I wanna see it painted black
Black as night
Black as coal
I wanna see the sun
Blotted out from the sky
I wanna see it painted, painted, painted
Painted black, yeah
- Jagger, Keith (The Rolling Stones) 1966
Nothing to do with global warming, or politics. What harm could a holiday shortened four day workweek cause? We had warned right here, repeatedly, about the dangerous third week of January. Even so, we had not expected this. All 11 S&P sector-select SPDR ETFs closed in the red for the week, with only Utilities (-0.81%) giving up less than one percentage point, and only the Staples (XLP) and REITs (XLRE) joining Utilities in surrendering less than 3%. Five sectors experienced contractions for the week of 5% or greater, led lower by Discretionaries (XLY) , Technology (XLK) and the Financials (XLF) , down 8.2%, 6.9%, and 6.4%, respectively.
The Nasdaq Composite closed on Friday down for a fourth consecutive session, not to mention a fourth consecutive week. That highly focused upon index, not only gave up 7.55% in just four days, but after entering what the "no skin in the game" crowd refers to as a "textbook" correction last Wednesday... now stands down 12% year to date, and 15.1% below its November 22, intraday all-time high.
The S&P 500 has fared marginally better, down "just" 5.68% last week, and 7.73% year to date, our broadest large-cap index has retreated a mere 8.7% from it's January 4th (less than three weeks ago) intraday all-time high. Because I do manage the "Stocks Under $10" portfolio here at Real Money, I feel compelled to mention the small-cap Russell 2000. The most closely followed small-cap index took a four-day beating of 7.81% over the past week, and now stands -11.21% for 2022. The Russell 2000 has back-pedaled 19.2% since hitting an all-time, intraday apex back on November 8th, placing the index within breathing distance of turning this "textbook" correction into a "textbook" bear market. Oh joy.
The old one had warned us of bad luck should we see "the albino mule deer." He told us to make sure that if we did see it, to not kill it, and don't dare eat it. Better to starve. I was alone. Of course. Out in the barrens. Two of these animals come running through the forest almost at a gallop. They see me, though I am well-hidden (they probably smelt me more than saw me)... and turn away, as quickly as they could. Out of sight in a flash. Nobody else saw one.
What the heck does that mean? Dare say, I did not tell the old man that I had seen a pair. It has been almost 40 years now. Haven't seen another albino since. Was it a message? I've run into weirder things out there (scary weird), encountering nature on nature's terms, but I still think about those two deer. They were huge. Why was I the only one that saw them? Why?
Markets have been trying to price in a more hawkish Federal Reserve Bank for weeks now. Yet, Treasury securities firmed up late last week... as yields not only stabilized, but contracted from the middle of the curve on out. Analysts at Goldman Sachs published a note over the weekend, forecasting the possibility of more than four rate hikes in 2022, or more than a full percentage point (100bps), as moves in the Fed Funds target rate are not limited to increments of 25 basis points.
From that note, economist David Mericle wrote, "We see a risk that the (FOMC) will want to take some tightening action at every meeting until the inflation picture changes. We also increasingly see a good chance the FOMC will want to deliver some tightening action at its May meeting, when the inflation dashboard is likely to remain quite hot. If so, that could ultimately lead to more than four rate hikes this year." The Goldman note adds that they see the Fed starting to reduce the balance sheet (quantitative tightening) by $100M per month starting with July, potentially shrinking the balance from nearly $9T to more than $6T over two years.
This is where the lifeblood gets sucked out of financial markets, and perhaps the economy itself. Economic activity appears to have slowed sharply into the year's end 2021. Currently, the Atlanta Fed's GDPNow model has Q4 2021 running at growth of 5.1% (q/q, SAAR). Wall Street consensus is for more like 5.4%. Until recently these estimates were running above 7%. We'll know more by this Thursday when the Bureau of Economic Analysis lays those digits on us. Projections for the first quarter and for full year 2022 are also coming in rapidly.
It's an Omicron story for sure. Shelves have been bare throughout the northeast - probably elsewhere as well, but that is my area of exposure - as truck drivers and employees of all kinds of consumer facing businesses have fallen ill at times. Yes, it goes much deeper than that. International supply chains remain kinked up, but that too, to at least a significant degree, is an omicron story.
Now, this begs me to ask the question... will the Fed dare be as aggressive as markets and Goldman Sachs think in trying to rapidly address hot consumer level inflation in a slowing economic environment? Even as fiscal stimulus, which has really been the primary driver for the demand side of the marketplace, dies a slow death? Does no one else understand that one can not correct for scarcity induced inflation through the implementation of policy? Does no one else understand that, even with crude prices run amok, and maybe going higher, that higher short-term interest rates, while certainly pressuring velocity, will have no impact on the Ports of Long Beach and Los Angeles, nor will they magically cause everyone working at your local grocer to test negative for Covid.
Don't Get Me Wrong
Please don't take me the wrong way. The Fed does need to try to normalize monetary policy as much as possible. I suggest tacitly addressing inflation without forsaking labor markets, which will soon struggle more than they have, without the fiscal cavalry on the way, and with more difficult short-term borrowing rates for small businesses. Knowing that 7%, or even 7%+ inflation is the output of artificial engineering coupled with the negative impacts of a global public health crisis, does it not make sense to move more slowly on rates, and more aggressively on the balance sheet? (Note to Jay: As always, I am here to help).
This does remove liquidity from markets and the economy at large, while putting the central bank in a more flexible position going forward. This also takes the change in posture out of the mainstream news cycle... thus having less of an impact on public psyche. You dig?
How important is that? There's no way to sugarcoat tightening policy into a weakening economy. Textbook Bear Market? Rate Hikes, Bare Shelves, Russia, Crypto-Fiat Taking the fear of rising interest rates out of the everyday conversation among lay people could keep people like your old "Uncle Louie" from stashing his life savings in a firebox under the bed.
We must ask ourselves two more questions. How much of the recent market action is directly tied to the pricing of potential military action in eastern Europe? Or Asia? How much is the meltdown in cryptocurrencies, the product of, the catalyst for, or in conjunction with the broader negative market activity?
Suddenly, there is talk of Russia trying to replace the Ukrainian government, and of U.S. troop deployments to the region. There has not been the threat of war among near peer rivals in Europe since the end of World War Two. Sure, we almost nuked each other in 1983, but most folks didn't know that. Sure we aimed on each other often enough, but that was usually out in the jungle, or out at sea, not in highly populated areas. Meanwhile, the EU and NATO squabble over who should lead a (dis) united Russian facing front.
While this goes on, Beijing continues to try to intimidate Taiwan on a regular basis, North Korea has felt free rein to lob ballistic missiles into the Sea of Japan at will, and the Middle East remains the Middle East.
We Bulls Wobble
Was it the Bank of Russia calling for the banning of cryptocurrencies in that country? Was it the Fed finally really getting down to discussing a "digital dollar" or a CBDC (Central Bank Digital Currency)? I call it "crypto-fiat". Whatever you want to call it, transitioning the U.S. dollar and other reserve currencies to a blockchain based technology ledger system will almost certainly end up in an epic battle for absolute power between major central banks who will have government regulators on their side and independent cryptos who will not. The power to tax little Jimmy on the $10 you paid him to shovel your walk beckons, as does the temptation to tax one's savings based on Uncle Louie's firebox having become obsolete.
Ever heard the expression "Don't fight the Fed"? The term usually refers to traders trying to swim upstream when the path of least market resistance is overwhelmingly downstream due to monetary policy. Now imagine, you're the one trying to take the power that the Federal Reserve Bank has enjoyed over the nation since 1913 and over the planet since the death of the gold standard away. Might not end so well.
Not saying you wouldn't have a chance, just saying that the odds might not be forever in your favor. Oh, you kids did hear about the SEC rejecting the method by which MicroStrategy (MSTR) had been adjusting quarterly performance for fluctuations in the value (or perceived value) of the firm's Bitcoin holdings, right?
In Search Of... Support
Isn't anyone on "our" side. The way I see it, cowpokes... There are two major catalysts that could potentially play out for the bulls this week. They may not, but you still do step to the plate, even when you have never hit this gnarly left-hander, right?
The first surprise would be what might be perceived as a "dovish" surprise from the Fed on Wednesday. Jerome Powell and his crew do not even have to sound truly dovish, they just have to sound like they are not committed to monetary reenactment of the Bataan Death March. Giving some lip service to that innately hominid ability to reason is really all we ask.
Beyond that, there are a plethora of high profile-large caps reporting this week. None will be more important to the broader marketplace than Microsoft (MSFT) and Apple (AAPL) , as these two are so widely held and remain such a backbone to both the technology sector from an equities perspective and the health of the economy moving forward. Who more than these two can tell us more about the state of the supply chain in 2022, and expectations for consumer/business spending? No one, that's who? If Tim Cook and Satya Nadella somehow dance their way around the negativity of the moment, so will we... unless somebody shoots somebody. That always screws things up.
Economics (All Times Eastern)
09:45 - Markit Manufacturing PMI (Jan-Flash): Expecting 56.8, Last 57.7.
09:45 - Markit Services PMI (Jan-Flash): Expecting 55.0, Last 57.6.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (HAL) (1.35)