The change in sentiment comes with the change in price. Though the bond rout continues, the S&P 500 tacked on 1.79% last week, closing on Friday, down "just" 4.68% year to date and 5.7% off of the January 4th intraday high for the index. Is it safe to say that the bottom is in? Safe? Can't go there. Easier? Yes, it is easier than it was to say that the bottom is in... for now.
Note that after four consecutive days last week of either finding resistance or support at its own 200 day SMA, the US equity market's broadest large-cap index traded freely and clearly above that line on Friday. Readers will also see the 21 day EMA approaching the 50 day SMA, which is something that some traders refer to as a "baby" or "swing trader's" golden cross.
Market impacting headline news has come at a frenetic pace. This, despite the fact that the market is in between earnings' seasons and the fact that the macro calendar (beyond last week's durable goods orders and this week's expected jobs data) has been rather thin. The US has announced an LNG deal with the EU, President Biden met up with EU, NATO and G-7, and specifically Polish leadership in a rapid fire visit to Europe last week. Words were spoken, and then walked back.
In addition, Russia appears to be refocusing their mission in Ukraine on securing the eastern Russian speaking Donbass region after what has been a humiliatingly poorly planned, and poorly led military "misadventure" in and around the rest of that country. While this is a positive development, the Russian military in response to almost constant "conventional" failure when confronted by the Ukrainian armed forces, has relied more heavily on the indiscriminate bombing of Ukrainian civilians. Obviously, that is a negative, and an aspect of this war that will prolong the condition of global shortages impacting global markets for energy and agricultural commodities.
Readers will also see that the Nasdaq Composite has, to this point, had an easier time tackling it's 50 day SMA than the S&P 500 did in taking its 200 day SMA. The Nasdaq Composite now stands -9.43% for 2022, as well as 12.6% off of the all-time high for the index, which came back in November. Trading volume thinned a bit last week, not all that light relative to 10 and 40 week averages, but the lightest we have seen in March 2022.
Is It Fear?
What has driven investors back into equities? Certainly it can not be FOMO, can it? What it might be is a fear of both being in and not being in equities. That could explain to some degree last week's lighter trading volumes. Wednesday morning, the Bureau of Economic Analysis will release their third and final publicly released estimate for fourth quarter GDP. Expectations are for growth (q/q SAAR) to have been revised from 7% to 7.1%. Are we sitting on an economy that's on fire? Labor markets seem to think so. Job creation and wage growth are both expected to remain strong when the BLS releases those numbers (for March) this Friday.
Still, it's hard to say for sure that this economy is even hot despite the low unemployment rate. Wage growth is nowhere even close to keeping pace with rising consumer level prices. In addition, the Atlanta Fed's GDPNow model currently has a real-time estimate for first quarter growth that stands at a quite paltry 0.9%. All as Fed speaker after Fed speaker spreads the hawkishness that currently has futures markets trading in Chicago pricing in a 70% probability of a 50 basis point rate (Fed Funds rate) hike on May 4th, a 79% probability of a second consecutive 50 basis point hike on June 15th, and then a 61% chance for a third consecutive such hike on July 27th. That's what causes fear in Treasury markets, and still investors are afraid to not be in equities. Even with the Dow Transports and the small-cap indices (Russell 2000, S&P 600), the kinds of equities that would be more responsive to economic growth or the lack thereof, underperforming broader markets.
Fear Not?
For 10 of the 11 S&P sector-select SPDR ETFs put in a green week over the past five trading sessions, led by Energy (XLE) and Materials (XLB) , up 7.61% and 4.09% respectively. Health Care (XLV) was the only sector to share red for the week, down 0.21%.
It was the kind of week where growthy type stocks did well, but Utilities (XLU) did better. I think... or was it value type "growth" stocks... hard to figure. Apple (AAPL) , up 6.55% over five days (but down this morning) led the Dow Jones US Computer Hardware Index, which was up 6.25%. Intel (INTC) ran 9.23%, while Advanced Micro Devices (AMD) gained 5.47%, leading the Philadelphia Semiconductor Index up 2.71% for the week. The Dow Jones US Software Index, however... gained just 0.09% for the entire week.
Oh... Fear
Readers will notice this morning that the yield of the US 30 Year Bond at 2.603% has inverted against the yields of the US Five Year Note (2.634%) and the US Three Year Note (2.627%). This is a first since at least 2006 for the 30 Yr/5 Yr spread. No, it's certainly not positive for investors to be pricing in a better return over three to five years than for over 30, or for a better return over three, five or seven years than over 10.
The more closely watched spreads, the 10 Yr/2 Yr spread by the financial media and the 10Yr/3 Mo spread by the central bank both remain positive. The 10 yr/2 Yr spread closed on Friday at 18 bps...
.... but has collapsed to an almost dangerous 12 bps this morning. However, the 10 Yr/3 Mo spread, which is the one that we know the Fed focuses on as it's most accurate predictor of economic contraction, has been expanding.....
... and that spread is up to 197 bps as I type out this piece at zero dark-thirty. Does that embolden policy makers? It might. Basically, debt markets are telling us that recession is coming, but not now, and maybe not this year. Time to engineer that soft landing? Maybe just time. That said, these markets are pricing in anywhere from a multi-year economic downturn later on or more optimistically... long-term sluggish economic growth.
Hence, besides what one might think... TINA (There is no alternative) remains a factor for now... in equity markets. Over the past two weeks, the S&P 500 has gone from trading at 18.5 times forward looking earnings (versus a five year average of 18.6 times) to trading at 19.8 times. Something has reweighted the value of US equities. TINA? Or safe-haven? Perhaps the latter is but part of the former.
So, What's Cheap?
While five sectors are trading below 20 times forward looking earnings, only Materials at 16.2 times is currently trading below its sector-wide five year average of 17.7 times. What's not? Even at just 12 times, Energy is trading at almost twice its five year average. Hmm.
Economics (All Times Eastern)
08:30 - Goods Trade Balance (Feb-adv): Expecting $-106.1B, Last $-107.63B.
08:30 - Wholesale Inventories (Feb-adv): Expecting 0.9% m/m, Last 0.8% m/m.
10:30 - Dallas Fed Manufacturing Index (Mar): Expecting 15, Last 14.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (SAIC) (1.22)
After the Close: (PLAY) (.61)
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