The day had a real ugly feel to it. Sure, intraday at least some of the market stories told the tale of the on-again/off-again rotation, this time back out of growth and into value, or out of pandemic-economy names and into reopening-economy names. But even those chosen earlier as victors for the most part surrendered their early leads.
Both the S&P 500 and Dow Jones Industrials closed down small after they were up quite nicely earlier. The S&P 500 even lost the 21-day exponential moving average (EMA), barely holding the 50-day simple moving average (SMA) going into the close. The Nasdaq large-cap indices took a fairly severe beating from the start, as did the small- to mid-cap indices. In fact, our two most closely watched small-cap indices, the Russell 2000 and S&P 600, are both down a rough 9.6% from their mid-March highs.
Taking the day itself in isolation, one just needs to look at what did work for the day, with (using Sector Select SPDR ETFs as proxies) Energy (XLE) up 2.5% and Industrials (XLI) up 0.7%, admittedly led by the railroads and marine transport, so still an energy story. Just where would the broader market have been on Wednesday had not the "Ever Given" not run aground and blocked passage through the Suez Canal? In fact, the Materials sector (XLB) finished a close third place for the day. Most folks know that about 1 million barrels of crude typically passes through the Suez Canal daily, but it's far more than that. The Suez Canal is a commonly used daily highway for roughly 12% of all global trade. Period.
I know you heard it early. Blame was passed around for weakness across those parts of our equity markets that were showing it. The Markit Composite Flash PMIs for March did show some heat under both Prices Paid and Prices Received. This is true, but also largely due to scarcity as much as demand. I know, it matters not the cause, but let this sink in: If there is downward pressure on capacity due to scarcity of supplies that largely constrain output or production, then it matters not that new orders print at multiyear highs. True, this increase in demand is measurable, but also very likely unreliable. This does not mean that Jerome Powell is right or wrong when the Federal Reserve chairman sees the increased regime of consumer pricing as transitory, but it does mean that we as both economists and investors must remain open to the possibility. Yes, there is a good chance that March could be hot.
That said, February was cold, ice cold. I did not expect to see negative month-over-month numbers for Durable Goods Orders for the month, but that is exactly what we got. How did the economics community get this so wrong?
"Masquerading as a man with a reason
My charade is the event of the season
And if I claim to be a wise man, well
It surely means that I don't know"
-Kerry Livgren (Kansas) 1976
So for February, Durable Goods Orders decreased 1.1% month over month. Slice it and dice it however you like. Ex-transportation? Down 0.9%, Ex-Defense? Down 0.7%, Core Capital Goods? Down 0.8%. In short, businesses stopped spending on business in February. Nobody does that in anticipation of oncoming demand. Not on purpose, anyway. Weather was an issue? Indeed. So are these constrained supply chains that we keep speaking of. Just because transitory inflationary pressure is temporary by definition, that does not make it less painful, nor do we know anything about how long pandemic conditions will force change upon the global logistics of commerce.
We may vaccinate most of the U.S. by mid-year. What good does that do us (economically) if we still need to buy most of our unfinished and finished goods from nations further behind in gaining herd immunity, or if one nation has the ability to almost monopolize the use of shipping containers? This is an area where former President Trump and President Biden appear to agree, and they are both right. Even the possibility of a renewal of American social activity could have only a limited positive impact upon our broader national economy until that economy can be less reliant upon the labor of others to produce supply that meets demand.
Where to Hide?
Tough question. Far tougher than maybe some of you know. Some have asked why longer-dated Treasury securities have been strong of late, thus forcing yields lower, especially on a day where the Flash PMI surveys showed upward pressure on inflation, once again at the producer level? Well, we do know that we have this overhanging monthly/quarterly rebalancing ahead of us, right? That is expected to force huge (but changing) capital flows into debt markets, right? We also know that some traders try to front-run the move and that some funds (pension and others) have within their mandate the ability to spread these moves, if large, over a number of days, right? So, what can you count on? Probably unpredictable market behavior for another week or so. Oh, fun.
Check this out. We hear the reopening crowd talk about "the great rotation" and we hear the outliers (myself included) talk about "the great unwind of the great rotation." The fact is that if one charts out all 11 Select Sector SPDR ETFs over the past two weeks or so, we are all wrong. Yup. No joke.
Since early to mid-March, only Consumer Staples (XLP) are trending in a northerly direction. Then the Utilities (XLU) and Health Care (XLV) seem to be moving sideways. Guess what? All three of those sectors are havens. They are defensive in nature. While us "trader types" have been trying to game the rotation/unwind, the actual flow of capital has been moving toward safety for two weeks. It's not just front runners and early movers finding solace at the long end of the curve; it is also those seeking shelter.
All of our growth and cyclical groups? All trending lower for two weeks. I mean, let us use our heads a bit. The cyclicals go nowhere unless the small- to mid-caps go with them, and the small- to mid-caps are this >< close to finding themselves in textbook correction territory. Oh, I almost forgot to mention... baseball games count in a week.
Psst... Bad News
I don't know how to tell you this. Perhaps you already know. Remember that toilet paper scare/shortage last spring? Hope you have not let your household stores dwindle. I don't know who broke the story. I found it at Bloomberg. Apparently, Suzano SA (of Brazil), the planet's largest producer of wood pulp, is now warning that shipments fell behind in March and there are delays due to a shortage of both available ribbed steel containers and the kind of ships (break-bulk) that carry said containers. This is forcing constraints upon their business.
Just a heads up, but Suzano alone accounts for about one-third of the planet's supplies of hardwood pulp, which is the natural resource used to manufacture what eventually ends up in your bathroom. Being the vast majority of earthlings do not read Market Recon on a daily basis, you have an advantage. Get ahead of the crowd today and buy some toilet paper. Maybe add on some paper towels. I could be wrong, and that would be just fine. Then again, I could be right.
At least someone confronted the Secretary of the Treasury on this "plan" to allow the International Monetary Fund (IMF) to print up to $650 billion in reserves (Special Drawing Rights) more at the expense of U.S. taxpayers than anyone else under the guise of aiding poor countries. Sen. John Kennedy (R-Louisiana) said, "You may want to help poor countries, but you and I both know that only about 10% of that is going to go to poor countries." Kennedy did not source his information.
In Wednesday's Market Recon, I estimated that roughly 3% of these created funds would end up in the hands of poor or what I termed as "frontier" economies, while funds would also flow into the hands of despots and terrorists who use poorer countries as personal shields. The facts are these: The IMF would allocate these reserve funds based in the share of each member nation. This means that 58% of these funds will go to economies that are considered to be "advanced," with 42% going to either emerging or developing nations. Just an FYI, China, the second -largest (headed for the largest) economy in the world, is still considered an emerging market economy, so there is something of a farce here. Of that larger slice, just 3.2% (so I am pretty darned close, aren't I?) of the whole lot would head for nations considered to be on the lowest rung ("frontier") of the ladder.
Basically, the plan is to create $650 billion of reserve funds to pad money supply... mostly for those comprising the G-20, including China, at the expense of middle-class Americans. Sen. Marco Rubio (R-Florida) released a statement urging the Biden administration to reject funding this planned IMF allocation of resources.
I wrote Wednesday about what plan I would support. Instead of creating and releasing these funds according to quota or share, allocate the funds in inverse order. This way, the richest nations actually support the poorest nations who do need the help. The U.S. needs to have veto power so evil-doers do not end up with a share. Mr. and Ms. America have always been generous. They have always cared. Do not play them for fools. It is beyond me how any American in a position of leadership could get behind this plan the way it is currently presented. Wake up!
Give Me a "D"
This may have slipped past a few of you out there. Late Tuesday, the Pentagon split a large contract intended to develop the next generation of interceptor missiles that will play defense should the U.S. ever come under intercontinental ballistic missile attack.
The Pentagon's Missile Defense Agency awarded Lockheed Martin (LMT) as much as $3.7 billion through August 2025 and Northrop Grumman (NOC) as much as $3.9 billion through May 2026. I sold my NOC on Wednesday morning in response, just an FYI. I unfortunately came in flat LMT. I expect to add both names back to my portfolio on weakness when appropriate.
The interesting part of this award is this: Boeing (BA) took down no part of the deal, despite providing the current ground-based Midcourse Defense System, which is our defense against such an attack until either Lockheed or Northrop produces an effective replacement. Boeing had been awarded a $6.6 billion contract in 2018 to replace its own product, but the Pentagon saw fit to cancel that contract and split the package between two key competitors. Hmm. Very interesting, very interesting indeed.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Last 770K.
08:30 - Continuing Claims (Weekly): Last 4.124M.
08:30 - GDP Growth (Q4-Final): Last revised to 4.1% q/q SAAR.
10:30 - Natural Gas Inventories (Weekly): Last -11B cf.
11:00 - Kansas City Fed Manufacturing Index (Mar): Expecting 24, Last 26.
The Fed (All Times Eastern)
05:30 - Speaker: New York Fed Pres. John Williams.
10:10 - Speaker: Federal Reserve Vice Chair Richard Clarida.
10:30 - Speaker: New York Fed Pres. John Williams.
12:00 - Speaker: Atlanta Fed Pres. Raphael Bostic.
13:00 - Speaker: Chicago Fed Pres. Charles Evans.
19:00 - Speaker: San Francisco Fed Pres. Mary Daly.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (DRI) (0.69)
After the Close: (SAIC) (1.46)