Dear Valued Clients and Friends –
Dividend Cafe dealt with the build up of leverage in our “shadow” banking system, and what it may or may not mean for “systemic” risk. It is more exciting than it sounds! Some video comments are here and the same on podcast here.
I won’t make any promises about what today’s market rally means, because I have absolutely no idea what it says about the future. Neither does anyone else. Time will tell. But there is a lot I can say today, and I do just that below.
Off we go …
- Futures opened last night after the long weekend up +265 points and went a bit higher into the evening (the Nikkei, by the way, was up +475 points). This morning futures pointed to a +500-point open pre-market.
- The market opened up over +400 points and went higher throughout the day.
- The Dow closed up +641 points (+2.15%) with the S&P 500 up +2.45% and the Nasdaq up +2.51%.
*FactSet, DJIA, June 21, 2022
- Why have “boring bonds” not been a hedge against declining stock prices in 2022? Ummmm, because of math. This is the very thing I wrote about over and over and over and over and over again in 2020 and into 2021 – that the zero-bound yield level took away their hedge benefits and their coupon carry, and left them only with principal preservation at maturity as a “parking lot” benefit to ownership. Our massive reduction in “boring bond” weighting in this time period was due to exactly this reason. Now, of course, the inefficacy of “boring bond” risk hedging is likely to reverse as yields have risen, and bring back “math” to the fray.
- The ten-year bond yield closed today at 3.30%, up six basis points on the day. The two-year closed at 3.19%, so the spread sits at eleven basis points wide now. Try to remember that the 2-year hit 3.43% last week and the 10-year hit 3.49%. Those two yield levels will either prove to be this period’s high, or they won’t. If they do, risk assets can/will begin to settle eventually. If they don’t, there is another phase to go here.
- Top-performing sector for the day: Energy (+5.14%)
- Bottom-performing sector for the day: Materials (+1.47%)
- In each Fed tightening cycle I have lived through emerging markets have far under-performed every developed market as a rising dollar has a levered negative impact on EM stocks, bonds, and currencies. I would say that this has been true in my study of Fed tightening cycles before my professional investing career began, but truth be told, my adult life and career more or less coincide with the actual advent of broader-appeal EM investing. Why do I bring this up? Because emerging markets are not under-performing their developed counterparts this time. Now, the EM index is down nearly -19%, so let’s not get carried away with my point, but that is +4% better than the S&P when generally EM would be 5-10% worse than the MSCI EAFE or S&P 500. I think it is worth pondering what may be different this time.
- What are the metrics to look for around a market bottom? Quantitatively, I have mentioned the VIX, the put/call ratio, a lower S&P P/E ratio, and credit spreads as all really useful numerical hints around a market capitulation. But qualitatively, where numbers are a less useful source of information, it essentially has to do with sentiment. Bull markets end on the last dumb dollar coming in and bear markets end on the last dumb dollar selling out. I suspect there will be a “layered” end to this bear market, where certain elements will “bottom” sooner than others.
- Forward guidance out of the earnings season coming up in a few weeks is going to be huge, huge, huge.
- How bad was it over the last week or two?
*Strategas Research, Technical Strategy Report, June 21, 2022, p. 2
- Former Clinton and Obama economic advisor and cabinet member, Larry Summers, who has received a lot of attention for his criticism of the Biden economic policy framework for the last 15 months, stated yesterday that we “need five years of unemployment about 5% to contain inflation.” I have not heard a statement or policy commitment from the Biden economic team suggesting they agree, but that old Phillips Curve view of the inherent trade-off between unemployment and inflation is apparently alive and well. Suffice it to say, this author does not agree.
- I expect to know more and have more to say about a potential Democrat compromise with Senators Manchin and Schumer towards a tax/spending bill meant to be a miniature version of last year’s failed Build Back Better initiative.
- Industrial Production increased +0.2% in May, which came with a +1% rise in Utilities output but a -0.1% decline in Manufacturing. But it was the fifth month in a row of positive growth in total aggregate Industrial Production.
- Box office receipts at the movie theater are up +132% vs. last month, and up +36% versus the same period in 2019, for which all box office operators can only say, “thank you, Maverick, and thank you, Jurassic Park!”
- There has been a nearly 300,000 passenger per day increase in flight travel since the April 18 removal of mask mandates.
Housing & Mortgage
- Capital Economics is projecting an actual national move downwards in housing prices for the first time since the financial crisis. The notoriously housing-bullish economics firm rooted their view in the affordability dynamics that currently show a new homebuyer having to spend a higher percentage of monthly income on housing than they even did at the top of the bubble in 2005/06.
- Existing home sales declined -3.4% in May and are down -8.6% versus a year ago. This is the fourth month in a row of declining sales activity.
- I mentioned late last week that the European Central Bank (ECB) was having an emergency meeting to discuss the latest disruptions in sovereign debt markets (namely, Italian bond spreads widening rapidly). Those spreads have tightened over the last few days and ECB officials have certainly “said some things” (that is my summary of when someone says something but doesn’t say anything). I see efforts to calm this space but don’t see any particular policy actions at this time.
Oil and Energy
- WTI Crude closed at $110.58, up +1%
- The energy sector was walloped last week, one of the first weeks of the year that when the market was hammered, energy was hammered right along with it. Midstream, in particular, has dropped over -15% in the last week, and is down -19% from its recent high. Last week was the fourth-worst week ever for the sector and the worst week that wasn’t part of the Great Financial Crisis or COVID. The selling feels quite overdone.
- A privately-owned LNG export terminal experienced an explosion last week that may take this terminal out for six months. They account for 20% of U.S. LNG exports. This caused prices in Europe for natural gas to rise (as less supply exacerbates already huge supply challenges).
- Today’s Energy rally was violent, though, and I’ll share more data in the days ahead.
- There has always been some degree of physical risk in work, and that risk was greater in a more industrial, less digital society. But even in construction, industrialization, and agriculture, work-related deaths have collapsed over the last one hundred years as workplace safety has advanced. 61 per 100,000 workers died in work-related accidents a hundred years ago; that number is 3 per 100,000 now (a reduction of 95%). Economic expansion leads to greater labor dynamism which gives workers more choice and forces employers into better care and conditions. More tolerable working conditions leads to greater economic prosperity, still, which leads to yet more labor dynamism, rinse and repeat. The cause is always and forever a free and virtuous society.
|I do understand what you are going for here but it doesn’t all add up this way. The missing piece is, of course, access. China and India can [marginally] increase their purchases from Russia, but if the countries that would otherwise have provided that oil to China and India cannot get the oil to Europe (i.e. no pipeline for transportation, different takeaway logistics, and economics, etc.), then it certainly means there is less oil in the world markets. And that is exactly what has happened.
There are two mistakes one can make if one is determined to politicize this subject (which I am most certainly not interested in doing; just in calling balls and strikes). One is to claim that the entire supply/demand reality impacting U.S. energy prices is Putin’s fault (an absurd conclusion). The other is to claim that Putin’s actions have had no impact on energy prices (an also absurd conclusion).
- TBG partner and head of our Private Wealth Advisor Group, Trevor Cummings, is bringing you DC Today on Wednesday (tomorrow). I believe things will be too tight for me to do it with my early morning through late-night schedule tomorrow, and Brian Szytel (my normal backup on these things) is out of the country. I am really excited for Trevor’s at-bat here!
- Clients will receive their Weekly Portfolio Holdings Report in their inboxes tomorrow morning.
Have a wonderful evening, and reach out with any questions whatsoever!
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
The DC Today features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet.