The Week Behind

This was another week that index investors could have slept through and woke up to relatively unchanged investments: S&P down 94bps; DOW down 95bps; NASDAQ down 157bps. Admittedly, it did not feel that way. 

Monday’s session featured recessionary positioning as everything aside from classic staples – ex) Campbells, Clorox, Kraft – found themselves in an orderly, yet firm, sell off. Tuesday, Treasury began to find a bid, but equities did not stage a convincing bounce. 

Wednesday’s CPI was cooler than last month but was unable to cool investor fear. Early rally attempts failed on both Wednesday and Thursday. AAPL, TSLA, and MSFT all broke major levels of support and found themselves at ~$138, ~$709, and ~$250, respectively. However, the S&P500 did not feel the same level of pain, buoyed by the rotation to defensive healthcare and energy sectors. 

Thursday night, after hours, the Senate confirmed Powell’s reappointment in a bipartisan vote: 80-19. Soon after, he sat with NPR for an interview where he sounded a lot more humble and repeated some past comments largely forgotten in the aftermath of the last FOMC meeting:

• Fighting inflation will not be easy. The FED cannot guarantee a soft landing.
• FED-tightening alone will not defeat inflation. The FED will need help from the supply side in the form of expanding supply chain capacity and stabilizing energy prices.
• The FED remains data dependent but still feel that 50bps hikes at the next two meetings are appropriate given the current data set. Furthermore, the FED will need more than one hot or cool data point to deviate from the current trajectory. 

Of those comments, I would have expected the indices to have a terrible Friday session, but they didn’t. I think this posture may have actually helped boost FED credibility sparking an explosive open to the upside across indices. Treasury caught a stronger bid, bringing the 10-year convincingly below 3%. At one point, the NYSE experienced 90-10, advancing-declining issues showcasing the wide breadth and conviction of the rally. Without follow through into next week, I will be hard pressed to sum this up as anything more than an oversold bounce fueled by a combination of shorts covering, algorithmic selling stopping, and, to a small extent, bulls nibbling. 

The Week Ahead

We are officially on follow-through watch. Look for 90-10 advancing-declining; 10-year yield to stay below 3%; and for mega-cap companies like AAPL, MSFT, AMZN, GOOG, and TSLA to stabilize. Oddly enough, look for bitcoin to catch a bid. It could serve as confirmation the aggressive selling in the NASDAQ is over given their current high correlation. The VXN, the VIX of the NASDAQ, spiked above 40 last week, which provides additional evidence a bounce is overdue.

On the earnings front, we hear from Lowe’s (LOW), Home Depot (HD), and Walmart (WMT). We’ll be looking to see if consumers are spending into planting season, an indicator of consumer health. With respect to Walmart, I’ll be interested to see if consumers are continuing to trade down in order to save money in the face of inflationary pressures.   

A Bear Market Bounce

I am not convinced this is going to be anything more than a bear market bounce. Consequently, no need to rush money into the market, unless you DCA, because I am not confident the current downtrend in the major indices is over.

Midday Friday, Jonathan Krinsky, one of the market’s more prominent bears, suggested this could be the start of a rally bringing the S&P back to 4200. While there is an ongoing discussion regarding how much FED-tightening is priced in and scenarios exist that could add more positive momentum, I am not convinced this market is ready for balance sheet reduction, which would create upward pressure on the 5 and 10 year treasury yields. 

The FED has an all-time-high $9T on the balance sheet. We are truly in uncharted waters. The closest analog is 2017-2019 during the FED’s first attempt at QT. The selling abated only after the FED made a dovish turn by stopping QT. Perhaps, the FED of today is smarter than the FED of yesterday as suggested by the slower rate of balance sheet reduction. However, inflation was not a problem then as it is now. Consequently, the FED cannot be expected to ease as quickly or aggressively if the markets continue to tank, especially if they do so in an orderly fashion as they have thus far.

This is not a reason to be overly bearish. It is an acknowledgment that the market will remain turbulent. It is a reminder not to get overly emotional and make an unnecessary error. Remember your investment goals. Trust your research. Stick with the companies you know are well-equipped for the environment ahead.