Stocks managed to advance by 1.63% for the week. The market was strong at the beginning of the week on another hope that the Fed will pivot sooner rather than later, but as that became apparent that was more hope than real, the market fell hard at the end of the week.
Employers added 263,000 jobs in September, less than the 315,000 added in August and lower than the six-month average of 400,000, but more than the consensus estimate. The unemployment rate fell to 3.5% from 3.7%, matching a half-century low. The labor force participation rate declined. The stronger than expected report sparked another sell-off in the markets, worried that the slowdown in forthcoming interest rate increases in now further away. The S&P dropped by 2.8% and the Nasdaq fell by 3.8%.
Cracks continue to appear in the economy. AMD, Samsung, and Micron Technology have all issued weak forecasts.
Financial markets hit new 2022 lows and oil dropped by 5.7% on Friday to close out the week. Oil is now down 36% from its June high. Over the last two weeks, the S&P 500 has fallen by 9.2% and the Nasdaq by more than 10%. The 2-year treasury yield closed at 4.22%, the highest level in over a decade. The composite PMI in the US was in contractionary territory at 49.3, but that was up from 44.6 in August.
A Eurozone recession is pretty much a certainty now and the odds for a US recession seem to be rising by the day. And to make matters worse, Putin has doubled down on his so far losing strategy in Ukraine and called up 300,000 reservists and threatened nuclear strikes.
US stocks fell by 4.80% and bonds were off by 0.95%. The 2-year Treasury yield increased by 29 basis points. International stocks dropped by 3.30%.
On Tuesday, the Bureau of Labor Statistics announced that CPI had increased by 8.3% since last year, higher than what was anticipated. The Core CPA, which excludes energy and food, was up by 6.3% compared to 5.9% in June and July, indicating that price pressures remain intense. The S&P fell by 4.3% after the news and the 10-year treasury yield increased to 3.42% from 3.297%. According to Ryan Sweet, senior director of economic research at Moody’s Analytics, the average household is spending $460 more each month to buy the same basket of goods and services as last year.
Markets are now anticipating a fed-funds rate of about 4.25% in December, implying 75 basis point increases in September and November, and then another 25 basis points in December. The terminal rate is anticipated to be 4.45% in April.
FedEx announced weak, very weak, preliminary earnings due to weak demand. The stock fell by 22%. Ray Dalio of Bridgewater writes that a 4.5% fed-funds rate could mean a 20% drop in equity prices.
Stocks were down by 0.73% in the US and 0.26% outside the US. Bonds fell by 0.63%. The yield on the 10-year treasury is now at its highest level since the pandemic began, closing at 1.34%. Bitcoin burst through $50,000 and is currently trading at about $56,000.
Helped by stimulus checks, retail sales advanced by the most in seven months in January, up by a seasonally adjusted 5.3%. The increase topped all estimates and indicates strong consumer demand. The Atlanta Fed’s GDPNow model now projects a 9.5% annualized growth rate in Q1, up from 4.5%. Industrial production was also up, for the fourth consecutive month, increasing by 0.9%.
While retail sales were surging, so were producer prices, which jumped by 1.3%. That was the biggest increase in the records that date back to 2009. The rising producer prices (PPI) haven’t spilled over into the CPI yet, but it is probably only a matter of time. Now it is only one month and maybe it is an aberration, but when the government throws trillions into the economy and then wants to add a couple of trillion more, the threat of inflation has to be considered. Higher inflation would mean higher interest rates, which would make it difficult for the government to do anything other than pay off interest in the future, it would also cut into p/e ratios which could cause the market to decline. Maybe none of this happens but for those of us that lived through the 70s, it is a threat not to be taken lightly.
Stocks had a big week as US equities advanced by 5.25% and international markets were up by 4.95%. US stocks ended the week at a record high. It was the best week since November as investors were looking forward to a $1.9 trillion stimulus package. For the same reason stocks were up, bonds were down, falling by 0.35% as the prospects of inflation lifted interest rates on the longer end of the curve. Oil jumped by almost 9%.
Dropping virus numbers are also helping. How much the vaccination program has helped no one is sure, but the huge second tidal wave of Covid seems to be slowing, similar to what happened to other waves in previous pandemics. The Super Bowl this weekend will be a test to see if social gathering around the country ignites a rebound, but for right now, recent numbers are very encouraging.
The Democrats are moving ahead without the Republicans on a stimulus plan valued at close to $2 trillion dollars. This is after a $900 billion plan passed in December and the trillions spent earlier in the year. There is simply no concern for the out of control deficits and the debt burden we are laying on future generations. We are putting the country in a dangerous situation at some future point when interest rates rise, but nobody cares. Biden should settle for a more reasonable plan that focuses on getting the country vaccinated, helping those who are truly in need, and for targeted infrastructure investments that will have a clear positive payoff. Even former Obama economic advisors Larry Summers and Jason Furman thinks the package is too big. Summers said, “stimulus measures of the magnitude contemplated are steps into the unknown.”
The economy just does not need a massive plan like this. Most of the spending will start to hit just when most of the country will have been vaccinated and a year-plus of pent up demand will start to be unleashed. All of this deficit spending, on top of more regulations, monetary expansion, and reduced international trade is a recipe for inflation, which potentially means much higher interest rates. And much higher interest rates on top of an out of control deficit will crowd out spending on needed programs in the future and threaten the value of the dollar. The government cannot act like the US dollar is monopoly money, because if they continue to do so, that is how it will end up.
Gamestop (GME) came back to earth this week. GME closed at $63.77, down 80% on the week and down by 87% from its high last week. It is still way above where it was a couple of weeks back, but while many were smart enough to cash out, there were probably more who bought at higher prices expecting GME to go even higher and are now left with huge losses, or those that rode the stock all the way up and all the way down. Moreover, the Wall Street Bets Reddit page, where many of these “investors” got their inspiration, was encouraging/telling their followers to hold GME stock straight through and not to sell no matter what. Of course, as the losses piled on, the prevailing Reddit theme was that the system was rigged, failing to take personal responsibility for buying GME at simply ridiculous prices and without regard to any fundamentals. The GME saga is just a sign of the times.
As is Dogecoin, a cryptocurrency that is flying high and is now worth more than $6 billion. Dogecoin was created as a joke in 2013. Like it was literally created as a joke, the developer wanted to create a coin that couldn’t be taken seriously. The developer, Billy Markus, spent a grand total of three hours one Sunday afternoon creating the currency. But Elon Musk has tweeted about it a couple of times in recent weeks and it has increased in value by 80%. In addition, the Reddit crowd is aiming to push the coin to $1 from its current 8 cent value. People are buying something with an intrinsic value of $0 but that doesn’t matter. It is the same mindset that pushed GME to $500 per share, but even worse, at least GME has a business with some kind of prospects (if it can be turned around) of generating cash flow.
Payrolls increased by 49,000 in January, and the December job loss was revised up to 227,000 from 140,000. Lower labor force participation dropped the unemployment rate to 6.3% from 6.7%. All in all, the payrolls report was considered a disappointment.
Normally, home prices fall in a recession, but not this time. Prices are up sharply, rising by 9.1% year over year in November. Home prices have benefited from Covid, as city residents move to homes in the suburbs, but also by the Fed’s monetary policy, which has included buying $40 billion per month in mortgage securities. That has reduced mortgage rates which have increased demand and thus, more expensive homes. The problem is first-time home buyers and others are being priced out of the market. The other problem, which we allude to above, is that excessive monetary and fiscal stimulus is starting to lead to inflation which could be a big problem down the road.
- Stocks rally on a market-friendly Fed press conference.
- Another strong jobs report.
- Estimated earnings for 2019 continue to be sharply cut.
- Howard Schultz may run for President and Corey Booker is.
Stocks advanced and were helped mightily by a Fed press conference mid-week. Fed Chairman Jerome Powell said, “I would want to see a need for further rate increases,” referring to an increase in inflation. And then to make it even better, the Fed signaled that they would maintain their balance sheet at a higher level than previously thought, indicating that the unwind of the balance sheet might be coming to a close. It was just about everything the market could ask for, and stocks shot up by 1.51% on the day. For the week, US stocks increased by 1.66% and international equities were up by 0.91%. Bonds were up on the week by 0.27% but fell on Friday on the news of a very strong jobs report.
The market has rallied by 15.9% off of the December low and is now at the midpoint between the range that was established through most of October and all of November.
JOBS / ECONOMY
The US job market made it 100 straight months of increased payrolls. Nonfarm payrolls rose by 304,000. It was the biggest increase since February of 2018. Wages were up by 3% year over year. That is six months in a row of increases at or greater than 3%. The unemployment rate did increase to 4% from 3.9% in December, but the government shutdown probably impacted that number. The share of American adults working or looking for work increased to 63.2%, up 1/2% from last year. This indicates that the strong job market is pulling in workers that have been sidelined, a positive development for the economy.
In more good news, the ISM Manufacturing Index climbed 2.3 points in January to 56.6, the biggest increase in five months.
One weak datapoint was jobless claims. After falling to a stunningly low 199,000 last week, they shot up to 253,000 this week. That was the highest level since September of 2017. The government shutdown will get the blame for now.
Overseas, the economic reports are still coming in weak. The Markit January Manufacturing PMIs fell. Emerging markets are now at an even 50.0 versus 50.5 last month, and developed markets fell to 52.2 from 52.9, greater than 50 is considered expansionary. Italy fell into a recession.
FUTURE ESTIMATED EARNINGS
Analysts continue to aggressively cut future earnings estimates. 2019 estimates are now at $169.60, down from a peak of $178.90 in September. That is down 5.2% in about 5-months. Estimates have now been cut eight-weeks in a row and 16 of the last 17 weeks.
HOWARD SCHULTZ / CORY BOOKER
Howard Schultz, a lifelong Democrat, announced that he might run for president as an independent in 2020. The reaction was instantaneous and vicious. Democrats and the media establishment went on a rampage trashing Shultz in every way possible, from his intellect to his wealth to the way he ran Starbucks. Most of the “comments” and accusations were caricatures and inaccurate. But that is what goes for public discourse nowadays. With both parties currently ruled by the extremes, it would appear there is an opening for someone close to the center. Schultz will test the waters and consider filling that gap.
Cory Booker announced that he will run for president. Booker’s initial comments were positive and focused on uniting the entire country, “We used to be a people who could look at the sky, point at the moon and change it from a dream to a destiny. There’s no Democratic or Republican way to get there. You definitely don’t get there by fighting each other, tearing each other down or dividing people against each other.” Booker joins a field that includes Kamela Harris, Elizabeth Warren and Kirsten Gillebrand.
Past performance does not guarantee future results.
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