Headgames. I sit down at my desk. Monday morning. Zero-dark thirty. The quiet before the storm? A hush that comes over a busy brain. I can see from my desk, in my open closet, an old hockey jersey that I have not noticed in a very long time. Number 24 in your program, but first in your hearts... Suddenly, the decades move backwards. The moments stop in a foreign locker room just before an "away" game... an away game that we lost against a team that actually has a fanbase. Intimidating? A little. I can hear the crowd. Nobody came to see our team. Nobody who followed the game gave our side much of a chance. We were in over our heads, talent wise. Still, you button down that jersey and you play the game. We had only our inner selves and our teammates to get psyched and prevent each other from getting psyched out.
Don't remember getting up off of the locker room bench. Are my skates tight enough? Too late now. Will this darned shoulder just stay in the socket for a couple of hours? Hope so. As long as I can get it back in without stopping the game. Don't need these fans throwing garbage on me if it does slip. Moving now. Led by our goaltender. Kid has a 0.7 GPA. School doesn't care. Half of the team is academically ineligible. The tunnel. Red Lights flashing. Now it's all in the head. You against you. Who's going to win? The game on the ice? No. The game in the mind? Seriously afoot. What's it going to be? Will you, can you... play as well as you know you can? That's the key. You know you can. You have always known you can.
Last week, the first week of April was a solid one for equities, at least one would think so. Value rotated back into growth. Small caps rotated back into large caps. Of all the major indices, the Nasdaq 100 lit the way, followed by the Nasdaq Composite, followed by the S&P 500. Speaking of the S&P 500, spin the wheel. Give it a go. Red or black? Pretty good chance regardless of wherever the ball stops, you'll see a new record close. Among sector select SPDR ETFs. Technology (XLK) was our goalie. That sector led us out of the tunnel, as hardware, software and semis all showed strength for five days. Energy (XLE) , the year's hottest sector, was left alone. A red door left unpainted at the bottom of the weekly performance tables.
Just a couple of things stood out last week as wrong. No volume. Practically none. The markets did not care. Even the algos took some time off. So it seemed. Breadth was really rather poor, defying what the headline indices for the most part expressed out loud. Most surveys of market participants show levels of bullishness that usually accompany market highs, or turning points. Now it gets serious.
The week ahead will no doubt rev up the "wood chippers" (what Wall Street folks call high frequency algorithmic traders), as well as real investors and traders alike. You are all well aware that Q1 earnings season kicks off in earnest this Wednesday, as JP Morgan (JPM) , Wells Fargo (JPM) , and Goldman Sachs (GS) each grab a bat and take a turn at the plate on Wednesday morning. This (Monday) afternoon, the U.S. Treasury will raffle off $38 billion worth of Ten Year Notes and then back that auction up with $24 billion worth of 30 year paper tomorrow afternoon. Then, there's the macro.
Tuesday morning, the Bureau of Labor Statistics wraps up March consumer level inflation in a neat and tidy bundle just days after the same government agency reported "margin crushing" producer prices that shocked to the upside. (Retail Sales and Industrial Production follow on Thursday.) Prices at the producer level are now accelerating at the hottest pace seen in over a decade. Oh, perhaps I failed to mention. Fun with fiscal policy returns this week for loads of headline grabbing attention. The U.S. Senate returns from recess today, out since March 26th. The House returns tomorrow (Tuesday), out since March 25th. They needed two and a half weeks off, because you know... Easter/Passover. Must be nice. Did you know that our elected officials get paid as if they work full time? True story. Just wait until the full House takes a powder on July 30th to return on September 20th. Must be grueling. How can they keep up such a torrid schedule? Know what? I am not running for office, but if I ever do, I promise that it won't be a retirement job.
Fed Chair Jerome Powell appeared on the CBS News show "60 Minutes" this weekend. Significantly, Powell expects the U.S. economy to strengthen throughout the second half of the year, and even mentioned a "base case" of putting together consecutive months of job creation prints totaling one million or more, while noting that between 8.5 million and 9 million fewer folks are currently employed than were in February of 2020. Powell stuck to the script... from... "unlikely we would raise rates anything like this year" to "the principal risk to our economy right now really is that the disease would spread again more quickly." While that first sentiment may prove inappropriate at some point, I think we can all agree with the second.
Chair Powell also pointed out that the Fed is "monitoring" the events that took place at Archegos, referring to this incident as a breakdown in risk management (Ya think?) and not a system-wide problem. What I found a wee bit concerning was Powell's statement, "This incident doesn't really raise questions about the stability of the financial system or of those institutions, which are mostly foreign banks." One, there were U.S. banks involved, they were just better and faster at getting themselves out of jam. Two, those "foreign" banks do large U.S. business, thus making them at least in part... systemic. I think "Beats me" would have been just as effective an answer.
Tis The Season
As we fast approach the unofficial kickoff of earning season, I think it is key to note that expectations are running extremely high, especially starting with this reporting season. The comparables are just not comparable. We are comparing apples to oranges. We are comparing a reopening economy to an economy shuttered by mandate. Not only will this skew our interpretation of corporate results by industry, but also of all macro-economic data points, such as those focused on inflation and wage growth where economists tend to place more emphasis on the year over year results than they do in month over month terms.
For the first quarter, FactSet shows projected S&P 500 earnings to have grown 24.5%, up from 23.3% just a few weeks ago. Revenue is expected to have grown 6.4%. The S&P 500 is trading at 22.4 times expected next 12 months' earnings, which is expensive by most historical metrics. These metrics are misleading in themselves. Anyone who thinks they have the experience or that we have been through this before is kidding both themselves and their clientele.
There is not one among us who managed money through either the Spanish Flu pandemic or World War II. What does that mean? It means that none of us have made decisions with both monetary and fiscal policy loose and expected to remain loose regardless of underlying macroeconomic conditions. Nor have the boundaries of policy capabilities ever been put to this severe of a test during the fiat era. We are all rookies. Some of us have just been beaten up a little more over the years. That said earnings are projected to have grown 53.9% year over year for Q2. That will be the extreme quarter in terms of incomparable year over year comparisons. Such comparisons become somewhat less absurd as we head into Q3 and Q4, with the grace of a merciful God and some good luck.
Just keep in mind that pent up demand can return an economy to baseline, but can not return an economy to trend without organic growth. One does not order seven dinners the first time they venture out. One does not take two vacations to makeup for last year. One does not join two gyms, send their kid to two colleges, or get five haircuts. Especially across service based industries, pent up demand will be a visible one time burst, only for those who can afford it. Savings are piled up we are told. Somehow, nobody mentions that there are unpaid rents and mortgages. Those are piled up too. This week, I expect that the banks will have done well trading. If not, then obviously, the wrong folks are trading. I would also expect to see significant improvement in net interest margin.
This is where it gets tricky. How healthy is demand for credit? How healthy are existing loans? Can "pent up" reserves finally be released and booked as profit? This is the season. Jingle jingle. Now you and I just have to figure out how much of the S&P 500's 10% year to date run is pricing in. Unless it is that you see the index up 40% for the year in late December. My guess? Congress will keep our marketplace volatile as they play salugi with fiscal policy. A whole lot of positivity, in fact you might say "perfection" is priced in. Issues with the supply chain forcing margin compression? Not priced in. Corporate tax hikes? Not priced in. The algos can't wait for those on either side of the aisle to start slinging some mud. You and I both know this gets ugly.
1) Nvidia's (NVDA) GPU Technology Conference runs all week. As CEO Jensen Huang provides the keynote address, I would expect that beyond a simple review of Nvidia's product portfolio, there will be some kind of regulatory update given on the pending $40 billion acquisition of Arm Holdings from Softbank (SFTBF) .
2) Microsoft (MSFT) is reportedly in advanced talks to acquire Nuance Communications (NUAN) . Nuance is a firm that uses artificial intelligence to offer speech recognition and natural interfaces through a variety of fields. Nuance went out at $45.58 on Friday. The shares were trading above $55 early on in pre-opening trade on Monday. I did not see MSFT trading lower yet with several hours to go until the opening bell.
3) CEO Cathie Woods of ARK Invest (ARKK) did tweet out a lengthy response to Tesla (TSLA) CEO Elon Musk on Sunday. Musk had asked her, "What do you think of the unusually high ratio of the S&P 500 market cap to GDP?" on Twitter's public social media forum and she responded in the same way. I am not going to copy and paste the entire response here, but her answer is interesting and I would recommend finding it and reading it for yourself.
Economics (All Times Eastern)
13:00 - Ten Year Note Auction: $38B.
14:00 - Federal Budget Statement (Mar): Last $-311B.
The Fed (All Times Eastern)
13:00 - Speaker: Boston Fed Pres. Eric Rosengren.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (APHA) (-.04)