Hope you brought your thinking caps today. We have a lot to cover and only a few hours to do it. When I say "move".... Helmets, flak jackets, gas masks on the hip, and two sources of water. Prepare for weather. Squad leaders, let me know when your people are good to go. Now, move.
Congratulations. Door number one? You're all one day closer to being completely forgotten by history. Door number two... Today is just the first day of the rest of your life. Perspective? Your choice. I'll go with door number two. This way, I still haven't hit potential.
Tuesday was a quirky sort of day that came ahead of the FOMC policy decision set for this (Wednesday) afternoon. Early on, longer dated Treasury security yields remained under control, The "un-rotation" continued in earnest. Equity markets peaked mid-morning, then prices gradually eroded into the afternoon where an attempt to re-rally the marketplace failed going into the closing bell. Growth stocks hung on to pedestrian gains for the day. The Nasdaq Composite just barely stayed green, while the Nasdaq 100 showed a bit more strength than any other major equity index, small cap through large. Technically speaking, the Nasdaq Composite held its position above its own 21 day EMA and 50 day SMA, which may possibly be important, at least early this morning. The Technology Sector Select SPDR ETF (XLK) also held above these key levels. The Nasdaq 100 however did fail at the 50 day SMA. Keep that in mind.
Breadth across both of New York's primary equity exchanges was decisively weak, which I took as a relatively healthy development one day ahead of the Fed meeting, as the action took those parts of our marketplace that were technically overbought or close to it, away from that precipice. Just as I hate to see a stock I own run higher into earnings, I also hate when markets go into a focused upon news event in a technically overbought state. Even better, trading volume was extremely light on Tuesday and indeed ebbed from Monday's levels. That does nothing for your P/L ratio, but it does make the late selling seen across the marketplace far less meaningful in terms of trend.
Why is that important? Simple. Over the course of a stock picking career that began in elementary school, one thing I have learned is that battles are fought through picking the right equities, but wars are fought and won through pattern recognition. This fact is only more and more true as human traders have largely been replaced by algorithmic traders who pay technical analysts to look at the same charts that we do (with much less at stake). How is this for evidence of passive investment? The market took its pound of flesh from the Dow Transports (-1.56%), and moved that pound into the Philadelphia Semiconductor Index (+1.26%). Of the 11 sectors, for the day, first and second place went to "growth", places three through six went to "defensive" sectors, and the cyclicals took places seven through 11. Humans never could have sliced and diced the marketplace with such precision. Even across the Dow Industrials which were flat-ish (-0.4%) on the day, the money moved from Honeywell (HON) , Boeing (BA) and Caterpillar (CAT) , and into Apple (AAPL) and Microsoft (MSFT) . Interesting.
The Ugly Stick Cometh
Hard not to notice what had been highly anticipated domestic macroeconomic results for February on Tuesday. First, the Census Bureau released the monthly report for Retail Sales. The results were catastrophic. Incredibly, January had been revised much higher to +7.6% from +5.3% at the headline, and to +8.3% from +5.9% at the core, and yes... these are month over month numbers, not year over year. February, usually a weaker month, saw a much steeper drop off than economists en masse, had projected. The headline print landed at -3%, and the core at -2.7% versus the -0.5% and -0.1% that had been expected. Weakness was present everywhere... motor vehicles, furniture, electronics, fun (sporting goods, hobbies, music and books), department stores and yes, even in e-commerce.
Then, the Fed released monthly data for Industrial Production. Just as catastrophic. The headline number fell off of a cliff at -2.2%, led lower by manufacturing output (-3.1%), while capacity utilization fell back to November's levels. Some economists were quick to blame severe winter weather. They do not lie. The weather was indeed awful across large swaths of the nation. I could have sworn that I had seen that weather covered in the news on a daily basis however. Just thinking that the economists who form consensus must have seen something concerning this negative impact prior to Tuesday's data dump. Guess not. Silly economists. Always copying each other's homework.
What does this tell me? An economist by training who has to live and die in the marketplace? More a practitioner than a theorist? This tells me that while of course weather had a negative impact, that stimulus had more of an impact... on the January data. January was when the final stimulus checks issued during the Trump administration hit households. We now know that a significantly larger boost in stimulus/support is on the way. Does stimulus boost demand? Of course. Does stimulus boost velocity? Of course. Is stimulus sustainable? Of course not.
Oh sure, GDP estimates are on the rise. The Atlanta Fed's GDPNow model now sports a real-time snapshot for Q1 annualized economic growth at 5.9%. How much of that growth is organic? Hard to separate the organic, sustainable transaction from the temporary reaction in activity reliant upon fiscal policy.
Is it too late? Have we, as both a nation, and a planet already become reliant upon ultra loose policies both fiscal and monetary that in fact are not even close to one maintaining independence from the other? Of course we are reliant. Story... When I was a kid, one kid was always the best basketball player at the playground. Never ran out of energy. Nobody could guard him. Found out later, that he was playing on amphetamines. At that same age, one of my jobs was opening my local McDonald's (MCD) before high school (after I cleaned up a bank overnight located on the same block... I haven't been unemployed since I was 11). One morning, slightly before 6 am, I found two dead kids on the sidewalk behind the store. Two dead 13 year-olds that had overdosed on something. The stuff that stays with you. I ask again. Are we reliant?
The Heat Is On
Baseball? You bet. The beach? Oh yeah. Post-Covid? We can only hope. An enormous infrastructure bill that will likely be passed through reconciliation after much debate as to composition and how to pay for it at the committee level perhaps as soon as late summer? Count on it. There will be fundamental disagreement. While all agree that American everything (roads, bridges, tunnels, electrical grids, water works, airports, seaports, etc.) is in deep disrepair, there are still two sides of the aisle. One side, the side in power will see a chance to build anew. Costlier, and climate friendly. The other side, currently a (just barely) minority will prefer to repair what already exists. Less expensive. Less climate friendly. All depends on what is, or more precisely "what counts" as infrastructure. Then, there's the 5G roll-out.
My feeling is that with an economy still climbing out of a hole, a labor force still dramatically underemployed, and a people still suffering spiritually from a very tough year and a half, that a very large infrastructure deal will not be all that hard to find, could even be some bipartisanship. How to pay for it, will be a fight for sure... but wanting to move the ball forward will be common ground. The positive impacts of the current stimulus package will start to wane at some point later this year, and as we have just demonstrated... We are a people now reliant upon the hand of those in power, which is a very dangerous place to be.
Investors will find markets extremely receptive to negotiations of large packages that will place a floor under aggregate demand. Markets will reverse on a dime once negotiation turns to not "if" but to "how much" to increase corporate and personal income tax rates. All, the while, the FOMC will try to thread a needle with probably no room for error.
Happy St. Patrick's Day !!
There will be no green line down Fifth Avenue in New York City. The city will be quiet. The "Fighting 69th", the regiment that Father William Corby (former regimental chaplain and former university president) named the University of Notre Dame sports teams for, will not lead the way in glorious formation. (You watch the "Fighting Irish" on TV on Saturdays in the fall? I played for the real "Fighting Irish") There is a virtual parade planned. That said, might as well watch Jerome Powell.
Today is also "Fed Day." There are no overt changes expected to be made at this point to monetary policy. The FOMC will, however, have to release their ridiculous dot plot as well as their quarterly economic projections, the first made since the White House and Senate changed hands, meaning that a lot less stimulus was baked into the most recent projections that were made in December.
Up will go the 4.2% GDP projection for 2021, and the 3.2% projection for 2022. What they do with projected inflation and unemployment will move markets. Even more so, though it likely has little to do with reality, will be where that first increase for the Fed Funds Rate is placed. In December, only one of the 17 dots appeared anywhere prior to the end of calendar year 2022. Only four more saw that first step by the end of 2023. Five of 17 saw any increase over a two year period. Think that changed? (Nod your head up and down.) The median first rate hike will probably move into 2023, and probably push on 2022. Then again, what do I know? I know that only velocity creates inflation. The Phillips Curve has proven useless in a high-tech, non-industrial (service based), highly indebted environment. Does the FOMC understand this? I don't know.
Expect a very uncomfortable press conference.
Economics (All Times Eastern)
08:30 - Housing Starts (February): Expecting 1.57M, Last 1.58M SAAR.
08:30 - Building Permits (February): Expecting 1.732M, Last 1.886M SAAR.
10:30 - Oil Inventories (Weekly): Last +13.798M.
10:30 - Gasoline Stocks (Weekly): Last -11.869M.
The Fed (All Times Eastern)
14:00 - FOMC Policy Decision.
14:00 - FOMC Economic Projections.
14:30 - FOMC Press Conference.
Today's Earnings Highlights (Consensus EPS Expectations)