This year continues to be difficult to navigate.
Friday briefly seemed to "prove" to those who argue that everyone is short, that there is cash on the sidelines and seasonal chasing is due, were correct. After stocks and bonds sold off after the initial data on Friday, they finished strong.
I spent the weekend double- and triple-checking my "sentiment" indicators and I keep coming back with more or less neutral.
I did get a lot of emails and notifications on why the job data could be off, most notably that Thanksgiving may have caused under-reporting by small businesses, which were the culprits in the ADP report. It is possible, since as you know, I've been questioning the strength of the reports and there always seems to be something.
The Wall Street Journal did post that layoffs are hitting "white" collar workers as opposed to "blue" collar workers this time around. That again fits my narrative that total jobs lost won't be as important as total jobs multiplied by average wage lost. That could mean that far fewer layoffs will have a bigger impact.
So, if Friday wasn't a squeeze and Monday was more "normal" then I cannot help but be in "risk off" mode.
My Take: Take Care
On rates, I'm mildly bullish. I think treasuries can provide positive total return between now and year end, but the big gains have already happened. I prefer short maturities -- like the iShares 7-10 Year Treasury Bond exchange-traded fund (IEF) -- vs. longer maturities such as in the bond fund (TLT) , for example.
Credit: Exit High Yield
Exit high yield funds like the high-yield fund (HYG) and junk bond one (JNK) and leveraged loans fund such as SPDR Blackstone Senior Loan ETF (SRLN) and the Invesco Senior Loan fund (BKLN) . I'm OK with still owning some leveraged loan closed-end funds as they are trading at big discounts to net asset value. I see right about 10% on some that I own. If we get any rally in the space, I'd sell, but if we get to a discount closer to 15% on year-end selling I'd buy.
On investment grade bonds, I'd shrink duration, which means selling the fund for those (LQD) , for example, to find funds with smaller maturities.
On credit, as a reminder, I generally prefer active managers over ETFs for anything longer than a "trade," because the market is more conducive to outperformance than in equities.
Municipals, I like, and prefer the closed end funds, but more of a buy the dip buyer here, than aggressively adding on (it has been a nice run since the summer lows).
Not So Hot Commodities
Over the weekend, OPEC+ committed to keep supply tight and China appeared to loosen its Covid stance. Yet, commodities did poorly on Monday. Look for economic weakness to weigh on commodities and the associated stocks (which could also see some profit taking).
Stocks Need Stability
Cash flow will matter more than growth. Stability will outperform hope. I am bearish stocks here, but more on the growth side than "income" side of the continuum.
The Hope
Russia seems to be getting pushed into at least seeming to be willing to negotiate with Ukraine. With the U.S. maybe nudging both sides in that direction, and China running out of patience, that could be the pleasant surprise.
We could see the so-called "Santa" rally, and it is difficult to bet against something that doesn't exist but is followed by so many traders.
So, look for some "cheap" call options. Something that would take the sting out of missing a 5% to 10% rally some are calling for, but the data doesn't warrant it.
I think at its simplest, the market priced in fewer Fed cuts, which was good, but now will price in that the Fed has already gone too far.
I wish I had more holiday cheer, but I'm feeling a lot like Scrooge right now -- but with just enough hope, especially on Russia, to own some calls to the extent you can.
