January 11, 2022

Stocks continued the big bounce today into technical support. 

Let’s take an updated look at the S&P 500 chart …

So, we had a 5.5% decline in this benchmark index to start the year, and now we have a sharp bounce of nearly 3% from this big technical trendline, which comes in from the election day lows of November 2020 (an important marker).

We heard from Jay Powell today, in his renomination hearings before the Senate.  He did nothing to change the expectations on the Fed’s guidance on the rate path.  Whether it be three or four hikes this year, we’ve just finished a year with around 10% nominal growth and over 5% inflation.  

The coming year may be more of the same, and yet we have a market and Fed posturing and speculating over how close to 1% the Fed Funds rate might be by year end.  That dynamic only adds fuel to the inflation and growth fire.  

On that note, we’ve been watching three key spots that should be on the move with this policy outlook:  bonds (down), gold (up) and the dollar (down). 

Gold was up 1.25% today, making another run at this 1830-50 level.  If that level gives way, the move in gold should accelerate.  As you can see in the chart, we would get a breakout from this big corrective trend that comes down from the August 2020 all-time highs.     

On a related note (dollar down, commodities up), the dollar looks vulnerable to a breakdown technically …

We kick off fourth quarter earnings this week.  We’ll hear from the big banks on Friday: JP Morgan, Citi and Wells Fargo.  

Bank of America and Goldman Sachs earnings will come early next week.

Last year, across the broad market, the table was set for positive earnings surprises, against a backdrop of deliberately dialed down expectations.  And those low expectations were against a low base of 2020, pandemic/lockdown numbers.  

With that, we’ve had positive earnings surprises throughout the first three quarters of 2021.  The expectation is for 21% earnings growth for Q4, which would give us four consecutive quarters of 20%+ earnings growth and 40% earnings growth on the year.  

That said, of the nearly 100 S&P 500 companies that have issued guidance for Q4, 60% are negative.  That’s straight from the corporate America playbook: Using the cover of the Omicron news from late November to lower expectations, to position themselves to manufacture positive earning surprises OR withhold some earnings power for next quarter. 

So, in addition to the changing interest rate cycle, could the slide in stocks to open the year have something to do with weaker Q4 earnings?  Maybe. 

On that note, let’s take a look at the big technical support hit today …

In the chart above, the S&P 500 hit this big trendline that comes in from election day.  This rise in stocks, of course, has everything to do with an agenda that entailed even more massive fiscal spending programs — AND a central bank that remained in an ultra-easy stance.  

Indeed, we’ve since had another $1.9 trillion spend passed in late January of last year, plus a $1.2 trillion infrastructure package later in 2021.  

Now we have a Fed that has flipped the script, and the additional bazooka agenda-driven fiscal package has been blocked — and we get a test of this big trendline.   

The good news:  The line held today, and stocks bounced aggressively (about 100 S&P points) into the close.  

As you can see in the chart below, we have a similar line in the Nasdaq, dating back to the election.  This breached but closed back above the line today.

With the above in mind, we should expect the banks to continue putting up big numbers to kick off the earnings season later this week.  That will be fuel for stocks.   

Remember, the banks set aside a war chest of loan loss reserves early in the pandemic, and they have been moving those reserves to the bottom line since, at their discretion.  As an example, both Citi and JP Morgan have another $5 billion to release, to bring their loan loss reserves back in line with pre-pandemic levels.  That’s $5 billion (each) that will be turned into earnings.

October 30, 5:00 pm EST

This violent repricing of the tech giants came with clear warnings (i.e. the tightening of regulatory screws).

Now that we have it.  And it is very healthy, and needed.

As we discussed yesterday, I would argue we are seeing regulation priced-in on the tech giants, which can create a more level playing field for businesses, more broad-based economic activity, and a more broad-based bull market for stocks.  This is a theme we’ve been discussing in my daily note here for quite sometime.

And I suspect now, we can see the areas of the stock market that have been beaten down, from the loss of market share to the tech giants, make aggressive comebacks.

On that note, here’s another look at the big trendline we’ve been watching in the Dow …

Again, this line holds right at the 10% correction mark.  And we’ve now bounced more than 700 dow points.

As I’ve said, it’s easy to get sucked into the daily narratives in the financial media, and it’s especially easy and dangerous (to your net worth) when stocks are declining.  They tend to influence people to sell, when they should be buying.

And as someone that has been involved in markets more than 20 years, I can tell you that it’s also very dangerous to let political views influence your perspective on markets and investing.  And I suspect we are seeing that mistake made in this environment (by pros and amateurs alike).

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October 11, 5:00 pm EST

September 26, 5:00 pm EST

The Fed moved again today on rates, as the market expected. This is the eighth quarter point hike in this post-QE normalization on rates. And this now puts the Fed Funds rate at the range of 2%-2.25%.

Now, the markets will pick apart the statement and endlessly parse the Fed Chair’s words in the press conference. But let’s step back and take a look at the impact of these Fed hikes thus far.

We know the economy is running at the best pace since before the financial crisis. We know that the jobless rate is near record lows. We know that consumer credit worthiness is at record levels. This has all happened, despite the Fed’s rate hikes.

What about debt service coverage? As rates are moving higher, are consumers showing signs of getting squeezed?

If we look back at the height of the credit bubble in 2008 (just prior to its burst), 13.22% of household income was going to service debt–within that number, 7.2% of household income was going to service mortgage debt. What about now? Debt service is now 10.2% of household income. And the mortgage piece is down to just 4.4%. This is the result of six years of zero interest rates, a massive QE program (which included the Fed’s purchase of mortgage bonds), and a government program that subsidized banks to refi high interest rate mortgages.

So the big question is, how has the Fed’s exit of QE effected the consumers ability to service debt? Are higher rates hurting?

Well, they started hiking rates in the fourth quarter of 2015. Total debt service at that time was 10.1%. That’s virtually unchanged from today. And the mortgage piece was 4.5%. That’s actually a touch higher than today.

Bottom line: The Fed’s normalization on rates has not damaged the consumer, nor has it killed the housing market.

But that’s only because the yield curve has been flattening. That is, longer term market interest rates have been steady. That means the benchmark rate from which consumer and mortgage rates have been set, has been steady. And those longer term rates have been steady, in large part, because Europe and Japan have remained in QE mode (buying global assets, which includes our Treasurys).

With that, while most have been watching the Fed closely for how it’s delicately handling the exit of QE, the more important spot to watch will be how Europe and Japan manage their exits. Hopefully, the U.S. economy is hot enough, at that point, to withstand the move in longer term U.S. rates that will come with the end of global QE.

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