More Volatility Ahead…
This post was originally written on March 15, 2022, 6:08 PM EST.
The S&P500 swung up and down quite dramatically over the last 10 trading days, but down just “1.6%” for the period. Nasdaq outperformed and was down 0.6% with Tech stocks finding a bid ahead of the Fed’s meeting tomorrow. The UNHCR reports that 2.5 million refugees have now left Ukraine with more to come. European markets bounced with European banks leading the rebound. That is good news! Oil has finally peaked at $123 per barrel, now $95 which may be a sign that the best cure for high commodity prices is high commodity prices. We continue to believe that exposure to energy stocks may be rewarding over the coming years, so savvy investors may get another chance to buy that dip.
More cyclical stocks like banks, semiconductor stocks, autos, and travel stocks bounced today. The majority of portfolio companies traded up for the day which may be a sign of some bottoming for the average stock. On the high end, we are, however, watching deteriorating technicals (charts) of some of the very large technology stocks like Alphabet, Microsoft, and Apple which underperformed the broader market in the last 10 days, which may be a sign that these larger components of the major averages need to come down more before we can hit a true bottom. The pattern historically is that the most solid and liquid stock get hit last before a true bottom can be formed.
What are we watching on the military and political front?
Biden announced sanctions on Russian oil and gas purchases. There was initially some confusion in the market about what that actually meant and a second press conference clarified that all oil and gas purchases already contracted are exempt and can still be delivered. This means there are still about 45 days of Russian oil flowing to customers in the West according to a leading oil analyst. This is important when gaming the duration of the conflict and the probability of a ceasefire or stalemate. It is unlikely that this (hot) part of the conflict can go that long given the reports that the Russian advance has stalled. It was reported that several Russian generals and their teams were killed by the Ukrainian resistance. An unsecured call was intercepted which verified the kill further pointing to setbacks for the Russian military. The Russian military has also lost many aircraft, which may hasten an end to the hostile part of the conflict unless the Russian Airforce is willing to sacrifice more of its air capacity. We are reminded that Russia is still fighting proxy wars in places like Syria, where air superiority is a key. It is unlikely the Russian Airforce would sacrifice the majority of its aircraft over Ukraine. At the current rate, they may lose half of their Airforce within the next month.
What are we watching on the macroeconomic front?
The domestic data during the last 10 days on the economy continues to come in very strong again. There was some easing of inflation pressures for purchasing managers in the data this morning. The yield curve continues to be pushed up ahead of the Fed meeting, with the 10-yr Treasury yield well above 2% again, signaling that the Fed cannot relax its policy to raise rates. Our favorite economist, Ed Hyman tells us that the next inflation reading (CPI) could come in at 8.2% with gasoline prices hitting $4.50 throughout the country. An investor survey ISI-Evercore ran suggests that most institutional investors are now expecting a recession in 2023. That is a major change in sentiment!
On the company level, there are no major earnings announcements at the moment so the market is trying to discount what is to come in the absence of new data. Earnings season begins with the banks on April 13, with JP Morgan. We would expect plenty of volatility until then. We should, however, have a clearer picture of the trajectory of interest rates, given the Federal Reserve meeting tomorrow. Many of our portfolio companies have already joined the boycott against Russia, by either closing stores (Starbucks) or ceasing business there altogether (Apple). Sports and cultural institutions have also joined the voluntary ban.
It goes without saying, there is unprecedented pressure on Putin to change course in the coming weeks or risk complete economic collapse and isolation. We remain patient regarding our portfolio positioning. Stay tuned!