March Stock Market Update
Dear Clients and Friends,
?Here is my March market review for you. It’s in 2 sections, a shorter summary write-up, and a longer one for you with more information and details.?That way you can pick which to read based on your level of interest and time. ??
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SUMMARY VIEW
?( ) references provided are at the bottom of the newsletter
?The major market indexes (DOW 30, S&P500, NASDAQ) are still negative year to date as of this writing, and some have rebounded back up partially, but I don’t think we are out of the woods, yet. Accordingly, there is no merit to any short term directional guesses, quotes or soundbites stating otherwise, regardless of how good it might seem, because we simply have no idea where 2 things are heading:
1.???the war in Ukraine and its outcome based on Putin’s strategy, or lack of it, and how that might further affect global stock and bond markets, and
2.???what the Federal Reserve will decide to do in May at the next rate hike, meaning raise rates by 25bps again, or by 50bps, and what to do with all of the bonds it already owns.
?The forward market impact potential from either of these could be very high if either doesn’t play out well. Or, we may sit in a state of high volatility, flip-flopping the market indexes up or down frequently with a lack of clear direction from either of the above for a few more months. Therefore, focus on value-based investments, being conservative and knowing that more volatility is here for a while.
?Earnings and economics overall are still steady, but we’ll see if that starts to fade over the next month or two. Inflation is high, and I estimate that it will stay that way through 2022, and the inputs to that math are changing regularly. For example, the Chinese port of Shanghai has nearly shut down its shipping due to Covid this month, and the number of vessels waiting to load or discharge is now above 300, vs about 75 in March. (1) That’ll affect shipping costs.
?Between the invasion & the US interest rate pace-of-increase and the related topic of the Federal Reserve’s balance sheet, and what each impacts, there’s much to study and follow. I’m not out of the markets, just following the above focus, and I’m always looking to buy appropriately.
?But in the end, don’t focus on soundbites or quotes. If you remember, there are 5 drivers of the markets: earnings, economics, geopolitics, oil and the Federal Reserve. The last 3 are a big guess right now, and anyone who gives you a quote or soundbite saying it’s a clear path for any of them deserves use of the off button on the remote.
?The following is probably the longest newsletter I’ve ever written, but there’s a lot going on to try and unpack, hence the summary above if that’s your preference. ??
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?THE DETAILED VIEW
?Topics in this newsletter:
1.???Quotes and the Fed
2.???Interest Rates & Inflation
3.???Economics
4.???Earnings
5.???Recession
6.???The Invasion
7.???Keeping up with the Jones’s
?The following is my professional view of world affairs affecting the markets, except where quoted. ( ) references provided are at the bottom of the newsletter
?Quotes & the Fed
?Speaking of quotes…Language is full of quotes, from those of Shakespeare (“This too, shall pass”), to President Roosevelt (“All we have to fear, is fear itself”) to those in the Bible and elsewhere. Even Roy Scheider’s ad-libbed line in the movie “Jaws”, (“You’re gonna need a bigger boat”) was a classic. And one of my personal favorites is “Always be a first rate version of yourself, instead a second-rate version of somebody else”… Judy Garland.
?Quotes to me are verbal brevity that summarizes the expertise, failures or successes of someone’s life so that others can learn or be inspired by the words. At least the good ones are, the ones that help us figure out how to improve personally, professionally or in service to others. Quotes that are just cute might have little of those qualities, but they make headlines just as well. And, people who seek a quote from a leader often want a factoid or a sound bite because they disdain the labor needed for the understanding behind it, and a quote can be grabbing.
?That’s the ongoing media frenzy associated with all that we hear from the Federal Reserve. Most people are not students of the economy or the stock market. They don’t need to be, and that’s ok. However, media is not most people. Media seeks to push for a verbal gaffe or something that sells attention to the format of their medium, such as radio, television or streaming internet news. Get a quote, that’s all we need.
?Because of media outlet’s sound bite focus, we can lose the understanding of the gravity of how difficult brevity, or quotes, can be from people in leadership. Case in point is Jerome Powell, Chairman of our Federal Reserve, one of the most difficult jobs in the world, telling us all way too long that inflation is “transitory”. That word and those with it became the quote. Was he right? Absolutely not. I didn’t buy it for a minute, and I’ve been proven right, but the financial press [with some exceptions] was fixated on a quote and nagged him endlessly to explain or justify it. Give us a minute by minute soundbite or quote, please!! (IMO, his job is shepherding brilliant academics and PhD’s to develop data driven forecasting opinions based on econometric models having more paths on how things can go than the NY City subway system, and sometimes just as unreliable on a bad day). Don’t chase soundbites or quotes.
?Interest Rates & Inflation
?No one knows how well or quickly the newly started hikes in interest rates (in an attempt to lower inflation) will work, or how fast rates should rise to get CPI, which is at 7.9% (2) back down to the Fed’s much lower ideal target.?So, don’t chase the news trying to hear a quote or soundbite on ‘where are interest rates heading?’ or ‘what will the Fed do and when and will it work’??The gravity of anything Mr. Powell, or Mrs. Yellen before him, says is profound and quotes on direction are our worst enemy. And those that think they know, don’t. Ok, time for another quote: “The greatest enemy of knowledge is not arrogance, it is the illusion of knowledge”.?That wasn’t from a Fed Chair, it was from Stephen Hawking, the astrophysicist. But it SO applies here. If you aren’t sure, don’t give a quote or a soundbite to infer that you do.?
?I’m sure you’ve heard about the crazy jump in the container shipping rates ? That’s also contributing to inflation, because if the big metal box to ship it here costs more to use, your product inside of it will cost more.?Well, they are still super high, but falling, whether you look at rates from Shanghai to LA, to New York or Rotterdam. However, with the Shanghai port problems, who knows for how long? For example, rates to New York are down to around $11k/container from over $16k/container, but still have a ways to go to get back to 2020 levels of $3k. (3) IMO, that prior level might be out of reach for a while, but shipping costs are falling nonetheless. Inflation is still high, but this element of it is slowly dropping, a good sign.
?So here we are, inflation is super high, interest rates are on their way back up, the stock market sold off and has risen back up some. It should have dropped like this last year, by the way, as inflation has been way up there for a long while, but the market only woke up to it this year, way before the invasion of Ukraine. FYI, US interest rates on home mortgages are running at 4.95%, nearly 2% higher than in 2021. (4)
?Economics
?Here are some related economic updates for you:
·????????Redbook, which is retail sales from stores open 12 months or more, dipped a little in February, but is still much higher than pre-Covid. (5)?Good.
·????????The unemployment rate is now down to 3.8% (5) Good.
·????????Durable Goods ex-transportation (stuff built to last more than a year) dipped slightly last month but is the same level as pre-Covid (5). Good.
·????????US Manufacturing PMI (producers mfg index) is the highest in years (2) Good.
·????????US existing home sales months of supply is at an all time low over the past 20 years. (6)
o??IMO, with the supply of homes at an all time low, and rents still soaring, we’ll need more supply of homes besides rising interest rates to slow down the rising housing market prices. Not good.
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·????????President Biden said that the US would send more natural gas to Europe to offset losses of it from Russia, but that was largely symbolic because we don’t have the capacity to export much more of it and they don’t have the capacity to offload it. Building more terminals takes time.?Russia provides about 40% of Europe’s gas. (7)?Good…eventually.
·????????In 2005, 2 out of 5 mortgages had an adjustable rate mortgage, less than 1 out of 100 in 2021. (8) Good. So, less people are exposed to rising interest rates on homes they already own. Good.
·????????“As a result of the invasion of Ukraine, inventory overstocking is the strategy for improving supply chain resilience that is most clearly underway. Reshoring appears limited so far, construction of new domestic mfg facilities has mostly gone sideways, and imports of foreign parts and final goods have continued to grow faster that domestic mfg output.” (9)?Not good.
·????????"I could be wrong. Uncertainty is rife. Everyone right now is reaching into the past and seeking for their favourite past historical inflationary episode as an analogy," Brad DeLong, economics professor at the University of California.
o??Like I said, don’t chase quotes.
?Earnings
?I’ll make this part simple. The current outlook for Q1 and Q2 earnings for this year is barely changed at all from what the forecast was for them back in December. (10) Or, from Schwab: “The geopolitical impact on earnings, the most important driver of stock prices, has remained modest so far. Global companies appear to be on a path for earnings growth in 2022” (11)
?Recession?
?Something very important is the slope of the yield curve on US government Treasuries. What I mean is that if you were to plot out the interest rates of short maturity bonds to long dated ones, such as out to 20-year bonds, in an ideal setting, it would look like a gradually upward sloping S shape. Short maturity bond yields would be lower on the graph than longer ones, which makes sense, because the longer you give up your money, the larger the reward should be for you. But not now.?The yield curve is getting very flat, and that’s a technical worry for many, because if there’s little value of buying a longer maturity bond than a shorter one, that ‘could’ be a sign of a recession coming down the road.
?IMO, that’s not the case this time, because the Federal Reserve has been raising interest rates, and that raises the shorter end of the yield curve, so it’s going up artificially.?Right now, the difference between the yield of a 2-year government Treasury vs owning a 10 year is about 5 basis points (bps) or .05%. (12) It was about 1.5% in May of last year. I’m watching it closely, but I don’t see a recession coming. Here’s a good, relevant quote: “our models show the flatness of the curve could be more a consequence of the Fed’s relentless buying of bonds, and the consequential growth of their balance sheet, rather than because of a looming growth shock. We would search for other indicators of a recession”. (13) I seriously doubt that we are on the verge of a recession just because of the inverted yield curve (short maturity bonds having a higher yield than longer dates bonds). Not with one of the tightest labor markets in a very long time and some of the lowest unemployment figures on record.
?The Invasion
?ND what do we say about the invasion of Ukraine? We all know that story well already. In this newsletter, my focus is on the effect on investment portfolios. It currently only adds (so far) to the worrisome stress load the market has because of rising interest rates, assuming that NATO doesn’t get pulled into the war. If you want to see the actual timeline of the long list of sanctions from countries around the world, not just us, in response to Russia’s invasion of Ukraine, take a peek here: https://www.piie.com/blogs/realtime-economic-issues-watch/russias-war-ukraine-sanctions-timeline?utm_source=twitter&utm_medium=organic-social&utm_campaign=sanctions-timeline&utm_content=link&s=09 T??(14)
?The economic impacts could be bad for European countries who rely on Russian oil and natural gas. Germany will find it hard to manage without Russian crude, because as of 2020, according to Eurostat, approximately a third of it comes from there, the same for Poland and about half for the Czech Republic. (15)?Also, data from FAOSTAT.org in 2018, Russia is the world’s largest exporter of wheat at 24% of the total, followed by Canada, USA, France and Ukraine at 9%. Jay Bryson, Wells Fargo Chief Economist, said that “the ripple effect of the war hits Europe harder than it does in the US, as the US has very little direct exposure to Russia both financially and economically aside from oil prices.”
?Keeping up with the Jones’s
?I read through an older research paper that is still relevant and much unchanged to today. It addresses the Merchant Marine Act of 1920, aka, the Jones Act. In the long research paper, “The Jones Act, A Burden America Can No Longer Bear” (16) the authors state that “the law was presented as a plan to ensure adequate domestic shipbuilding capacity and a ready supply of merchant mariners to be available in times of war or other national emergencies. No fewer than 16 congressional committees and 6 federal agencies have some form of oversight authority”.?That makes for smooth sailing, right? (Sorry, couldn’t resist.)
?One of the many provisions is that “ships eligible to transport goods from one US port to another must now be 75% US owned, 75% US crewed, and assembled entirely in the US and with all major components of the hull and superstructure fabricated domestically.” The analysis report goes on to describe how it drove away competition in shipping costs with such few US companies available that met that tough standard.
?Just think, if you want to send your product by ship from Boston to LA, if there’s no ship that meets that narrow criteria, you’ll have to ship by other probably more expensive means. “The US shipping industry is the first casualty of the Jones Act.” Ships built overseas cost about 7x less than to build one here, so US shippers build fewer ships and most of the US fleet is past retirement age. (So good luck trying to save money with long distance shipping!)
?Enough said. The Jones Act needs a rewrite, and I hope someone doesn’t just give a quote to make a headline about it. That Act has a direct impact on inflation.
?Two closing quotes to walk away with for Ukraine:
·????????“It’s not the size of the dog in the fight, it’s the size of the fight in the dog.” Mark Twain, and ok, the movie “Rocky”.
·????????“The best thing about the future is that it comes only one day at a time” Abraham Lincoln.
o??I pray that Ukraine’s future is steadfast & bright.
?Thank you for your time. Hopefully, the world settles a little and my next newsletter will be back to its normal, shorter length.
?References:
1.???www.VesselsValue.com March 2022
3.???Drewry, Bloomberg and Saxo Group
6.???Per Liz Ann Sonders, Managing Director, Chief Investment Strategist, Charles Schwab & Co, and data from Bloomberg News
7.???NYTimes, 3/25/22, Clifford Krauss
8.???FHFA, National Mortgage Database (NMDB), monthly data through March 2021.
9.???Goldman Sachs Economics Research 3/27/22
10.?Refinitiv S&P500 Earnings Scorecard Report, 12/31/21 vs 3/25/22
11.?Jeffrey Kleintop 3/38/22, Chief Global Investment Strategist, Schwab
13.?Richard Bernstein Fixed Income Insights 3/24/22
14.?The Peterson Institute for International Economics.
15.?Helen Robertson, Editor for Bloomberg News.
16.?Research paper, The Jones Act, Cato Institute, by Colin Grabow, Inu Manak and Daniel Ikenson. 6/28/18
?This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly.