In the midst of performing Google searches in an attempt to determine whether this week's market action represented an orderly correction or a disorderly one, I happened upon the classic 1987 film Disorderlies, which starred hip-hip group the Fat Boys as feckless hospital employees. What I didn't know was that that cinematic classic also featured veteran character actor Ralph Bellamy, famous for many roles, but especially Randolph Duke in Trading Places.
Randolph and Mortimer Duke thought they had a winning trade on FCOJ futures after having an early look at the US government's monthly crop report, but you don't need inside information ahead of tomorrow's non-farm payrolls report to trade wisely.
The bond market is crashing. That's all the information that equity investors need, and it is not bullish.
The yield on the 2-year US Treasury note is quoted at 3.52% as of this writing. This is the denouement of an extraordinary move that began in February when the benchmark 2-year was yielding about 1.60%. It's just impossible to comprehend a 200 basis point back-up in yields in a six-month timeframe as anything but bearish for equities.
In terms of the level of yields themselves, the 2-year yield now is at its highest yield since October 2007. That's an extraordinarily contractionary sign for the U.S. economy, and it is the public policy equivalent of the Fat Boys' Disorderlies that are causing it.
No one will ever make a movie about Powell and Yellen, mostly because they are both such incredibly uninspiring public speakers, but boring people can still cause crashes. That's where you need to take the other side of the Randolph Dukes of the market and for goodness' sake, protect your portfolio with options.
Contact me if you would like more details on how to effect such a strategy, but today is the day to do it. Wall Street is expecting a figure of about 300,000 jobs created in tomorrow's report, but I don't care what is in Clarence Beeks' envelope.
The bond market is calling the tune now. If it's a stronger-than-expected number, then 75 basis points in September becomes assured, with more hikes to come in 4Q22. This equity market simply can't handle a 4-handle on the 2-year UST yield. It becomes too expensive to borrow.
If it's a weaker-than-expected jobs number, then look out, because Mr. Market will finally figure out that after two consecutive negative quarterly GDP reports, we actually are in a recession now. Employers don't need as many employees in a macro slowdown, but with the Great Resignation and quiet-quitting, those employees still are able to command cycle-high annualized wage growth.
We are just not living in an orderly time in the US economy, so to predict orderly stock market corrections is ludicrous. Stagflation spares no one.
Buy yourself some puts on Big Tech (I bought some against Tesla (TSLA) this week for my personal account and am enjoying the performance so far, or at least write some calls against legacy positions. Next, you should avoid financials (remember 2008, the bond market certainly does,) and stick with energy. Even in a recession, stagflation's impact on hydrocarbon-pricing and ESG-mania's impact on natural supply growth will make Exxon Mobil (XOM) and Chevron (CVX) the best of a bad bunch - of stocks.
Make sure you have an orderly portfolio to weather a disorderly market.