This bi-weekly financial section is published in USA Today's: The Town Journal. This publication is distributed in Bergen County New Jersey, covering 4 towns with roughly 22,000 residents.
BULLS & BEARS ENGAGE IN A VIOLENT TUG-OF-WAR
US Markets
The current cyclical bull-market, which began in March of 2020, is now beginning its third year. About the year ahead, Ryan Detrick, chief market strategist of LPL Financial said, “Year three of bull markets tend to be a little tamer, with the larger gains happening in years one and two.” He also pointed out that out of the 11 bull markets since World War II, three of them ended during year three." The ones that did not end, "saw an average gain of only 5.2%,” said Detrick.
We are witnessing a Tug-of-War. Market participants cannot make up their collective mind, it seems. U.S. stocks, and markets more broadly, have whipsawed from gains, to losses, to gains again on a daily basis. To illustrate this Tug-of-War quantitatively, last week the price move in the Nasdaq Composite was its 39th daily change of at least 1%, up or down, in 2022. That is the greatest quantity of daily 1% swings during any quarter since the first quarter of 2009 which had 40 daily price moves, up or down, of greater than 1%. This daily tug-of-war between the bulls and the bears could continue for some time. Intertwined risks related to Federal Reserve policy, geopolitics, commodity prices, and economic growth are not going to go away overnight. As it stands now, this will be the first down quarter for the S&P 500 since the first quarter of 2020.
The S&P 500 finished up last week with a gain of 1.84%. The tech heavy Nasdaq 100 finished the week with a gain of 2.24%. The Dow Jones Industrial Average finished the week with a gain of 0.31%. The Russell 2000 small-cap index finished the week with a loss of 0.55%. Of the S&P 500 sectors, 9 of 11 finished last week higher. The sectors were led by energy, materials, and utilities. The laggards were real estate and health care.
Market Moving Headlines
Federal Reserve Chairman Jerome Powell on Wednesday, 03/23, said, inflation is “much too high” and labeled it as a threat to our economic recovery. He explained the Fed’s plan now features seven 25 basis point (0.25%) rate hikes this year and added that policymakers would increase rates by more than 25 basis points if necessary. When asked about a recession, he warned that bringing about a “soft landing,” economic speak for preventing a recession as the economy slows, will not be straightforward. The 10-year treasury yield has blasted to almost 2.5% as of the close on Friday, 03/25. Where this rate goes from here will certainly dictate how market participants behave moving forward. Why? The yield on a 10-year treasury note is considered a benchmark rate. It influences many other interest rates such as mortgage rates, and the rate at which companies borrow money. Beyond that, it is used in the calculations that value businesses. As the rate rises, it diminishes the current value of a business’s future returns.
Warren Buffet has closed his biggest deal since 2016 in a mind-bending $11.6 billion all-cash purchase of the Alleghany Corporation. Alleghany’s core business is property and casualty insurance, but it has a broad portfolio of profitable non-insurance businesses. Some view Alleghany as a mini-Berkshire Hathaway. Both Berkshire Hathaway, ticker BRK.B, and Alleghany, ticker Y, are trading at all-time highs on the news.
Uber Technologies is planning to list all of New York City’s taxis on its app. This agreement could ease Uber’s driver shortage, curb high fares, and refer more riders to cabdrivers, the Wall Street Journal reported. Uber passengers will pay roughly the same fare for taxis as for Uber X rides. Unlike Uber drivers, New York City taxi drivers will see expected fares before a trip and can decline rides they deem not worth their time. Uber said it listed more than 122,000 new taxi drivers on its app last year in markets including Spain, Austria, and Hong Kong. Andrew Macdonald, Uber’s global mobility chief, told the Wall Street Journal, “Uber wants to list every taxi in the world on its app by 2025...” and “I certainly think it’s possible.”
Last week was also an active week for economic data. Considered a leading economic indicator, initial jobless claims beat expectations and fell by 28,000 to 187,000 for the week ending 03/19. This is the lowest number since 1969, just a few years after the start of this dataset. Continuing claims also fell and beat expectations. They fell by 67,000 to 1.35 million. Continuing claims are now at their lowest level since 1970. The Bureau of Labor Statistics, which only has their data updated through January, lists 0.6 unemployed people per job opening. This means there are more job openings than unemployed people.
Another leading indicator, the Purchasing Manager’s Index, PMI, was released last Thursday, 03/24. This monthly data is the result of survey data collected from senior executives of private sector companies. As with the majority of economic data, it is used to help understand where economies and markets are headed. The key findings of the March S&P Global Flash US PMI were very positive for the economy. Both Manufacturers and service providers saw a continued rise in activity. Regarding manufacturing, March data showed a marked rise in new orders illustrating domestic demand remains strong. The survey also revealed that new export orders rose. This illustrates there is also international demand for our products. As continues to be a prominent theme in 2021, the companies mentioned their input costs are continuing to rise quickly, and the strain on the supply chain continues to hamper their productivity as backlogs of work grow. The companies also noted they stepped up hiring to help meet demand.
Another leading economic indicator, the University of Michigan’s Consumer Sentiment Index was also released. The number is 59.4, which is down slightly from 62.8 and below expectations of 59.7. This number peaked in April of 2021 and continues to slide. It is notable that while sentiment is declining, according to the US Census Bureau as of January, retail sales have not declined despite falling sentiment.
Another economic indicator that was released last week was the number of new 1-family homes sold. US new-home sales decreased 2% to an annual rate of 772,000 in February. This number represents the number of homes that would be sold over a year long period if the same number of properties were bought each month based on the rate of sales in February. Is this cause for immediate panic, no. Is it important and a leading indicator of the economy in a similar way to the stock market, yes.
The average sales prices for new homes sold in February was $511,000 and the median price was $400,600. This sales decline is surprising analysts as the inventory of properties for sale just hit the highest level since 2008. Data on February housing starts from earlier this month shows home builders are continuing to ramp up home-building activity. With the median sales price of new homes up, a new home is not an option for many first-time homebuyers, even before the impact of higher mortgage rates is considered,” said Danielle Hale, chief economist at Realtor.com. The 30-year mortgage rate is at 4.42% today, rising to a new pandemic-era high. The 30-year rate has not been this high since January 2019.
International markets
The year-to-date picture remains largely the same. The greatest year-to-date strength is from the emerging markets of Brazil, Chile, Peru, Columbia, South Africa, and Qatar. In the developed world we can find Norway, Australia, and Canada in positive territory, but they are in single digit gain territory while those emerging markets above are all in double digit gain territory. After a month-long halt, the Russian market did partly open for trading. It is an incredible and fragile mess. The New York Times reported that only 33 of the several hundred stocks actually traded. The market was open for just 4 hours per day. Foreign investors could not sell their holdings, and there is a blanket ban on short selling to prevent more losses.
Fixed Income
The fixed income space remains in a decline. This is one of the worst 1st quarters on record for bonds. This is true for domestic and international bonds. Last week, and this year-to-date, of the 31 bond ETFs we track at East Coast Charts Research, not one of them is positive. In fact, 21 of them, so 67%, closed last week at 52-week or all-time lows.
Commodities
The US Dollar continued its climb higher closing the week at 98.82. Commodities were very strong last week following a 2-week decline. Energy had the largest gains, followed by base metals, and then livestock. Many names continue to make 52-week and all-time closing highs. Gold closed up at $1,957.87 per ounce. WTI Crude oil closed up at $113.90 a barrel. Gasoline also finished last week higher.
The Week Ahead
Next week is going to be another week full of headlines. The economic calendar is packed with economic data. Tuesday, 03/29, we have the Case-Shiller national housing price index. Wednesday, 03/30, we have the ADP employment report, the Gross Domestic Product revision, and corporate profits. Thursday, 03/31, we have consumer spending, and the Personal Consumption Expenditures (PCE). This is the Federal Reserve’s preferred inflation gauge. On Friday, 04/01, we have the unemployment rate and nonfarm payroll data.
Last week the major US stock indices gained ground for a second week in a row. Many analysists are building a case for the bottom having been formed. One can always construct a bullish narrative, and one can always construct a bearish narrative. We certainly have signs of improvement, but we do not have a full-on bullish look. Our plan is to keep an open mind when it comes to better than expected outcomes and to worse than expected outcomes. We head into next week with a flexible, unbiased, and open mind.
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