Yesterday, all major indices finished the session higher, but there was a lack of conviction. While there was some bobbing around after the Federal Open Market Committee (FOMC) minutes, investors still seemed unsure about when the Fed will change course. The S&P 500 enjoyed the best session, but the Russell 2000 was lower again. It is still in an uptrend but barely. 

Market breadth on the exchanges was negative again, and it continues to be a cause for concern.

Market Breadth	NYSE	NASDAQ
Advancing	1,578	1,479
Declining	1,703	2,839
52 Week High	211	154
52 Week Low	38	113
Up Volume	1.39B	1.93B
Down Volume	2.66B	2.62B

Message of the Market

Energy stocks got smacked around once again as investors chased profits after West Texas Intermediate (WTI) couldn’t stick the landing when it spiked earlier this week. 

S&P 500 Index	+0.34%
Communication Services XLC		-0.15%
Consumer Discretionary XLY		-0.06%
Consumer Staples XLP	+0.53%
Energy XLE		-1.63%
Financials XLF	+0.14%
Health Care XLV	+0.63%
Industrials XLI	+1.00%
Materials XLB	+1.04%
Real Estate XLRE	+0.51%
Technology XLK	+0.55%
Utilities XLU	+0.65%

It’s all about mega-cap growth, making many investors wonder why they bothered getting out in the first place. Hint: it feels great when they zoom higher, but not so great zooming down.

Because a Jay Powell Party Don’t Stop

The much-anticpated FOMC minutes were intriguing and revealed “several” members eager to get the ball rolling on removing the punch bowl but were clearly overridden by Powell and other more powerful forces.

FOMC Minute Excerpts

Staff Review of the Economic Situation

Core PCE price inflation, which excludes changes in consumer energy prices and many consumer food prices, was 3.1 percent over the 12 months ending in April.

Staff Review of the Financial Situation

Financing conditions for consumer credit remained generally accommodative. Consumer loans grew at a robust pace in April, driven by rapid growth in auto loan balances. Credit card balances on banks' books rose in May, reversing an April decline. For subprime borrowers, conditions in the credit card market appeared to have eased somewhat further from the tight conditions seen after the onset of the pandemic.

Staff Economic Outlook

On the downside, if the effects of supply constraints proved to be transitory, as expected, then the inflation record from the past 25 years suggested the possibility that low underlying trend inflation and a flat Phillips curve could cause inflation to revert to relatively low levels despite a strengthening economy.

Participants' Views on Current Economic Conditions and the Economic Outlook

Participants observed that economic activity was expanding at a historically rapid pace, led by robust gains in consumer spending. A vast majority of participants revised up their projections for real GDP growth this year compared with the projections they had submitted in March, citing stronger consumer demand and improvements in vaccination rates as the primary reasons for these upgrades. That said, participants generally saw supply disruptions and labor shortages as constraining the expansion of economic activity this year. Participants' projections of real GDP growth in 2022 and 2023 were generally little changed.

In light of the incoming data and the implications for their economic outlooks, a few participants mentioned that they expected the economic conditions set out in the Committee's forward guidance for the federal funds rate to be met somewhat earlier than they had projected in March. Several participants emphasized, however, that uncertainty around the economic outlook was elevated and that it was too early to draw firm conclusions about the paths of the labor market and inflation.

Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings in light of incoming data. Some participants saw the incoming data as providing a less clear signal about the underlying economic momentum and judged that the Committee would have information in coming months to make a better assessment of the path of the labor market and inflation. As a result, several of these participants emphasized that the Committee should be patient in assessing progress toward its goals and in announcing changes to its plans for asset purchases.

Committee Policy Action

Members judged that the economic outlook had continued to improve and that the most negative effects of the pandemic on the economy most likely had occurred. As a result, they agreed to remove references in the FOMC statement that noted that the virus was "causing tremendous human and economic hardship" and that "the ongoing public health crisis continues to weigh on the economy." Instead, they agreed to say that progress on vaccinations had reduced the spread of COVID-19 and would likely continue to reduce the negative economic effects of the public health crisis.

The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments."

Voting for this action: Jerome H. Powell, John C. Williams, Thomas I. Barkin, Raphael W. Bostic, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Mary C. Daly, Charles L. Evans, Randal K. Quarles, and Christopher J. Waller.

Voting against this action: None.

What’s Up With Housing?

• Mortgage applications decreased again for the seventh time in the past eleven weeks.
• The 1.8% drop came even as the 30-year fixed rate slipped down to 3.15%, the lowest level in three weeks.
• Supply is an issue, but refinancing is also flaccid.

The Federal Reserve pointed directly at high housing prices as an inflation issue that must be addressed soon. Perhaps the spike in prices will stall demand enough for a reprieve.

Delta Variant

I’m still watching those headlines build up heightened fear. For example, The Washington Post headline makes it seem like the new strain of coronavirus is a major contributor to pandemic deaths.

And talk of masks and new restrictions will grease the skids for at-home cajoling.

Pandemic deaths near 4 million worldwide amid delta variant surge

Washington Post

Coronavirus Now: With Delta set to be predominant strain, should we still be wearing masks?

Boston Globe

Today’s Session

The market is at all-time highs, so numbers that once would send everyone heading for the hills are far less significant.  Its about percentage gains and losses.  With that in mind, I have been writing and talking about the quality of the rally and the very weak internals, including the all-time high on Tuesday, which was the worst all-time high session for the NASDAQ ever.

Then there has been the message of the bond market.  A message that has been clear but completely ignored by the experts.  The ten-year yield has been in full retreat even as Wall Street has collectively stood on a soapbox predicting it would move higher – much higher.  Lots of investment decisions have been made based on this groupthink.

• It has driven the value versus growth debate.
• It has driven the reflation trade.

It’s fine to ignore the message of the bond market, or to glean something others do not, but what we have seen is the same folks that said the spike in yields meant one thing refuse to say the plunge in yields means the exact opposite thing. 

This morning groupthink is shifting, and because so many brilliant folks are reassessing, an already shaky market is under pressure.  The reflation trade is under serious pressure, but there is nowhere to hide on a morning like this.  The good news is when everything is down on confusion and angst, it means the stocks you want to own are getting cheaper.

There is no great urgency to buy the first tick lower. 

The lesson here is to listen to the market even when it goes against your own work or ego and always take solace in the fundamentals, as ultimately, it determines the fate of your portfolio.   I always get excited during shakeouts and only fear investors freaking out so much they make mistakes fatal to their long-term goals.

Ten-Yield yield hit lows last seen in early February.

Regulatory Tidal Wave

Another issue for the market is the coming wave of regulations ostensibly to curb businesses pricing power, but in effect, most of the time it will make them less competitive on the global stage.  Case in point, the Biden administration is pushing to cap rail and ocean freight rates. 

This in the midst of higher shipping and container rates around the world.

Interestingly, freight leaving the United States is less than freight coming to the United States.

Workers’ Strike

The workers’ strike continues and its very problematic.  I support anyone trying to make more money and collectively squeezing business isn’t the opportunity that comes around very often.  But everyone should understand if you wait too long, turn down a reasonable raise, wait for that dream job to fall into your lap, this period will go away from a shift in demand and robots taking your place.

IJC came in higher than expected and have stopped going down even in many states without Fed UI.

Beware Wall Street Seeking a Villain

One of the worst performing stocks of the week has been Didi (DIDI), the Chinese ridesharing company that went public with lots of fanfare and raised $4.4 billion. All of Wall Street has egg on their face, including some talking heads that gave the stock their blessing.  They will be looking to deflect any blame by pointing the figure at individual investors – especially those that exchange thoughts and ideas on Reddit and other platforms. 

This cop out is not only disingenuous it’s shameful.   It’s not new, however.  Wall Street cheers rallies, sucks every nickel out of the public peddling junk companies at overvalued prices, then blames investor exuberance when things turn south. BTW investors have not been exuberant.

Portfolio Approach

We took profits in  a position in Industrial this morning in our Hotline Model Portfolio and raised cash to 15%.   If you are not already a subscriber to our Hotline Premium Service, email Info@wstreet.com to get sign up today. 

 

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