Mar 14, 2022
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“Life is like riding a bicycle. To keep your balance, you must keep moving.” – Albert Einstein
It’s a new week, and while it has been typical to see futures lower on the first trading day of the week so far this year, the S&P 500 and Dow are currently indicated higher. Nasdaq futures were higher earlier but have given up those gains. The catalyst for the weakness in tech stocks this morning is likely due to new COVID lockdowns in China and the impact that these shutdowns will have on tech supply chains.
Crude oil prices are down over 5%, and the cause for that decline seems to be tied to some positive sentiment related to cease-fire negotiations over the Russia-Ukraine war, but it could also be related to concerns over demand as China starts new rounds of Covid lockdowns. One thing for sure, is that a new wave of lockdowns in China, will not be good for global economic growth.
Read today’s Morning Lineup for a recap of all the major market news and events from around the world, including the latest US and international COVID trends.
It’s a new week for the markets in what has been a lousy year. Heading into the week, all but four sectors are oversold, while Energy and Utilities actually finished last week at overbought levels. Consumer Staples (XLP) was the big loser last week falling close to 6%, while Technology (XLK) and Communication Services (XLC) fell more than 3%. On a year-to-date basis, the performance disparity between Energy and everyone else continues to widen. While XLE is up over 38% YTD, no other sector is in the black, and Consumer Discretionary (XLY), XLK, and XLC are all underperforming the Energy sector by more than 50 percentage points YTD. Gaps in performance of that magnitude are pretty much unprecedented.
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Mar 11, 2022
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“And Lord, we’re especially thankful for nuclear power, the cleanest safest energy source there is. Except for solar, which is just a pipe dream.” – Homer Simpson
It’s just a coincidence that Google searches for the term ‘nuclear war’ are hitting a record high as we’re marking the 11th anniversary of the Fukushima nuclear disaster in Japan, but the term nuclear has been showing up a lot lately. Whether it is Germany’s plan to shut down its nuclear power plants and make it even more reliant on Russian energy, or the Russian invasion of Ukraine that has raised risks of a nuclear accident at the site of the former Chernobyl plant or Ukraine’s other nuclear power plants that are operational, or the risk of nuclear war with Russia if NATO comes in to actively help defend Ukraine, you can’t get away from the subject of nuclear lately.
Thankfully, equity markets look to be putting a lot of these concerns aside temporarily giving investors a reprieve heading into the weekend. S&P 500 futures are currently up over 1%, crude oil is up over 1%, gold is down 1.5%, the 10-year yield is flat right at about 2.0%, and bitcoin is right around $40,000. The positive tone in equities was present for most of the night but just got an added boost shortly before 7 AM on reports that Russian President Putin said there were positive shifts in talks with Ukraine. At this point, the markets will take whatever good news they can get, but keep in mind that Putin is also the one who said Russia wouldn’t invade Ukraine.
Read today’s Morning Lineup for a recap of all the major market news and events from around the world, including the latest US and international COVID trends.
It’s been a pretty nasty week for US equities since the close last Thursday. During that span, the S&P 500 is down over 2% while the Nasdaq is down 3%. The worst performing sector during this period has been Consumer Staples (XLP) which is down close to 5%, while Technology (XLK) and Financials (XLF) are both down over 3%. Rounding out the top five of biggest losers, Communication Services (XLC) and Consumer Discretionary (XLY) are both down over 2.5%. Not surprisingly, all five of the aforementioned sectors are also at short-term oversold levels.
While most sectors are lower, three have managed to buck the trend over the last week. Energy (XLE) has been the biggest winner, rising close to 6%, followed by Utilities (XLU) and Real Estate (XLRE). Unfortunately for the broader market, though, these three sectors are also the smallest sectors in terms of their weightings in the overall S&P 500.
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Mar 10, 2022
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“The best way to destroy the capitalist system is to debauch the currency.” – Vladimir Lenin
It was fun while it lasted. After a much-welcomed rally Wednesday, futures are firmly in the red this morning and set to give up a little more than a third of their gains from yesterday, and as we’ve been typing this the losses have only been mounting. For the S&P 500, that would put this week’s losses at over 2% for the week. Meetings between foreign ministers from Russia and Ukraine did not yield any substantive results, so the fighting looks set to continue. Elsewhere in Europe this morning, the ECB left rates unchanged (as expected), but announced a faster timeline for its plan to wind down asset purchases.
The big economic event of the day is obviously CPI, and it’s not going to be pretty as the headline reading is expected to increase 0.8% relative to January, while the core reading is forecasted to increase 0.5%. Don’t forget about jobless claims, though. The weekly reading on initial claims is expected to come in at a level of 225K. One combination of data that the markets will not want to see is higher than expected readings on both fronts.
Read today’s Morning Lineup for a recap of all the major market news and events from around the world, including the latest US and international COVID trends.
There’s no arguing that the current levels of inflation are high and likely to go even higher in the months ahead. Since the start of 2021, there has only been one month (August 2021) where headline CPI has come in weaker than expected, and the compounded impact of these higher than expected monthly readings is the fact that today’s report for the month of February will mark the 9th straight month that y/y headline CPI has been above 5%. That’s a pretty long streak, but looking back over history, it’s nowhere close to as long as some of the prior streaks we have seen. Late in WWII and into 1920, headline CPI was above 5% for nearly five years. In the early 1940s during WWII through 1951, there were three separate streaks where headline CPI was above 5% y/y for at least a year. Then there was the 1970s coming out of the Vietnam War and into the early 1980s when there were three streaks that lasted at least 20 months including a five and a half year streak ending in 1982.
To put it another way, in the entire decade of the 1970s, more than 75% of all CPI readings were above 5% and the average y/y reading was 7.1%. Inflation is painful right now and will likely get worse from here, but the current period is still nowhere near the 1970s.
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Mar 9, 2022
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“Your reality is as you perceive it to be. So, it is true, that by altering this perception we can alter our reality.” – William Constantine
Equities are experiencing a monster rally this morning with S&P 500 futures up over 1.5% and the Nasdaq indicated to open higher by more than 2%. European stocks have rallied even more with Germany’s DAX up nearly 5%! As we have pointed out several times over the last several weeks, though, futures are only telling us where the market is now, and where we finish the day can easily look a lot different than it does now. Take the current level of futures, for example. At the open today, the S&P 500 will still be trading below yesterday’s afternoon high. We’ll take what we can get, though.
There’s seemingly not much in the way of a catalyst that can be cited for this morning’s move, but comments from a Russian spokesperson saying that Russia isn’t looking to overthrow the Ukrainian government have been cited by some as contributing to the move. These types of comments have been common over the last two weeks, though, and they differ from what has actually been taking place on the ground in Ukraine.
The only economic report on the calendar this morning is the JOLTS report, but it’s a January report, so it won’t be telling us anything we don’t already know.
Lastly, today marks the 13-year anniversary of the Financial Crisis low in March 2009, ending what was one of the worst bear markets in US history, and if you remember that day, there wasn’t a lot of hope for investors as it looked like there was no way out for the market. The thing to remember regarding bear markets and market corrections, though, is that at the lows, the way out is never obvious.
Read today’s Morning Lineup for a recap of all the major market news and events from around the world, including the latest US and international COVID trends.
Energy stocks have had a rally this year that can only be described as insane. Over the last 50 trading days, the Energy sector ETF (XLE) is up over 40% while the S&P 500 ETF (SPY) is down more than 11%. That works out to a spread of nearly 53 percentage points! Since XLE started trading in 1999, there has never been a 50-trading day period where the XLE outperformed SPY by as wide or wider of a margin.
Looking at the above chart, it’s hard not to argue that the Energy sector has massively gotten ahead of itself. 50 percentage points of outperformance in 50 days? Changing perspective a bit, though, shows just how depressed the Energy sector was relative to the rest of the market. The chart below shows the long-term relative strength of XLE versus SPY since the start of 1999. What a ride it’s been!
Basically from the time XLE started trading to mid-2008, it handily outperformed SPY, but in the 12 years that followed, XLE gave up all of its outperformance and more, only just recently getting back to even. Since the start of 1999, both ETFs have essentially experienced the same returns (+232% for XLE and +238% for SPY). So even after the recent surge in XLE, it is still slightly underperforming SPY over the last 23 years, and if you measure performance since the lows of the Financial crisis, SPY’s performance is more than five times the return of XLE!
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Mar 8, 2022
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“No fact begins with if” – Nicholas II
With the entire world focused on the Russia-Ukraine war and possible scenarios under which President Putin can either ratchet up or dial back the tensions, it’s ironic that today marks the 105th anniversary of the start of the ‘February Revolution’ which essentially ended the reign of czarist rule in Russia when Nicholas II abdicated his throne. Historians cite a number of factors for the February Revolution including frustration with government corruption, a poor economy, and autocratic rule, but the Russian military’s poor performance in World War I was the primary catalyst for the Revolution. Russians came out in droves to protest the conditions and despite an attempted crackdown Russian police and ultimately the military, the protestors refused to back down. Within less than a week, Nicholas II abdicated the throne ending the era of czarist rule in the country.
Not long after Nicholas abdicated, Vladamir Lenin returned from exile in Switzerland to lead the Russian Revolution, and as he is often credited with saying, “There are decades where nothing happens, and there are weeks where decades happen.” During the February Revolution, it took less than a week for protests to lead to the abdication of the throne by Nicholas II and usher in the communist era. The current Russia-Ukraine war hasn’t even been two weeks yet, and several years from now, with the benefit of hindsight will we be looking back on this period as another one of those moments where ‘decades’ occurred within a matter of weeks?
Futures are looking pretty boring at current levels as we type this with little change in any of the major averages, but since the close yesterday, we have seen them trade down more than 1% and trade up by close to 1%. One thing we can pretty much bank on here is that equity indices will not finish the day where futures are currently trading.
In the commodity space, we’re still seeing some intense moves as nickel prices more than doubled to over $100,000 per metric ton resulting in a halt of trading for the remainder of the day. Given that move, the 2% rally in crude oil looks downright pedestrian.
Lastly, on the economic calendar, the NFIB Small Business Optimism Index came in lower than expected falling from 97.1 last month to 95.7.
Read today’s Morning Lineup for a recap of all the major market news and events from around the world, including the latest US and international COVID trends.
With all of the volatility we’ve seen so far this year, the average daily change of the S&P 500 and Nasdaq has been ticking higher, and over the last 50-trading days, both indices have seen average daily moves of at least 1%. For the S&P 500, the current rate of daily volatility is still below the highs from December 2020, but the Nasdaq’s average daily move of 1.51% is on the verge of eclipsing that peak from the same period. For some perspective, though, the current pace of volatility in stocks is nowhere near the levels experienced during the COVID crash when both indices were experiencing average daily moves of more than 3%.
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Mar 7, 2022
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“Facts do not cease to exist because they are ignored.” – Aldous Huxley
It hasn’t been a fun morning for equity investors around the world this morning as futures have been in the red everywhere you look. German stocks, while currently off their morning lows are currently on pace to close in bear market territory. Here in the US, futures are also lower, but well off their overnight lows.
The Russia-Ukraine war continues to drive headlines, and the place it is being felt the most is in crude oil prices. While prices of WTI still remain elevated at a price of more than $118, they actually briefly traded as high as $130 in overnight trading. How desperate is the market for additional barrels of oil given the disruption of Russian supplies? This weekend, US government officials actually visited with the Venezuelan government in an effort to boost ties with a country we cut off diplomatic relations with back in 2019.
Read today’s Morning Lineup for a recap of all the major market news and events from around the world, including the latest US and international COVID trends.
Mondays (or the first trading day of the week when Monday was a holiday) have not been friendly to bulls this year. In the nine weeks so far this year, the S&P 500 has opened the day lower seven times by an average of 0.54%, and today looks like it will be the eighth). The rest of the week has also been negative, but with an average gap lower of 0.03% for all other days of the week, Mondays have been notably weak.
While stocks have opened the day lower to kick the week off, selling hasn’t necessarily followed through to the rest of the trading day. After opening down by an average of 0.54% to start the week, SPY has averaged an intraday gain of 0.42% with positive returns just over half of the time. That compares to an average intraday decline of 0.20% for all other days of the week.
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