarked that “I was actually happy to see how Chair Powell’s Jackson Hole speech was received…I certainly was not excited to see the stock market rallying after our latest Federal Open Market Committee meeting”.
Investors always discuss the Fed’s dual mandate of maximum employment and stable prices, and lately they have questioned whether the Fed has shifted to focus on a single mandate of stable prices. With Powell taking the unusual step of completely ditching his Jackson Hole speech last month and then Kashkari outright endorsing the negative market reaction to Powell’s speech, the idea of a single mandate Fed – one intent on lower stock prices – now seems accurate. Now, if only we knew how much of a bear market would satisfy the Fed’s new mandate.
When you have members of the Federal Reserve openly rooting for lower stock prices, you can’t be surprised by the performance of equities this year, but when you put it in a historical perspective, 2022 ranks right up there with the worst of them. Yesterday, the S&P 500 fell more than 1% for the 45th time this year. That works out to 25% of all trading days, or more than one 1% decline a week. Since the five-trading day week started in 1952, the only other years with a higher percentage of 1% down days were 1974, 2002, and 2008. With declines of 29.7%, 23.3%, and 38.5%, respectively in those years, this year’s decline of 19.10% seems pedestrian.
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Sep 20, 2022
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“The sea is dangerous and its storms terrible, but these obstacles have never been sufficient reason to remain ashore.” – Ferdinand Magellan
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Just like yesterday, futures are lower this morning as interest rates continue to make new multi-year highs while crude oil is marginally higher. The major news event of the overnight session was a 100 basis point rate hike from Sweden’s Riksbank. That was the largest rate hike for the central bank since 1992. In economic news, Germany’s headline PPI increased 7.9% month over month. Yes, you read that right- month over month. In the US, Building Permits and Housing Starts came in mixed relative to expectations. Housing Starts were expected to come in roughly unchanged at 1.45 million, but the actual reading came in at 1.575 million. Building Permits, however, missed expectations by just about as much as starts beat (1.517 million vs 1.610 million consensus forecast).
As has been the case for most of the year, interest rates are on the rise again this morning. The 2-year and 10-year US Treasury yields are up about 4 basis points (bps) pushing both up to new multi-year highs. What’s somewhat notable about the moves in the last 24 hours is that for the first time in just over three months, both the 2 and 10-year yields are at 52-week highs.
In the case of the 2-year yield, its yield has been hitting 52-week highs pretty much every day since Labor Day, but the 10-year yield only took out its June highs yesterday. No matter how many times we say it, it’s hard to imagine that less than nine months ago, ten-year yields were at 1.5% while two-year yields were less than 0.75%.
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Sep 19, 2022
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“Objects in motion stay in motion in the same direction unless acted upon by an unbalanced force.” – Isaac Newton
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There’s very little in the way of economic or earnings data this morning, the Fed is in its blackout period, and the buyback window is closed. Therefore, there appears to be very little in the way of catalysts to interrupt the current path of equities which has been lower and interest rates which have been higher. Futures are indicating a decline of about 0.75% at the open for the S&P 500, and the 10-year yield is above 3.5%. The only economic report on the calendar today is homebuilder sentiment, and given the moves in interest rates, it’s hard to imagine an upside surprise.
The negative start to this week follows what was a lousy week for not just US equities but equities all over the world. US stocks were easily the worst performers last week with the S&P 500 (SPY) and Nasdaq 100 (QQQ) both falling 5%, but other major regional equity ETFs all fell at least 2.5%. Of the nine ETFs listed below, they are all at least 4% below their 50-DMAs, all of them are oversold, and all but three (SPY, ACWI, and VPL) are down 20% YTD. It’s not even three-quarters finished, but 2022 is already shaping up to be one of the worst in the post-WWII period for not just US stocks but stocks all over the world.
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