Morning Commentary
It was another ugly sea of red with only the Energy (XLE) sector stocks in the green, although pure bank stocks looked very compelling.
Bonds Bound Higher
Bond yields erupted, and the stock market stumbled as the guessing game has shifted into overdrive on what the Fed will do, including growing calls for a 50-basis points (BPS) rate hike right out of the gate. The velocity of the spike in yields is causing as much consternation as the total rate hikes. Nevertheless, the 10-year yield doesn’t have a lot of resistance from yesterday’s close and 2.00%.
Meanwhile, the 10/2 year yield is down to 90 basis points.
Even at 25-basis points each, Goldman Sachs (GS) sees 10 rate hikes through 2024. Of course, I think it’s a fool’s errand to guess what the Fed will be doing three years from now. Interestingly, once the door opens, Goldman doesn’t see it closing.
Past as Prologue
There is a lot of work on how markets react to interest rate hiking cycles; below are two tables from Strategas that are very helpful. Going back 25 years, the stock market has been able to rally during initial rate hiking cycles. However, when there are four or more hikes within the calendar year, the S&P 500 was down more than 6% in 2018, but three times prior.
It might not feel like it now, but if history repeats itself, Real Estate (XLRE) and Technology (XLK) will be big winners later in the year.
Market Breadth
It was a bloodbath, and it’s reflected in the market breadth on the NYSE and NASDAQ Composite. The adjustment the market has to make to new valuation ratios and a consensus on where the Fed goes from here means more turmoil and downside bias. But each day, more and more names become oversold with the best names becoming extremely attractive.
Market Breadth |
NYSE |
NASDAQ |
Advancing |
521 |
797 |
Declining |
2,917 |
3,900 |
52 Week High |
97 |
89 |
52 Week Low |
292 |
793 |
Up Volume |
677.91M |
1.28B |
Down Volume |
3.36B |
3.17B |
The S&P 500 had one drawdown of 5.0%+ last year, which didn’t happen until late autumn. Now, it may happen before the week is out. It’s fine, and in many ways, it’s better than lingering.
Follow the Money
Yesterday, the Empire State Manufacturing report missed the consensus by a mile, but what else is new when it comes to economic data these days.
In that report, however, there is a peek at where the money is going. With the wage spiral becoming the number one concern of businesses, the cap-ex boom has begun, and it will continue for years. In the Empire State report, cap-ex and tech spending climbed to the highest level on record.
I’m sure this is repeated throughout all industries, not just manufacturing. The beneficiaries of all this spending are the names taking it on the chin hardest right now – that will change.
https://www.newyorkfed.org/medialibrary/media/survey/empire/empire2022/esms_2022_01.pdf?la=en
Portfolio Approach
There are no weighting changes this morning in our Hotline Model Portfolio.
Today’s Session
The market is looking higher at the start of trading but trepidation in the air is thick and heavy. Bond yields still have an upside bias, and investors are not sure when to make their move, even the so-called smart money, which normally buys into the close.
Earnings reactions are better in general but great for banks that are actually banking.
Bank of America (BAC) is overcoming mixed results and poised for a huge start to trading, because its loan business is booming – imagine that (no word on toasters).
Morgan Stanley (MS) posted strong numbers and execution across all its business platforms.
Housing Boom Still Sweet
I’m beginning to worry about homebuilders after a series of missteps and slower growth. The big key is affordability, as mortgage rates rise, and supply begins to increase.
KeyBank downgraded several homebuilders:
Housing Starts +1.4% consensus +1.7%
New home sales were up 12.4% to a seasonally adjusted annual rate of 744,000 in November, but consensus was 770,000.
Mortgage rates
The median existing-home price for single-family and condos in the US was $353,900, up 13.9% from November 2020. Annual home-price appreciation is more typically between 4% and 5%.
Housing Stocks
Comments |
Thank you for your commentary. I am very bearish on the housing market. Watching local statistics, I see houses sitting on the market longer and more homes coming back on the market after going pending, and I am in the very hot South Florida market. Prices are also flattening here. The figures you mentioned, while still up, may be the start of the slide I am seeing locally. Lisa on 1/19/2022 12:51:55 PM |
What is this “hysteria” over higher interest rates and subsequent housing affordability!!! Mortgage rates are in the 3%+ range - have we never been able to afford houses when we had rates in the 5 - 8% range (like we have seen in the past)???? Look @ where we are starting from!!! Calamity Janes!! Jerome Powell is not stupid but our “fears”, as usual, I believe are overdone!! The world is not coming to an end!! Dick Denecker Dick Denecker on 1/22/2022 4:18:38 PM |
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4/26/2024 9:39 AM | BIG TECH STEPS UP |
4/25/2024 1:16 PM | Don't' Bury me, Yet! |
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4/24/2024 1:30 PM | Earnings Flood In |
4/24/2024 9:26 AM | BUYING THE DIP |
4/23/2024 1:25 PM | Bloom Off Rose |
4/23/2024 9:32 AM | WHAT HAPPENED TO THE BRAVADO? |
4/22/2024 1:22 PM | Pins and Needles |
4/22/2024 9:30 AM | LIVE BY THE SWORD … |
4/19/2024 1:20 PM | Fair Chunk of Rotation |
4/19/2024 9:35 AM | DON’T OVERREACT |
4/18/2024 1:37 PM | Didn’t Break Down |
4/18/2024 9:40 AM | MARKET OFF SCRIPT |
4/17/2024 1:59 PM | Facing Pressure |
4/17/2024 9:37 AM | POWELL STILL WANTS TO HELP |
4/16/2024 1:35 PM | Muted |
4/16/2024 9:42 AM | FEAR ARRIVES |
4/15/2024 1:17 PM | Making a Statement |
4/15/2024 9:45 AM | Equal Opportunity Drubbing |
4/12/2024 1:37 PM | Pressure Overall |
4/12/2024 9:42 AM | WHO YA GONNA CALL? |
4/11/2024 1:38 PM | No Urgency |
4/11/2024 9:27 AM | Tough Sledding |
4/10/2024 1:22 PM | Hang In There |
4/10/2024 9:51 AM | HERE COMES THE LATEST RATIONALE FOR PERSISTENT INFLATION |
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