Readers have noticed the impacts of general shortage, consumer-level inflation, the likely trajectory of monetary policy, and the expectation for slowing economic activity upon Treasury markets.
The inversion of the yield of the U.S. 10-Year Note through the yields of everything down through the U.S. 2-Year have certainly changed expectations for bond traders.
From an equity perspective, these markets have also tossed aside key sectors such as the Financials ( ( XLF) ) and the Industrials ( ( XLI) ) for obvious reasons.
Rising Treasury yields out at the long end of the curve, at first had quite the negative impact upon the Technology ( ( XLK) ) and Communications Services ( ( XLY) ) sectors, as higher rates are considered to have a rather negative correlative impact on growth or higher valuation type equities. That said, as the short end of that curve preps for a higher rate regime and as the long end benefits from the global lure of haven during a time of strife, these tech/growth types have appeared to, if not purely enjoy a mass re-allocation of capital flows, to at least lead the shape of large-cap equity index performance.
Readers may have also noticed that of late, there has been a developing algorithmic habit of marking up the close regardless of what markets have been doing ahead of the late charge. I had thought it was related to the end-of-month/quarter prep, but the activity continued on Friday and Monday.
Check Out the Goods
Since mid-March, we've seen the S&P 500 retake its own 21-day exponential moving average (EMA), 50-day simple moving average (SMA) and 200-day SMA. On Friday, the index retested the 200-day line, and rebounded off of that spot on Monday. Take a look:
The moving averages are different for the Nasdaq 100, but the shape of recent price discovery has been much the same:
I chose the Nasdaq 100 over the Nasdaq Composite as the 100 is more highly focused on tech and includes no financials, better suiting the purpose of this segment. Note that the Nasdaq 100 continues to contend with resistance at its 200-day SMA.
Now let us stroll down Segment Performance Boulevard and see what we can see. It may or may not surprise some investors to find out that Information Technology is the second best performing S&P sector select SPDR ETF ( XLK) of the 11 over a one-month time frame despite being in ninth place year to date:
Take a look at this chart of the XLK, above. Now, take a look at the S&P 500. Pretty darned similar.
Now, take a look at Communication Services ( XLC) :
Again, very similar. Not quite as, Communication Services is closely related to Information Technology, but certainly not a clone. Communication Services contains the Internet industry and Telecom, but also media, entertainment and publishing, whereas Tech includes semiconductors, software, telecom equipment and hardware. Not identical twins, no... but certainly both sectors would be invited to the same family reunion.
So, tech and tech-related sub-sectors or industries might not truly be leading markets vertically, but they certainly are leading investor behavior in a more horizontal fashion. This market is reliant upon these two sectors whether we like it or not. Win or lose, this is the hill upon which equities will make their stand.
Just Another Manic Monday
Equity markets struggled early on Monday, and gathered steam as the day wore on. Tech, for the most part, dominated. The Nasdaq 100 climbed 2.01%, while the Nasdaq Composite gained 1.9%. The S&P 500 scored a milder 0.81% increase, while the Dow Transports continued to underperform, closing down 10 points or 0.07%.
Small to Mid-cap stocks underperformed as well. The S&P 400 gave up 0.24%, while the S&P 600 lost 0.38% countered by the 0.21% gain made by the Russell 2000.
Just five of the 11 S&P Sector SPDR ETFs closed the session in the green, and only three decisively so. Communication Services led the way, up 2.76% for the day. The sector itself was led by the Dow Jones US Internet Index (+2.9%), as Twitter ( TWTR) popped 27.12% on news that Tesla ( TSLA) CEO Elon Musk had taken a 9.2% stake in the firm.
Consumer Discretionaries ( ( XLY) ) finished the day in second place at +2.25%, led by the Dow Jones US Automobile Index (+4.86), which in turn, was led by the already mentioned Tesla, up 5.61%. Finally, Information Technology gained 1.9% for the session. Performance was spread across both the software and semiconductor industries. The Dow Jones US Software Index moved 2.19% higher as Unity Software ( U) and Okta ( OKTA) led the charge. The Philadelphia Semiconductor Index scored a one-day gain of 1.73%, led by Marvell Technology ( MRVL) and Nvidia ( NVDA) .
Breadth was good, but not fantastic, and trading volume was light. That said, the entire day, in retrospect, may not be all that meaningful. Winners beat losers at the NYSE by roughly 9 to 7, while at the Nasdaq, the margin fell short of 2 to 1. Advancing volume took a 65.3% share of NYSE-listed composite trading and a 72.7% share of that metric for Nasdaq-domiciled names. Trading volume contracted day over day for NYSE-listed securities, Nasdaq-listed securities, S&P 500 subordinate stocks and for Nasdaq Composite subordinate stocks as well.
The War in Europe
"A lasting order cannot be established by bayonets"
- Ludwig von Mises
As Russian forces retreat from northern and central Ukraine in an effort to consolidate in the eastern and southern parts of the country, and as the Ukrainian army reoccupies Ukrainian soil, the atrocities suffered by non-combatants at the hands of that Russian army become ever more apparent. Truth be told, I am simply stunned by the incompetence and lack of professionalism displayed by the Russians. I really can't believe that we once considered this army a near-peer adversary. Clearly this is a poorly led, poorly trained and poorly supplied street gang, more than it is anything resembling a world-class military.
In response to the horrors witnessed by a world that doesn't want to believe what they see, U.K. Foreign Secretary Liz Truss, from Warsaw, called for a new wave of tougher sanctions on Russian banks, Russian oil, gas, and coal as well as banning Russian ships from ports of call. This echoed French President Emmanuel Macron's call to ban Russian energy commodities from Europe, and was followed by U.S. national security adviser Jake Sullivan's statement that the Biden administration would announce additional economic sanctions against Russia later this week.
Meanwhile, the U.S. Treasury Department announced that it will halt Russia's ability to make U.S. dollar payments through U.S. banks. A spokesperson for the U.S. Treasury Department's Office of Foreign Assets Control said, "Russia must choose between draining remaining valuable dollar reserves or new revenue coming in, or default." The spokesperson (speaking on the condition of anonymity) added "Russia is facing a recession, skyrocketing inflation, shortages in essential goods, and a currency that no longer works in much of the world."
The Death (or at least severe illness) of Globalism
It doesn't take much of a fortune teller to see that going forward, multinational corporations will likely be less multinational. First it was the pandemic that forced shortages of everything from labor to semiconductors. Then, this war in Europe forces shortages of both energy and agricultural commodities. We all know that corporations had long sought to manufacture goods and source materials as cheaply as possible. While the cost of doing business dropped, so did consumer-level prices. That was a welcome development. Not so welcome was the exporting of a large portion of the U.S. middle-class economy.
While globalism tamed inflation, it also hollowed out the domestic U.S. economy. No longer did the middle class dominate that economy, and as it would follow... U.S. politics, but as the populace divided into the "haves" and "have nots" in numbers not experienced in recent times, so did the body politic into populist factions claiming to represent the underserved, into opposing opinionated groups....bearing more clout than maybe they should have.
While refocusing and prioritizing modern American (and global) business more on the benefits of securing materials and supply chains is revalued in competition against the benefits of margin expansion, inflation will be tougher to tame than it had been in recent decades where the Fed instead found inflation difficult to provoke. I don't like inflation any more than the next kid. That said, maybe there is a level that stands above the experience of the past 30 years that improves growth conditions for middle-class opportunity. This could potentially draw membership from those mired in lower-class realities. It's an idea.
We're going to have to be brave as a people. Let's hope we also have the necessary patience.
On That Note...
The Baltic Dry Index dropped on Monday for an eighth straight day, as vessel segments within also contracted.
In Addition...
Australia announced its plan to spend A$3.5B ($2.6B) in order to accelerate an upgrade to its missile capability. This comes ahead of a planned move toward manufacturing precision missiles on Australian soil in coming years. Australia has named Raytheon Technology ( RTX) and Lockheed Martin ( LMT) as strategic partners in implementing this plan.
The plan is part of the AUKUS agreement between Australia, the U.S., and the U.K. that will also deliver nuclear powered submarines to Australia to help counter the threat to the South Pacific posed by China. The corporate beneficiaries there could/would likely be General Dynamics ( GD) and BWX Technologies ( BWXT) .
Economics (All Times Eastern)
08:30 - Balance of Trade (Feb): Last $-89.7B.
08:55 - Redbook (Weekly): Last12.9% y/y.
09:45 - Markit Services PMI (March): Flashed 58.9.
10:00 - ISM Non-Manufacturing Index (Mar): Expecting 58.3 , Last 56.5.
16:30 - API Oil Inventories (Weekly): Last -3M.
The Fed (All Times Eastern)
10:00 - Speaker: Minneapolis Fed Pres. Neel Kashkari.
10:00 - Speaker: Reserve Board Gov. Lael Brainard.
11:05 - Speaker: Reserve Board Gov. Lael Brainard.
14:00 - Speaker: New York Fed Pres. John Williams.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: ( AYI) (2.37)
