The markets have been largely directionless here in April. The S&P 500 is basically where it started the month. First-quarter earnings season has commenced and reports will continue to flood across the wires over the next few weeks.
We saw good numbers for the most part from the major banks like JPMorgan Chase (JPM) , while investment banks such as Goldman Sachs (GS) have reported mixed results. It is hard to tell as an investor whether equities will continue to be listless until the next Fed meeting, an event some hope will mark the last interest-rate hike we see from the central bank for a while, or this is just the calm before the storm.
I continue to sound like a broken record stating I am extremely cautious on the current state of the markets. Friday is option expiration day, which means I will have additional cash flowing into my portfolio at market close.
My trading remains sparse and a good portion of that additional "ammo" will likely find itself into three-month Treasuries. And why not? As of Friday morning, the yield was north of 5%.
The current yield curve is one of my biggest current worries about the market, or more importantly, the economy. Almost everything on the yield curve is inverted with the one exception being the 10-Year and 30-Year Treasuries. At one point this week the difference between the 3-Month and 10-Year hit 170 basis points. This has myriad negative ramifications for the market.
For starters, for the first time in a decade and a half, we can honestly say this is not a TINA (There Is No Alternative) market. Those with excess cash no longer have to be entirely reliant on stocks in order to secure yield. Obviously, this hurts the demand for equities.
Second, an inverted yield curve historically is a solid sign that a recession is on the horizon. Given the current extent of the inversion, I am in the camp that the economy will be in recession within 12 months if not sooner. It is not hard to find signs the economy seems heading for a contraction. The question to me is what the severity and duration of this event will be.
Thursday, the March Leading Economic Indicators fell 1.2% to a level of 108.4 versus expectations of a decline of .4%. The marks the twelfth straight month of contraction and the lowest LEI level since November 2020. The April Philly Fed Business Outlook also came in with a disastrous reading of a negative 31.3, far above the -19.2 consensus.
The inverted yield curve will continue to pressure regional banks given their hold to maturity bond portfolios. In addition, some $1.5 trillion worth of commercial real estate loans need to be rolled over during the next few years. Given falling valuations across a wide swath of the commercial real estate sector and the fact that refinancing rates will be much higher than the ZIRP (zero interest-rate policy) glory days, that is likely to be a quite painful exercise.
I won't go into the fast-approaching debt-ceiling battle or myriad other worries an investor has to have right now on the markets and the economy. While we are still officially in April, the old adage "Sell in May and Go Away" is likely to loom large this year.
