'The usuals' aren't calling
Hard to call a bottom when investor fear is missing.
Traveled this week on the west coast of Florida. At our first stop, Sarasota, the advisor, blushing, asked to see my shoes before moving on to business.“What’s going to happen here?” she remarked, concerned her clients “are too calm.” She wants them to fight the urge to buy the dip. Next stop, Port Charlotte and a fun advisor dinner where I learned nearby Arcadia is the home of the first-ever rodeo (and other interesting tidbits unfit to print here). The group agreed, “This is not going to end well.” At a client event in Fort Myers, some worried about a depression and banks “taking our money,” while later, a couple at dinner in Naples wanted me to settle their dispute about loading up on gold bars because “this is a disaster.” Whoa! But still, too much complacency. A Naples advisor group wonders if we “should buy the dips,” while a Tampa advisor on a call noted “the usuals” (who predictably panic at bottoms) haven’t called. Wall Street remains skeptical without some combination of capitulation (a VIX north of 40), a spike in put/calls (99th percentile) or extreme oversold conditions. Bank of America thinks the S&P 500 still looks historically expensive and Strategas Research sees 4,450 as a big upside hurdle. Support at 4,200 has held, sort of, but the tape feels weak, with value stocks the best performers (Energy keeps killing it). Growth looks like a burst bubble. It may be a “nowhere to run/nowhere to hide” market where most individual constituents have been hit, but a deteriorating negative trend implies deeper oversold conditions are needed before a meaningful low develops. The market is nearing a death cross (the 50-day below the 200-day moving average)—this could be bullish if sentiment were in what Renaissance Macro calls a “trouser-soiling state.” As it stands, there are pockets of concern, not outright fear. “The usuals” aren’t calling.
No surprise food and energy prices are surging (more below). Russia ranks first, second and third, respectively, in global exports of natural gas, oil and coal. Russia and Ukraine account for 30% of the world’s wheat and 18% of its corn. And Ukraine produces nearly half of the planet’s sunflower oil. Price shocks are a bigger problem for Europe than the U.S., which exports as much energy as it imports. The U.S. is far more energy efficient than it used to be (it only takes 6% of the oil to produce a unit of GDP than it did in the ’70s and ’80s), and its farmers produce a wide range of commodities. So even as higher prices crowd out other expenditures, they generate revenue and income for big segments of our economy. Further, while at all-time nominal highs, gasoline is far from 2008 levels in real terms, representing just 2.3% of GDP versus 4.3% in 2008. Because Europe relies heavily on Russian oil and gas, European markets are pricing in an 80% probability of recession. Incentivized by Putin to end its reliance on its neighbor, and though this will take time, Europe appears ready to ramp up energy production at home, and is committing to dramatically boost defense spending, particularly along old Iron Curtain borders. Big importers of Ukraine and Russian grains, Middle Eastern and North African countries are weighing changes, too. The world is a far different place today than it was just three weeks ago.
Soaring breakeven rates—the spread between inflation-indexed and nominal Treasury yields—are signaling 3%+ inflation could stick around for years. But fixed-income markets continue to reflect minimal near-term recession odds. The classic yield curve (10-year minus 3-month Treasury) is still wide and high-yield credit spreads, while rising, remain relatively low. Had they followed Treasuries’ jump in volatility—the MOVE Index spiked this week to its highest level since March 2020—“junk” yields would be some 600 basis points higher. At this writing, the 10-year Treasury yield is trading just north of 2%. Long yields don’t tend to make their highs until midway or closer to the end of a tightening cycle, not at the start (Fed liftoff is expected next Wednesday). U.S. equities on average have generated real annualized returns of 3% through past rate-hike cycles, versus 0.2% annualized for bonds. Fundstrat puts the valuation gap between the S&P’s earnings yield and the 10-year bond yield at 280 basis points, very attractive relative to the average differential of 30 basis points since 1980. With cash levels elevated (their highest since March 2020), big market swings are likely to continue. U.S. macroeconomic conditions remain supportive—companies and consumers are flush with cash, jobs and incomes are rising and, with Covid shackles falling, Americans with $2+ trillion of excess savings are itching to spend. The MSCI USA Index is down just 2% since the start of the war versus 13% for the MSCI EMU Index. But it’s hard to have conviction. Not until “the usuals” get queasy.
- A tight labor market is good for workers Even with inflation eating away at the gains (more below), nominal wage growth jumped 10.6% over the last two years, a Bloomberg analysis found, as employers competed for workers. Job openings continue to run near December’s record high, as do voluntary quits. Jobless claims did tick up but are still hovering near historic lows.
- Homebuyers aren’t feeling remotely queasy Mortgage purchase applications jumped 8.6% in the latest week, the first increase in five, the Mortgage Bankers Association said. It attributed the increase to a small dip in mortgage rates and strong pent-up demand. Separately, homebuilders told Evercore ISI that business is strong and improving, pushing the proprietary survey’s sentiment to near a record high.
- The data is good (but arguably irrelevant now) Industrial production in Germany, the European Union’s largest economy, significantly beat forecasts for January, rising at 23% annualized pace. The increase was more than five times the consensus for a 0.5% monthly gain. Half of the upside surprise was due to a 10.1% jump in building activity.
- Two entire generations have never witnessed this February CPI came in at a 40-year high, and the world FAO Food Price Index hit an all-time high. And this was before the surge in energy and commodity prices brought on by the war between two of the world’s biggest sources of oil, natural gas, critical metals and grains. So far this month, crude, gas and wheat prices are up 14%, 20% and 29%, respectively. The run-up is more than offsetting nominal wage gains, with real wages falling 2.6% this month, a 15-year low.
- Presidential approval is most closely correlated with gas prices Preliminary Michigan consumer sentiment for March plunged to its lowest level since 2011, while inflation expectations jumped to a 41-year high, fueled by soaring gas prices that hit $4.33 a gallon this week. Respondents expected personal finances to worsen in the year ahead by the largest amount since the survey started in the mid-1940s.
- Small business headaches worsen February’s NFIB optimism gauge fell to a 13-month low as rising prices, ongoing supply disruptions and labor shortages forced owners to push selling prices and worker compensation near all-time highs. Even with the adjustments, many businesses are posting lower sales and earnings. The survey was taken before the invasion that worsened the burdens.
A win-win for China? That’s what pundits say Xi is seeking as he positions himself as an arbiter of the Russian-Ukraine dispute and his country as a neutral power that can profit no matter how the conflict turns out—including creating a non-dollar payments system that could potentially work around SWIFT. But this isn’t without cost to China, a heavy importer of foodstuffs whose prices are soaring, or Xi, who finds himself associated with a Russian leader now widely viewed as a global pariah.
Please fight the urge to market time Panic selling can result in outsized opportunity cost as the best market days often follow the worst days. Bank of America shares that, since the 1930s, if investors sat out the 10 best days per decade, their returns would be 45% versus about 20,000%!!!
Credit cards, Starbucks, McDonalds … now beer? Among the latest Western companies to exit Russia: Carlsberg, even though it’s that country’s best-selling beer, and Heineken.