An 'automatic' rally made sense in the wake of compelled liquidations (or margin calls) in Friday's early going; with traction beyond tough to maintain. Yes the market recovered significantly; leaving things understandably vague with respect to next week's prospects. Outside of overpriced mega-caps that still have room below where they would become less risky; most small stocks are sort of 'waiting for Godot', or a chance to try rebounding meaningfully.
A few reasons for this: a) holding the technical low preceding at least briefly; b) Neil Kashkari talking about economic conditions deteriorating fast enough so as to blunt the Fed's more aggressive policy plans; plus c) news Ukraine apparently struck 'another' (the 'newly designated replacement') Flagship of Russia's Black Sea Fleet; one of only 4 remaining 'modern' Russian Frigates.
As to 'a'; there are variables (including Covid and the war plus China) that will impact whether or not S&P progresses (as it has) in stair-step toward ~3800, which I've had in mind as a 'measure' for some time. Worse if open war with Russia does unfold; not so bad if the economy softens and Fed backs off.
As to 'b'; that's what some Fed observers talk about, and me too. The idea of a weakening economy, spurred on by perceived losses of financial values in stocks and real estate, cutting short the duration of increasing Fed rate hikes.
All these variables and more have prevailed; along with 'mega-caps' catching down with the broad market; a process ongoing for more than a year. Now 'c'.
The 'revelation' (reasonably assumed by not widely discussed) of intelligence provided by the U.S. to Ukraine in spotting Russia's naval deployments 'c' has chilling effects, because that (along with the 'mobile command' units housing many Generals killed as well publicized).. could be viewed as crossing a 'red lines' between supporting Ukraine and being a co-belligerent in the conflict. It may be precisely why the Pentagon spokesman was pained to emphasize the U.S. did not provide Ukraine targeting decisions; 'just' location information.
This week's markets got more unhinged; perhaps a sigh of relief that it came back somewhat on Friday; but realizing both the Fed and Bank of England too for those that noticed, seemed to retreat on 'rate hiking' extremes; only to then recant and leave that (like the single 75 basis point hike) back on the table.
That type of confusion - or 'unforced errors' as David Tepper called the signs from central bankers - created both a credibility problem and maybe somewhat of an admission they were behind the curve for over a year as I contended. In that respect Tepper agrees with what I've said and believes this confused lots of traders. But I personally think what this really needs is a dip in Oil prices.
In sum: Sentiment got almost as negative as it can be; which in itself doesn't say you have to have a completed decline in the overpriced 'Grand Dames'. It did provide (for the brave) a decent time to add to speculative positions in the already truly-hammed stocks in the process to a period of better sobriety..
Inflation is still high; stagflation will be the excuse if things work lower; and so until there's a grander down-down-down type of negativity; things can remain in a sort of process; but obviously risk 'decreases' as the S&P goes lower. Of course 'peak inflation' (or not) matters now; and CPI next week won't really be terribly comforting (as backwards data viewing); but we should be near some sort of meaningful effort at stabilization; albeit temporary and news-sensitive.
Housing; Food; Travel and Education: all costs are rising significantly.
Of course with the strong Jobs number, superficially all seems strong at home and the CPI will likely not dissuade the Fed itself. Not to be overlooked; we've got Russia's 'Victory Day' (over Germany in WWII) on Monday; with some sort of move by Putin expected; we'd prefer he quits the war and proclaims all his objectives are completed and tries to save face. Alternatively he could ask for a formal 'war declaration' or worse; although he really can't field functioning non-nuclear forces to achieve that; so unless he wants to further humiliate the Russian people, it's time to disengage. Impossible to predict; but if he does so markets will have a celebratory favorable response; and Oil would dip too. If he instead 'invades Moldova', all bets are off, as the crisis ramps ever higher.
In light of the variables; suppressed prices in many stocks now and sequential downside weeks back-to-back, we would both avoid the short-side, and for a speculator sprinkling a mixture of innovative/disruptive 'gambles' for portions of an account, we continue adding piecemeal but only on significant dips near or at lows for the entire phase. Nothing is certain but most of the downside in stocks 'other than' the grand dames, is increasingly limited barring disaster.
Aside the obvious risk of direct NATO / Russia conflagration; there is China. It should be noted many Chinese cities remain in close-down / lock-down; while Tesla somehow claims to have resumed production (though we'd be nervous about TSLA due to competitive factors which will blossom very soon now). As shipping issues of goods from China get resolved, presuming they do soon, it will alleviate some price pressures; and work against rampant inflation; while we will not see a deflationary trend like the past, because of higher domestic wages, energy and even politics, all of which collided to escalate inflation.
In essence the Fed stayed irresponsibly behind the curve for more than a year; called for inflation when their mandate is for stability not any 'flation'; of course wants to repay Debt with depreciated Greenbacks; bad enough as a goal during extreme Government spending that preceded; but also now 'war' in Ukraine added fuel to the fires of higher commodity and energy prices; thus exactly the situation that prevails. But it's not tenable; so I look for a change.
So, the Fed rate hike was expected; then the 'unhinged' confusion. The Fed's policies won't resolve the war; they won't fix the supply-side (but China getting a better vaccine for Covid would help); and most issues will continue virtually regardless of what the Fed does now; which largely ignores the health crisis, and only gives lip-service to the stagflation in Europe 'or' the effects of war. In a sense that's also why our multiyear bullish Dollar posture has persisted.
Quantitative tightening coupled with tighter policy in this environment is fairly unique. Corporate bonds have sometimes become a drain on revenues that a shareholder doesn't always look at, but matters when it comes to bottom-lines sometimes. But again; that doesn't effect some companies.
And we're nearly at a time some call 'buyback season', which won't be a big deal this year; but if the backdrop allows a general rally, could be helpful. We are not enthused about buybacks, because they tend to be compensation to executives (indirectly) and lead to insider selling like last year's historical level of insider liquidations we noted at times. So I was pleased to hear Lisa Su of AMD at least say money goes first to growing the business before funding the buybacks, which they had also announced forthcoming.
Bottom line: S&P continues flirting in proximity to further breakdown; having managed (barely) to hold the lows of a week ago; after busting Thursday's low levels early Friday before rebounds. Clear jitters prevail going into next week.
Risks of going into 'recession' are typically presented as a negative. It should be obvious with Housing cracking and so on. Plus rents are commanding so much higher expenditures among younger people (most middle-aged folks do own their homes or at least have a low-interest rate mortgage locked-in well before this year), that it along reduces discretionary spending in that segment that is usually out-and-about. Some areas have been so crunched (I noted the creaming of Home Depot the other day); that they might rebound. But I'm not entirely convinced consumers will be willing to absorb higher costs; or that the vendors can even supply the HDs of the world with adequate goods, as yet.
And as inflation stretches, 'demand destruction' well beyond the energy sector and Housing is something to contemplate. We will be watching to see when 'airfares' start dropping and travel promotions of significance return for signs as well of consumer reticence. Retail sales are contracting; manufacturing is slowing; and not all of it is related to China supply issues; though much is.
Market could see another 'whoosh' before a rebound; but itching to get one.
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