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April 18, 2022
Like the Easter Bunny jumping around the yard, the markets have been hopping back and forth for much of the past few months. There are many reasons to be skittish, from the continuing conflict in Ukraine to a still uncertain withdrawal of liquidity by the Fed. Following the pandemic, the Fed was forceful and quick to flood the market with liquidity. Now that inflation is running well over their 2% target, they are measured and careful about pulling back on the surfeit of money floating around. In fact, many of the indicators of “financial stress” still show the markets very stress free. The inflation numbers last week were in line with expectations. However, the core rates (excluding food and energy) were lower than expected, giving rise to the thought that “peak inflation” is here and the rate will begin dropping in the months ahead. Retail sales were up last month, but unit sales were roughly flat, with higher prices making up the “gains”. The coming week is relatively light, but earnings will get into full swing. There will (always!) be something to watch in the markets. Expect the unexpected in the weeks ahead.
The alternating excited and depressed markets have been a boon for traders, but not so much for long-term investors. Sentiment is getting very bearish, as evidenced by the Amer. Assoc. of Individual Investors (AAII) weekly data. The widest spread between bulls and bears since 2013, ahead of a seven-year run for stocks. Volume has been expanding on market declines, indicating investors are turning tail anytime there is a sniff of bad news. Interest rates drop a bit one day, and it charges stocks, especially the growth style. The daily market moves are relatively easy to determine a reason why, but that reason is exclusive to that day and does not carry forward to the next as investors focus on something new. When will the back-and-forth end and a new trend begin? The trillion-dollar question without (as of yet) an answer.
The inverted yield curve has not only re-inverted but has gotten relatively steep quickly over the past few weeks. So too, the difference between high yield bonds and treasuries has also declined from their recent peaks. Does that mean the recession call is off the table? Maybe. However, it will depend upon how aggressive the Fed is over the coming months and whether they stick to their inflation fighting mantra or revert to making sure the equity markets stay elevated. One component of the bond model is commodity prices, which remain near all-time highs and have been up over 40% on a year over year basis for more than a year. If we are indeed close to “peak inflation”, keep an eye on commodity prices to lend some additional credence to that claim. Hard to see inflation rolling over soon.
Year to date, there is at least a nine-percentage point difference between growth and value, whether looking at large, mid or small stocks. The divergence is a big change from the past few years, when growth was king of the market. Familiar names like Apple, Microsoft and Nvidia have all declined this year, while rather uncommon names like Abbvie, Duke Energy and pick an energy stock have all seen gains year to date. Investors have not given up on the familiar and embraced the “unusual”, but if the trends continue through the summer months, those smaller gains in the big cap names may come under pressure as investors lock in “any kind” of gain. The defensive nature of the market is not unusual given the turmoil of the past six months in stocks in general. Volatility is up, worries abound, so investors are looking at companies and sectors that can still do well no matter the outlook. If inflation continues to be one of those worries, look for commodity companies to continue their run higher as well.
Earnings season will be interesting as companies discuss employment, input costs and whether they can pass them along to their consumers. Inflation and the Fed are likely to be key themes well into the summer. Will interest rates ever come back down again? If the Fed can not contain or rein in inflation, look for higher still interest rates this year.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.
Kingsview CIO Scott Martin discusses Twitter, inverted yield curves and commodity prices.
Program: Cavuto Coast to Coast
Station: Fox Business News
NEIL CAVUTO: The read from very young and savvy folks on the significance of all of this. Scott Martin, Jonathan Hoenig, Jonathan Susan’s point that maybe this might grant him a little bit more freedom, that is Elon Musk to do the kind of things he maybe he prefers to do and maybe he read in the footnotes. Becoming a board member. Kind of obligates you to do things you don’t really feel like doing what happened.
JONATHAN HOENIG: And there’s no question, Neil, unfortunately, I mean, being a board member of a of a company, it’s a liability. And Elon Musk has a great history of that. And the SEC has gone after him in the past over things that he has tweeted. So, you know, then you could have a situation where Twitter shareholders would come after him and say, well, you know, you tweeted this, it impacted the stock. So to your point, he’ll have a be even bigger impact on the company, not as a board member, and perhaps he will increase the stake. The whole fiasco indicates, ironically, Neil, that the system works. I mean, every day this story has been in the news. Everyone who owns Twitter uses Twitter, owns the stock, uses the service, has done so voluntarily. And it’s owners who decide the company’s future. No government is necessary in Elon’s deciding it’s not for him. It’s going to benefit shareholders nonetheless.
CAVUTO: Scott, what do you think? I mean, the stock continues running up today and it’s had an appreciable run, up about 30 plus percent since all of this started. So you could make the argument that it is it is still heavily influenced by the presence of Elon Musk. What do you think?
SCOTT MARTIN: A nice shot in the arm, Neil, but down pretty significantly from that boost last week. And we owned Twitter into that boost and gosh, needed it really after the last year of the performance of the stock. And we actually liquidated most of our shares. So I think to the point, though, that you and Susan were making Twitter does have some things. I think the problem, though, is it’s a lot of potential energy still with respect to kind of the news aggregation, the interactivity between the users and so forth. But it’s quick, it’s kind of direct. You know, the search features and such have improved. The edit button is definitely, I think, coming, whether Elon is there or not. I mean, it could have been something simple, Neil, as Elon Musk finding out that there’s like a no pot smoking, say, policy on the board, you know, that could have been a derailment in itself as based on some of his past history. So there’s a lot of things that I think went into the fact that when he started looking at the real rules and regs and maybe even talked to a couple of board members, he was like, you know, this may not be such a friendly neighborhood for me and I should just move on. But it does portend maybe a hostile takeover down the road because he can buy more shares by not being on the board.
CAVUTO: You know, I mean, we can switch gears to the markets in general. Now, Twitter, I think, would be an exception to what’s happening generally among the Nasdaq technology issues that have been taken on the chin Jonathan. Certainly in the face of fears of higher interest rates, we’re seeing that play out again today. Do you think it’s a fair rule of thumb that technology stocks take it on the chin every time rates back up? Why is that?
HOENIG: Well, well, I mean, Neil, technology stocks are those longest looking, most ambitious, oftentimes trading at the highest multiples. And, you know, it’s hard for, I think, kind of everyday investors maybe understand how important that interest rate is. I mean, every number, every calculation in the economy is based on interest rates. And, Neil, you can’t underestimate I mean, in my investing lifetime, I’ve never seen rates go up so fast in such a short period of time in the last year. The yield on the two year note has gone from 1/10 of 1% to two and a half percent. This is a major move. And one reason why I think you’ve got to be cautious in today’s environment. We’ve really never whether it’s the inverted yield curve or some of the rising and cost of commodities, these are very perilous and very lots of warning signs that a recession very much might be ahead.
CAVUTO: All right, Scott, of course, when he talks about inverted yield curve, that’s when shorter term rates eclipsed that of longer term rates, usually previews a slowdown or at worst, a recession. Are you worried about that? A growing number of economists now are and that it could happen sooner rather than later. Of course, these same economists have been wrong. Well, on everything. But my point is, should their worry be justified in your eyes?
MARTIN: Yeah. I don’t know who’s been more wrong, those economists or the CDC. And I love when Jonathan talks to me about inverted yield curves. I mean, I’ll tell you, he’s ten feet away, Jonathan. Don’t make me come over there and give you a hug. Here’s the thing, though, Neil, to your point and Jonathan’s right, the rise has been meteoric. I mean, if you go back to August of 2021, we’ve doubled the rate in the ten year. The problem is, in my mind, as far as looking at stocks going forward and why they’re getting maybe unduly punished, rates really aren’t that high kids. So the fact that they are up, yes. Is a problem. Commodity prices, to Jonathan’s point, very high and rising. It’s still not that crazy. So if we get some leveling off here, maybe three and a quarter, maybe three and one half on the ten year when the Fed slows down their role, I think that’s when tech stocks get rebirthed again.
CAVUTO: You know, Jonathan, there are a lot of investors there. We talked about technology at the outset who are holding on to still huge gains in those technology issues, depending on exactly when they got into names like Apple and Amazon and Tesla. How do you advise them? A lot of them see doubling and triple. Pulling in their money. Do they cash out? Do they? What do you what do you tell them to do?
HOENIG: You know, Neal, it always comes back to you as an individual investor. I mean, what is your individual situation? And, you know, it takes a lot of introspection. You have to think, how will I feel if this position, given its size in my portfolio, goes down ten, 15%? Will my lifestyle have to change? You know, I just even remember back to the late 1990s, you had a lot of, frankly, a little older investors who had big positions on an apple. And it was an apple back then. It was Microsoft and Oracle. Right. You know, basically they were a little overweighted. So, you know, no one predicts the future, the market with any complete certainty. So I think it comes back to your own situation. If you really had that long term time horizon, ten, 15 years, what is a correction mean? But if you’re a little close to retirement, I think now is a good time to take a little bit closer look at your risk.
CAVUTO: Scott, what of your long term horizon is forgot about ten or 15 years, maybe ten or 15 minutes. What do you do?
MARTIN: That’s my horizon. And what you have to do is basically hang on for dear life, but know that there’s nothing wrong. Guys with corrections, there’s nothing wrong with bear markets. In fact, just as humans, we freak out and don’t buy. We actually sell. I think you’ve got to flip the switch. I think you have to take these opportunities at lower prices to load back in.
CAVUTO: All right, gentlemen, we’ll be seeing you a little bit later in the show, talking about what we can expect out of the big bank earnings. They’re front and center this week, beginning on Wednesday and Thursday, we’ll get more of them. So get your gauge on how they are going to respond to how they see things going forward, not just the earnings, which are expected to be strong, of course, but the future guidance. That’s really the whole name of the game.
Kingsview SVP Paul Nolte discusses the global economy, China’s economic slowdown, watching the yield curve, and the bond market.