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Morning Commentary

POWELL RULES THE GALAXY †

By Charles Payne, CEO & Principal Analyst
5/5/2022 9:34 AM

Fed Chairman Powell played it perfectly yesterday. He began his press conference by repeatedly saying the word “inflation” and stressing the goal to bring it down and back below the Fed’s 2% target. As he expressed this myopic focus, an early rally attempt fizzled, and all the major indices slipped into the red.

Then came a series of questions that turned the market around, and ultimately, he answered the real question on everyone’s mind. Would the Fed put the interest of Main Street ahead of Wall Street?  As it turns out, the answer is a resounding “No.”

First: Powell expressed confidence in a soft landing (the term wasn’t used), noting as participation increases, the unemployment rate would hold at low levels, and wages could moderate.

Second: Powell said 75-basis points (bps) rate hikes are not being considered.

Third: Powell put limits on mortgage asset reductions. The market took off, and for a moment, Powell was once again a superhero to Wall Street, but perhaps a supervillain to Main Street.

Ocean of Green

Energy (XLE) led the way, as the European Union (EU) moves toward a ban on Russian oil. Mega-cap names powered Communication Services (XLC) and Information Technology(XLK) higher. Defense sectors brought up the rear, but they were all higher.

There were just a few specks of red in the S&P 500.

S&P 500 Map

Key Charts

Everything is keying off the ten-year bond yield, which is struggling around 3.00%, where it’s been consolidating that big March/April rally.

Chart

Small-Cap

The Russell 2000 is back above a key line that had served as support. The IWM iShares Russell 2000 Exchange-Traded Fund (ETF) has to rally above 210-215 to attract buyers that would rather chase than keep trying to catch a falling knife.

Chart

Energy

Crude oil stocks increased, but that didn’t stop crude oil from gushing higher, a big part of the move came from the EU efforts to ban Russian oil. Later in the afternoon, there were signs a ban would be difficult as several nations are too reliant.

The Energy Sector (XLE) is back at levels from late April.

Chart

Earnings Season

This has been a very consequential period for the corporate earnings. There has been a great distinction between winners and losers, and after the bell yesterday, there was no middle ground with grand rallies and massive drawdowns.

The S&P 500 Earnings Dashboard:

Broad Market

This week 320 companies have reported, and what’s standing out is how many opened lower only to surge higher into the close.

Conclusion

The market was a coiled spring going into the Federal Open Market Committee (FOMC) decision, and several pieces were in place from cash on the sidelines, sentiment, and the oversold nature of the market and key components. The ‘bear’ is still alive and well, but sessions like yesterday are reminders that while stocks take the stairs on the way up and the elevator on the way down, they sometimes  catch that same elevator on extremely oversold bounces.

With that in mind, the S&P 500 has only rallied 2.25%+ on the same day of a Fed rate hike once before.

March 21, 2000

Powell talked up the War on Ukraine and China’s coronavirus lockdowns as wildcards that will influence inflation and are obviously out of his control. 

Right now, both of those geopolitical events don’t appear to be nearing a resolution. The bottom line is for all the tough talk from the Fed, Powell & Co are reluctant to do real damage to the stock market.  This doesn’t mean the market will gallop higher from here, as inflation eventually curbs spending, which means less revenue and smaller margins.

More than ever, this is a stock picker’s market.

Portfolio Approach

We added to Consumer Discretionary yesterday afternoon in our Hotline Model Portfolio.

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Today’s Session

US productivity for the first quarter came in as a big miss. A shocker this morning with first quarter productivity tumbling -7.5%, as unit labor coast surged 11.6%, the street was looking for -5.2% and +10.5%, respectively.

This was the steepest first quarter decline in productivity since 1947.

Greenspan used to talk about “productivity miracle” as a reflection of the efficiency of the US economy and the core of its greatness - this is the exact opposite – thoughts?

By the way, oil is higher on reports the Biden administration is looking to buy crude for the Strategic Petroleum Reserve – can’t make this stuff up.


Comments
My bet: That 3% resistance on the 10year is now support. Time will tell.

Charles Haselberger on 5/5/2022 10:00:43 AM
 

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