Pro Perspectives 1/11/22

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 …

 

Pro Perspectives 1/10/22

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.

Oil Prices, A Big Factor For Fed

June 12,  5:00 pm EST

Remember, last week we talked about why $50 is a very important level for oil.

A recent Dallas Fed survey has the breakeven level for shale producers at $50.  In other words, the shale industry needs oil prices above $50 to produce profitably.

If the shale industry becomes unprofitable, that becomes a problem. As we found in 2016, when oil prices crashed, the shale industry became vulnerable.  Defaults started lining up in the industry, which made banks vulnerable.  When banks are vulnerable, credit tends to tighten and the financial system can quickly become unstable.

Now, as we know, the price of oil bounced from that $50 area last week, but we’re getting another test today.  Oil was the mover of the day — down close to 4%, and back under $51.

This, I suspect, will play a very important role in the Fed decision next week.

Despite the fact that expectations point to a rate cut in July, we’ve discussed the pressures building that might lead the Fed to move next week (which would be a big surprise for markets). Oil plays into that scenario.

Stocks and crude oil have been two clear influences on Fed policy over the past few years.  The latter weighs on inflation.  While the Fed claims to ignore the influence of food and energy in their inflation measure, they have a history of acting when oil moves sharply.  On that note, oil is down 22% over the past year.  And, again, we’re testing an important level that can have spillover effects into the economy.  That’s why a sharp decline in oil prices tends to influence stocks.  That’s why the charts of stocks and oil have tracked so closely …

 

 
So, we’ve had a nice bounce in stocks over the past week or so.  We had the same for crude.  But now crude is back testing the lows of this decline.

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Stocks, A Buy On This Dip

May 14, 5:00 pm EST

Yesterday we looked at the big technical support level for the Dow — the 200-day moving average.

That level held beautifully, and stocks bounced aggressively today.

Here’s a look at that chart now ….

 

With stocks bouncing after a quick 5% correction, we also have a big technical area of support holding in the interest rate market.  As you can see in this next chart, the 10-year yield is holding this big trendline into 2.40%.

So, we have a stronger dollar today, strong commodities prices, higher global stocks and higher rates.  What’s different today, relative to yesterday?  Nothing.

We have a market underpinned by better than expected economic data and earnings. And (different than December) we have a Fed that is in a relatively accommodative stand, promising to do nothing to disrupt the trajectory of the economy and stock market.  That makes stocks a buy on dips.
What China Has To Lose On A ‘No Deal’

May 7, 5:00 pm EST

As we get closer to the hard deadline on a U.S./China trade deal, markets are adjusting for the potential of a no deal/ tariff escalation.

What does that look like?  U.S. stocks are now off 2% from the highs of the year.  That still puts us up 15% year-to-date.

The bigger adjustment is coming in China.  As we discussed yesterday, China is in the position of weakness in these negotiations.  The U.S. economy is strong.  China’s economy has been very weak.  A more expensive and indefinite trade dispute puts downward pressure on both economies (and the global economy), but it puts the Chinese in dangerously slow economy — which becomes politically dangerous for the Chinese Communist Party.

As such, here’s what Chinese stocks have done in the past eight days …

 

And, perhaps as a warning shot, China is starting to move their currency.

As we’ve discussed, China has used their currency (a weak currency) as the primary tool to achieve their extraordinary economic ascent over the past two decades — cornering the world’s export market.

We should expect, when their backs are against the wall, with a dim economic outlook, they will go back to weakening the yuan.  That’s what they have been doing since Trump’s tariff threat on Sunday.  They adjusted down the yuan yesterday by almost 1%.  That doesn’t sound like much, within China’s currency regime, it’s a big move.  We saw a one-off move like that once last year.  The other time was August of 2015, which led to fears that China might devalue the yuan. That set off a global market rout.

With the above said, China is sending Hui for the meetings that are scheduled to run Thursday and Friday.  Hui has been the point-man on trade negotiations.  His presence, in light of the tariff threats, give some encouragement that China has intentions to get a deal done.

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Trump’s Win-Win Bet

May 6, 5:00 pm EST

Late last week, the White House floated the idea that a trade agreement with China could come by this coming Friday (May 10).

And then Trump did this yesterday …

 

Why would Trump risk complicating a deal, even more, by threatening China with a deadline/ tariff increase?  Because he has leverage.  He has a stock market near record highs, and a strong economy and the winds of ultra-easy global monetary policy at his back.

China, on the other hand, has an economy running in recession-like territory, with key data just (recently) bouncing from global financial crisis era levels.  And Chinese stocks, after soaring 34% since January 4th, have given back 12% from the highs, in just seven days.  And they’ve just fired a ton of fiscal and monetary policy bullets to stimulate the economy – which could be diluted by a more expensive and indefinite trade war.

So, Trump has a win-win going into the week.  If the threat works, he gets a deal done, and likely gives less to get it done.  If China backs off, stocks go down, and he gets the Fed’s rate cut he’s been looking for – stocks go back up.

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Stocks Flashing A Technical Reversal Warning

May 1, 5:00 pm EST

As we discussed yesterday, the interest rate market has been signaling that the Fed made a mistake in December, when it hiked rates one last time, into a stock market that was in a steep decline.

In today’s post-Fed meeting press conference with the Fed Chairman, markets were expecting signals from Jay Powell that they might be looking to take that hike back, if the current subdued inflation levels persisted.  But Powell was reluctant to give much of a leaning toward a cut.  In fact, he said the risks that precipitated their “pause” on the rate path (China and European growth, Brexit risks, and trade negoations), have been largely improving.  He’s right.  He said the economy was solid.  He’s right.

Still, stocks came off sharply into the close.

After today, you have to ask the question:  Can stocks force the hand of the Fed, again?  Remember, stocks fell 8% in just four trading days after the Fed’s December hike – penalizing a tone deaf Fed.  In a market that was already down 9% on the month, the slide was exacerbated by the further Fed tightening. 

That stock fallout soon led to a response from the U.S. Treasury, as Mnuchin called out to major banks and the President’s Working Group on Financial Markets (which includes the Fed) to “assure normal market operations.”  That put a bottom in stocks.  And within days of that, the three most powerful central bankers of the past ten years (Bernanke, Yellen and Powell) were backtracking on the Fed’s rate path — signaling a pause.  The Fed’s pivot has fueled a V-shaped recovery in stocks.

So, we’ve just come off of a four-month run in stocks that gave us a full recovery of the late 2018 losses — and a new record high in the S&P 500.  That was the best four month gain since 2010.  Now we enter May with this chart …

 
As you can see, with the decline this afternoon, the S&P 500 put in a key reversal signal — a bearish outside day.  That’s tough to ignore, given that we’ve had a 16% gain in stocks to open the first four months of the year. This signal may be enough to stop the momentum, for now, as we wait for the word on a China deal — which is now said to ‘possibly’ come by next Friday.

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Why A Fed Rate Cut Would Steepen The Yield Curve

April 30, 5:00 pm EST

As we head into a Fed decision tomorrow, we’ve talked about the prospects of a Fed rate cut.  It’s highly unlikely.

It’s even more unlikely today, after Trump pushed for, not just a cut, but a full point cut …

 

Unfortunately, the influence Trump tried to wield late last year, is probably why the Fed hiked in December — just to prove to the world that they (the Fed) wouldn’t be politically influenced.

With that, we now have an economy growing at 3%+, stocks near record highs and subdued inflation.  And yet we have a ten-year yield at 2.5%.  It doesn’t fit.  The interest rate market is still sending the message that the December rate hike was a mistake.

With that, if we did get a cut by this summer, I suspect the interest rate market would adjust to reflect a more optimistic economic outlook.  By that, I mean, with a cut in the Fed funds rate, the long end of the yield curve (specifically, 10-year yields) would probably go UP not down –steepening the yield curve.

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Bar Has Been Set Low To Manufacture Positive Surprises … And They Are Rolling In

April 26, 5:00 pm EST

The first reading on first quarter U.S. GDP came in this morning at 3.2%— much better than expected.  This is a huge positive surprise, for what many expected to be a terrible quarter.

Just a month ago, the consensus view was something closer to 1%.  Goldman was looking for 0.7% going into the end of the quarter.

With that, we’ve been talking about this set-up for positive surprises all year.

Remember, the economy added on average 173,000 jobs a month in Q1.  Both manufacturing and services PMIs expanded in the quarter, and stocks fully recovered the losses from December.  Add to that, just days into the first quarter, the Fed told us they were done raising rates.  Whatever headwinds the Fed was stirring up, quickly became tailwinds.
Yet we’ve been told an economic recession was coming and an earnings recession upon us.  The above is a recipe for growth, not contraction.

Still, as we’ve discussed, never underestimate the appetite of Wall Street and corporate America to dial down expectations when given the opportunity.  That sets the table for positive surprises.  And positive surprises are fuel for stocks.   Stocks are fuel for confidence.  Confidence is fuel for the economy.

Last week we looked at the early signals on Q1 economic activity.  The positive surprises started with what looks like the bottom in Chinese industrial output and retail sales (two key indicators of economic health). This is important because the global slowdown fears have been centered around the weak Chinese economy.

Then both UK retail sales and the U.S. retail sales came in better.  And yesterday, we had a hot durable goods orders number in the U.S for March.

So, despite the negative picture that has been painted, the trajectory of U.S. economic growth seems to be well intact.

This is just the first reading on the Q1 number, but it gives us an average annualized growth rate of three percent even.  The average annualized growth coming out of the Great Recession (pre-Trumponomics) was just 2.2%.

And keep in mind, the next big pillar of Trumponomics is a trillion-dollar-plus infrastructure spend (with bipartisan support).

Just as expectations have been dialed down, this is where we could see a real economic boom kick in, especially if we get a deal on China (clearing that drag on sentiment).  As we’ve discussed, we are well overdue for an economic boom period.  We’ve yet to have the bounce-back in growth that is typical of a post-recession, if not post-depression environment.  You can see in the table below, the six years that followed the Great Depression, relative to the growth coming out of the Great Recession …

 

Have a great weekend!

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More Positive Surprises Hitting In The Economic Data

April 18, 5:00 pm EST

Yesterday we talked about the positive surprises in the Chinese data.  This is important because the global slowdown fears have been centered around the weak Chinese economy.

So, we now have what looks like a bounce off of the bottom in Chinese industrial output and Chinese retail sales (two key indicators of economic health).

Today we had more positive surprises for the global economic outlook picture.  The UK retail sales number came in better than expected.  And the U.S. retail sales came in better.

You can see in the chart below, this March U.S. retail sales is a bounce from the post-crisis lows of December.  

With this, the Q1 GDP estimate from the Atlanta Fed has bumped up to 2.8%.

We’ve talked about the set up for both earnings and the economic data to surprise to the upside for Q1, given the dialed down expectations following the December decline in stocks.

You can see how this is playing out in the chart below (see where the gold line is diverging from the “consensus estimate” blue line) …

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