"How wonderful is it that nobody need wait a single minute before starting to improve the world."
- Anne Frank
Half Time
The bell at 11 Wall Street will ring twice today, as it does every single business day to open and close the regular trading session at the New York Stock Exchange. The second bell, at 4 p.m. ET this afternoon, will mark the completion of the first half of 2022.
It's been rough. The Nasdaq Composite has given up 28.55% year to date, the S&P 500 a mere 19.88%. Small-caps? Glad you asked. The Russell 2000 closed on Wednesday night 23.42% lower than it did on December 31, 2021.
Of course all of these indexes peaked either ahead of, or just after New Year's Day, so they are all down more from their tops than they are year to date. These indexes are all also off of their recent lows, so they have been down more than they are now. Still, marking the passage of time, such as a month, quarter or half, as we do today, is meaningful. Especially when, depending on the metric used, this first half is the worst first half since 1970. Fifty-two years.
That's a long way to go between epic six-month beatings like the one just experienced. Congratulations.
See How They Run
Three of the planet's leading central bankers, the Fed's Jerome Powell, the Bank of England's Andrew Bailey, and the European Central Bank's Christine Lagarde (the host), spoke from the ECB's annual conference in Sintra, Portugal on Wednesday. They were hawkish.
Lagarde said, "I don't think that we're going to go back to that environment of low inflation. There are forces that have been unleashed as a result of the pandemic, as a result of this massive geopolitical shock that are going to change the picture and the landscape within which we operate."
Powell added, "We're living with different forces now and have to think about monetary policy in a very different way. We understand better now how little we understand about inflation." Powell was straight forward, vowing to prevent a "higher inflation regime" from becoming embedded in the U.S. economy, as the underlying tenet behind the Federal Reserve's willingness to get aggressive on short-term interest rates despite the obvious fact that the U.S. economy teeters on the edge of recession.
On that fact, Powell commented, "The process is highly likely to involve some pain, but the worst pain would be from failing to address this high inflation and allowing it to become persistent."
Elsewhere (on CNBC), Cleveland Fed President Loretta Mester, who does vote on policy this year, said, "We're just at the beginning of rate rises, really. I think getting interest rates (the Fed Funds Rate?) up to that three to three and a half percent is really important." For her part, Mester added that she does not see the U.S. economy going into recession, but like Powell, admits that the process of getting monetary policy where she thinks that it needs to go is "going to be a painful one in some respects." Mester added that she sees a 75 basis point rate hike lined up for the July 27 policy meeting.
On Inflation
The now persistent bout with elevated consumer inflation across the United States (and elsewhere) was born of the joining of forces created through four points or origin.
One... Ultra loose, highly irresponsible fiscal and monetary policy over a number of years, even decades.
Two... Extremely misguided domestic policy decisions made shortly after the Biden administration took office that severely hampered the U.S. energy sector's ability to be resilient in a crisis.
Three.... China's persistent reluctance to move away from their Covid-Zero policy, which has repeatedly shut down areas key to global commerce.
Four... Russia's invasion of Ukraine that has to differing degrees shut down, or slowed down the export of energy and agricultural commodities from that region.
The Fed alone can only address their contribution to origin number one as the federal government's permanent enabler. This they can do, as they are now, by trying to blunt both consumer and commercial demand, but this change in trajectory can really only impact core inflation. The Fed can do nothing that will impact food and energy prices. Nor can most anyone else, short of taking military action.
China will open when China is ready. NATO has been bolstered by Russian aggression in Eastern Europe as new members likely to sign on as allies have been invited to do so. That said, unless NATO is willing to "invade" the western half of Ukraine either through the implementation of a "no-fly" zone or through kinetic occupation, then it remains impossible to ensure the protection of any part of Ukrainian agriculture.
The fact is that only one part of origin number one is addressable by the central bank, while the other part of origin number one would be under legislative control and origin number two under executive control. The Fed can only do so much. What they can do, can and likely will further slow economic activity.
On NATO
In addition to formally inviting both Finland and Sweden to join the alliance, NATO will now prepare a new defense plan that will increase the number of troops on high alert at all times to respond to invasion from the current 40K to more than 300K.
On top of that, the U.S. will establish a permanent headquarters for the 5th U.S. Army Corps in Poland, station an additional 5K troops in Romania, and increase rotational deployments to the Baltic states. Two squadrons of Lockheed Martin's ( LMT) F-35 Lightning II fighter aircraft will deploy to the U.K. as U.S. air defense systems are placed in Germany and Italy. The U.S. Navy will also station an additional two destroyers in Spain, bringing the total there to six. This is all on top of the 100K U.S. troops already in Europe, which is up from 80K prior to February 24.
The Royal Navy will pledge a naval carrier strike group to NATO's new high-alert forces, while all NATO states are expected to increase defense spending as well as deployments. The Biden administration has expressed public support for Turkey's request to purchase 40 new F-16 Falcon fighter aircraft (again, Lockheed Martin) as well as modernization kits to upgrade 80 existing F-16s. Though these deals still have to get through Congress, it would appear that this helped Ankara drop its veto power over the invitation made to Finland and Sweden.
Sometimes, I Feel Like I'm The Only One Talking About the Defense Contractors
That said, with the S&P 500 down 19.98% year to date and the Nasdaq Composite down 28.55% in 2022:
Northrop Grumman ( NOC) is up 20.33%.
Lockheed Martin ( LMT) is up 19.41%.
L3Harris Technology ( LHX) is up 13.06%.
Raytheon Technologies ( RTX) is up 9.67%.
General Dynamics ( GD) is up 6.34%.
This is a space where it really pays to pick your stocks, while sticking to the major contractors. The ETFs have outperformed the broader market, but have not performed with the names mentioned above so far this year:
iShares U.S. Aerospace & Defense ETF ( ITA) is down 5.23%.
Invesco Aerospace & Defense ETF ( PPA) is down 4.44%.
Is Defense recession proof? Not in "normal" peacetime, but maybe this time. Margin proof? Hey, raw materials, rare earths, semiconductors, wages... prices fluctuate. That might be asking too much.
Seasonality
I only go back to the year 2000 on these things because that is approximately when technology started impacting price discovery and it is difficult to compare price discovery across eras.
Tomorrow (Friday) brings with it the month of July. Might be your last chance to make some hay for a little while. Since the year 2000, the S&P 500 has been positive 64% (14/22) of the time in July for a median gain of 1.11%. 64% is not at all special. 64% places July in a three-way tie for fifth place since the year 2000. April (not this year) would be top dog at 74% followed by December, November and May.
The month of August is also part of the three-way tie at a 64% positivity rate, but only for a median gain of 0.27%. September? Median "gain" of -1.16%, worst month of the twelve.
According to the charts, large-cap investors want to fade by late July into early August and start working their exposure back toward full-sized by October. Yes, October is usually a positive month, despite its reputation, even if I take the model far enough back to include 1987.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 227K, Last 229K.
08:30 - Continuing Claims (Weekly): Last 1.315M.
08:30 - Personal Income (May): Expecting 0.5% m/m, Last 0.4% m/m.
08:30 - Consumer Spending (May): Expecting 0.5% m/m, Last 0.9% m/m.
08:30 - PCE Price Index (May): Expecting 6.6% y/y, Last 6.3% y/y.
08:30 - Core PCE Price Index (May): Expecting 4.8% y/y, Last 4.9% y/y.
09:45 - Chicago PMI (June): Expecting 58.1, Last 60.3.
10:30 - Natural Gas Inventories (Weekly): Last +74B cf.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: ( MU) (2.46)
