Markman Capital Insight

The Pace Is Accelerating - #NotesFromMyScorecard

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-- Since the covid-19 low set in mid-March 2020, the average price of a gallon of gasoline in the United States has tripled. Since January 2021, the average price is up 122%. So far this ear, the price is up 52%

-- Do you see a pattern? The pace is accelerating. That a big problem as it shows all efforts taken to abate inflation have failed, and may even be making the problem worse.

-- Acceleration of inflation also makes it very hard for companies to plan effectively, which increases the likelihood of earnings estimate misses.

-- When you consider that the Federal Reserve has really just started to raise rates to cool off the economy, you realize that any hopes that the central bank can back off on its tightening path are out the window. Count on the central bank to raise its target rate to at least 3.25% by the end of the year and quite possibly 4.00%.

-- As for stocks in the past week, phew! Monday and Tuesday were up nicely, and then our forecast that “all rallies will be sold” kicked in with 1%+ declines the next three days. Bespoke Investment Group analysts report that since 1945, there have been only 13 other similar instances, with the most recent happening in December 2018, otherwise known as the Christmas Eve Massacre.

-- The S&P 500’s forward performance on the first trading day of the new week in these 13 instances were mostly negative. A week later was a coin flip, but but over the next one, three, six and twelve months, performance was pretty impressive. In the December 2018 instance the S&P 500 was down on the following day, but after that recorded a gain of 2.9% the next week, 10.5% the next month, 18.1% the next 3 months and 22% in the next six months.

-- One instance sticks out like a sore thumb, however: Oct. 16, 1987. The benchmark index crashed 20.5% the following Monday, and all periods from 2 weeks to 1 year forward were also negative.  

-- If we’re going to talk about the worst follow-on return we should also mention the best: The signal tripped very close to the end of the Great Financial Crisis bear market on Feb 27, 2009. The S&P 500 was down 4.8% on the following Monday and 7% over the next week. But after that investors cheered up and logged gains of 11% in a month, 21.5% in 3 months, 40.2% in 6 months and 50.2% in a year.

-- Moving on … it’s worth noting that there was remarkable unity among asset classes, sectors and stock factors. When you see such a tight correlation it means the market is responding to outside macro-economic forces and not the prospects for earnings growth individual companies or groups.

-- The Dow Jones Industrial Average was the best single index, barely, with a 5.3% loss over the past 3 days. Most indexes fell around 6.2% in the three-day slamdown. As for growth vs value, the S&P 500 Growth etf (IVW) fell 7% while S&P 500 Value (IVE) fell 5.5%. …. Small-caps were no bargain, falling 5.5%.

-- The worst sectors over the past 3 days were Tech (XLK), ,-7.5%, and Financials (XLF) at -7.7%. The best were Energy XLE) at -3.6% and Consumer Staples at -3.1%. … Even utilities were unplugged, down 5% as a group.

-- Overseas the best country index over the past 3 days was China (ASHR) at -1%, followed by India (PIN) at -2.2%. … The worst was Italy (EWI) at -9.1%.

-- Ags and metals were the best of the lot as Invesco DB Commodities (DBC) rose 0.1% over the past 3 days, and gold (GLD) rose 1.%. … Over in the mystical corner of the market, cryptoland, Bitcoin (GBTC) was no help with a 7.6% loss, and Ethereum (ETHE) sank 11%.

-- Even government bonds were chewed up, with the 20 yr Treasuries etf (TLT) down 1.2% in the three-day span. Still kind of hard to believe, but TLT is now down 20.6% for the year, providing no shelter from the storm.

-- Here’s a strange stat from Bespoke Investment Group: The performance gap between the best and worst sector ETFs this year is a stunning 90 percentage points: +64% for energy is best, while -26% for consumer discretionary is worst.

-- The kicker: In 1999, Tech’s 78% rally was 91 percentage points better than the 17% decline in Consumer Staples. The next year, it was Technology that was the worst performing sector as its 41% decline underperformed the 50% gain in the Utilities sector. Plus ca change …

-- If you’re feeling glum about stocks you are in the majority. The Conference Board survey shows that just 28% of consumers expect higher stock prices, the lowest number since 2016. The survey shows just 9.3% expect higher bond price. It’s rare for consumers to hate both stocks and bonds at the same time and when it has happened before it has been near stock price troughs. One year out performance has been positive.

-- Consumer, labor, mortgage and economic data are in the same boat: Reports are not super-negative yet, but the majority are falling steadily from their peak last year. There is definitely a downturn in the offing, and it’s nowhere near the bottom at this time. … Stocks are falling ahead of the definitive data, as they are typically forward-looking. … The good news is that the opposite will be true too sometime in the future: Stocks will rise well before the economic and consumer data does.

-- The Federal Reserve had already foreshadowed 50 bps hikes in June and July; the market is now sniffing out the possibility of the July hike turning into a 75 bps tightening. Make no mistake: From the perspective of the Fed, slowing the tightening process is a non-starter. A 75 bps hike probably won’t happen because Chair Jay Powell took it off the table a few weeks ago, but numerous serial 50-point increases are virtually certain. Ultimately expect a Fed Funds rate in the 4% area at minimum. which is a whole lot more than the 0% level the central bank adopted to help counter the pandemic recession.

-- But wait, there is a glimmer of hope that supply chain kinks which contributed to the ignition of inflation are getting worked out. Bespoke analysts note that the New York Fed’s Global Supply Chain Index aggregates a combination of existing supply chain metrics including the Baltic Dry Index, Harpex Index, airfreight costs, and delivery time indices of PMI surveys into a single number to garner how stressed supply chains are globally taking into account both the reported time and cost of deliveries. It is measured in standard deviations based on how far from the historical norm these readings are. Bespoke reports that the index peaked at the end of last year and has generally been on the decline since then outside of a brief move higher in March and April that was largely reversed in May. The analysts conclude that the resumed decline in the index points to further improvements in supply chain stress, providing some evidence of inflation relief on the horizon as the index has held a modest correlation to year-over-year moves in both CPI and PPI since 1998.