So, You're Saying There's a Chance?
You saw it on Thursday. I know you felt it. Heck, you probably participated in it.
Equity markets were again in free-fall, driven lower this time by some comments made by Fed Chairman Jerome Powell, and well, the utter collapse of the cryptocurrency/algorithmic stable-coin complex.
Treasuries? There was some strength there yet again, as Thursday's auction (30-Year Bonds) came off a bit better than did the auction the prior day of US 10-Year paper. That 10-Year Note paid as little as 2.82% on Thursday after giving up 3.16% earlier in the week. (I see the 10-Year Note yielding 2.91% as the wee hours pass.)
The thing that caught my interest on Thursday -- though as a primarily "equities" guy -- was the sharp rebound that the major domestic equity indexes experienced after hitting their daily nadir with about 90 minutes left in the regular session. The Nasdaq Composite had been down as much as 2.25% on Thursday, which means that at Thursday's lows this index was 31.5% off of its November 2021 highs, rolling prices all the way back to early November 2020. The Composite would squeeze into the green on Thursday, and on elevated trading volume at that. The S&P 500 would not find green on Thursday, closing down 0.13%, but also staged a high-volume bullish reversal that allowed the index to close higher than it opened. Notice the hollow red candlestick below...
Notice also that the close for the S&P 500 came about two-thirds of the way up the wick of that candlestick. Does that matter? Technically, yes. It does mean that the S&P 500 and the Nasdaq Composite, which did close in the green...
.. are likely to stage an attempted rally on Friday morning.
Change in trend? We have all seen this movie a few times. We cannot respond affirmatively to that question, though there is a chance. That said, none of the issues that have caused this market weakness have been solved: Russia/Ukraine, China/COVID, rampant inflation, less fiscal largesse and less monetary enabling of said fiscal largesse have all made their mark. The cube of economic activity has already started to contract. Reversing course would require bullish reversals across many fronts. Nonetheless, should Thursday's 90-minute rally that developed into a global rally and then strengthened in US equity index futures markets continue into Friday, I would be more apt to treat it as a bear market rally. I am more than OK if more than that develops. I count on nothing.
Blood and Guts
Thursday's late-day rally was best expressed by the blood and guts of our market. For while the Dow Industrials, Dow Transports, S&P 500, Nasdaq Composite and Nasdaq 100 all closed within 0.33% of the unchanged mark, the small- to mid-caps finally roared. The S&P Mid-cap 400 ran 0.93%, while the Russell 2000 (+1.24%) and S&P Small-cap 600 (+1.22%) led the league.
Breadth was rather positive when the fact that the markets spent much of the day in the hole is considered. Winners edged losers at the New York Stock Exchange and beat losers by a rough 4 to 3 at the Nasdaq market site. Advancing volume took a 57.9% share of composite NYSE trading volume and a 65.5% share of that metric for Nasdaq-listed stocks. Aggregate trading volume popped 8.2% day over day for NYSE-listed names and 8.8% day over day for Nasdaq listings, while S&P 500 member stocks had their busiest day since April 29 and Nasdaq Composite stocks their busiest since March 18. (Russell 2000 constituents had their busiest day in aggregate since March 18 as well. March 18 was a "triple witching" expiration event.)
Six of the 11 S&P sector-select SPDR ETFs closed in the green on Thursday, with Communication Services (XLC) out in front at +1.09%. Interestingly, that sector's sister sector, Technology (XLK) , brought up the rear, closing in 11th place at -1.03%. The weakness there did not come from the usual suspects, however.
While the Philadelphia Semiconductor Index gained 0.54% for the session, led by Lam Research (LRCX) and Applied Materials (AMAT) , and the Dow Jones US Software Index gave up just 0.55%, it was the far-less-followed Dow Jones US Computer Hardware Index that brought the sector lower, and that index is really something of a one-trick pony. The index surrendered 2.5% on Thursday, weighed heavily upon by Apple's (AAPL) 2.69% decline. BTW, I did add to my AAPL long after hours on Thursday evening.
Volume as Economic Activity
Less-hot but still very hot consumer-level inflation stole the show on Wednesday and less-hot but still very hot producer-level inflation took the headlines on Thursday morning, What is really aching markets, though, is the prospect for a recession, or at least a sustained economic contraction. As businesses took a break from inventory building and as the federal government cut back on spending, the US economy contracted 1.4% (quarter over quarter, seasonally adjusted annual rate) for the first quarter of 2022. This is now old news. Should the second-quarter print on the wrong side of zero, the US economy will by definition be in a recession. Currently the Atlanta Fed's GDPNow model, which is a real-time snapshot more than a predictor, has the current quarter running at growth of 1.8%.
Jerome Powell interviewed with the "Marketplace" public radio show on Thursday and made some comments that struck me as to just how serious this Fed chairman currently is when it comes to getting inflation under control, even at the expense of the economy. Powell said, "The process of getting inflation down to 2% will also include some pain, but ultimately the most painful thing would be if we were to fail to deal with it and inflation were to get entrenched in the economy at a high level." Powell went on: "The question whether we can execute a soft landing or not, it may actually depend on factors that we don't control, but we should control the controllable... there's a job to do on demand." Read that last part again: "There's a job to do on demand." Rates do belong higher. The monetary base is way too large.
These are indisputable facts. That said, much of the 2021/2022 run of inflation is still due to broad scarcities crossed with fiscal irresponsibility. Powell understands that these factors are beyond his control or that of the Federal Open Market Committee (FOMC). Intentional demand destruction will not correct for supply problems not for fiscal recklessness, though it will make further fiscal recklessness or even just servicing past fiscal recklessness more of a drag on economic activity. Intentional demand destruction. Sounds awful. Then again, complain we did not when artificial demand creation ran rampant.
We've gone through this exercise before. Pretend that the US (or any) economy is a cubed box. With a length of 2, a height of 2 and depth of 2, surface area of 24 (6 sides) requires volume (as a proxy for economic activity) of 8 just for that cube to maintain its current size. Should the economy try to grow, a lot more growth in activity is required to improve overall perception of the economy in general. A 3x3x3 cube appears to the eye to be 50% larger than a 2x2x2 cube, yet would require a volume of 27 to maintain surface area of 54. Yes, this is an incredibly simplified model and that is intentional as it makes it much easier to explain. So for Joe and Jane Public to perceive a cubed box that appears to be 50% larger, there must be a 237.5% increase in volume. That said, momentum requires less of a surface-to-volume ratio as the cube expands.
Now, our economy is no perfectly cubed box, mind you. I don't think I could come up with an appropriate shape and volume model. One must think hard on this. What happens as inventory building declines, demand (both business and consumer) is intentionally damaged, and credit costs rise, pulling in fiscal expansion, as the enabler has excused himself for now? Activity itself will only be able to support a smaller cube. A cube of 1.5x1.5x1.5 requires volume of just 3.375 to sustain itself, but can only generate a surface area of 13.5.
There are no magic beans that can create for us a magic beanstalk that grows to the clouds. I have told you many times that the 10-Year /3-Month yield spread is the purest and most accurate predictor of economic recession that we have. Right now, that spread is nowhere near inverting, but just take a look at the past week or so.....
Yeah, About That...
On Friday morning, Tesla (TSLA) CEO Elon Musk tweeted out that he had put his $44 billion deal to acquire Twitter (TWTR) on temporary hold pending details of the calculation that spam and fake accounts represent fewer than 5% of total users. TSLA popped and TWTR sagged on the news of this tweet.
Dethroned
As of Thursday night's close of business, state-owned oil company Saudi Aramco ran with a market capitalization of $2.383 trillion while Apple's market cap had sunk to $2.307 trillion on the stock's lowest closing price since last Oct. 13.
Economics (All Times Eastern)
08:30 - Import Prices (Apr): Expecting 0.6% m/m, Last 2.6% m/m.
08:30 - Export Prices (Apr): Expecting 0.8% m/m, Last 4.5% m/m.
10:00 - U of M Consumer Sentiment (Apr-adv): Expecting 63.8, Last 65.2.
13:00 - Baker Hughes Total Rig Count (Weekly): Last 705.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 557.
The Fed (All Times Eastern)
11:00 - Speaker: Minneapolis Fed Pres. Neel Kashkari.
12:00 - Speaker: Cleveland Fed Pres. Loretta Mester.
Today's Earnings Highlights (Consensus EPS Expectations)
No significant domestic quarterly earnings scheduled.
