Read All About It! (just don't trade on it)
02/20/2022. Catch up with the entire previous week in financial markets in less than ten minutes every Sunday by reading or listening to my weekly market review.
When stock markets move in huge ranges primarily based on media headlines and short-term price movements are at the mercy of the whims of the news cycle, it’s time to back right off as an individual investor. We saw why last week.
A Russian invasion of Ukraine would cause a short term flight from higher risk assets like stocks and crypto to lower risk assets like cash and bonds (and maybe some commodities). But in the medium and longer term, the prices of stocks are driven by earnings, both real historical and future expected. US corporate earnings are not meaningfully affected by most geopolitical events and certainly not a Russia/Ukraine conflict. Russia’s economy, at 1/20th the size of the US’, doesn’t even make it into the world’s top ten and Ukraine's annual GDP amounts to about 16 weeks of Walmart sales.
History is littered with examples, from World War II to JFK’s assassination to the outbreak of numerous Middle East conflicts, of stocks moving higher, sometimes much higher, during what seem to be serious geopolitical crises.
So following a sharp fall caused by fear of the crisis happening before it actually does (which is where the market was last week), now suddenly there is a potential mis-match between where the stock market is and where it “should be”.
The point is that if you get caught up in the twists, turns and rapid reversals of these global events by chopping and changing your investments in a market driven by the unpredictable actions of world leaders and populated by black box algorithms and institutional traders with billions of dollars of firepower, you are eventually going get caught on completely the wrong side of things, get badly hurt financially and emotionally and risk having to scramble to get out of an expensive mistake. It’s just not worth it. It also didn’t help that there was a three-day weekend coming up during which most investors can’t make any adjustments until Tuesday morning.
Stay out of these kind of markets, other than just continuing ongoing, systematic boring recurring purchases of broad-based or factor ETFs (see Financial Term Of the Week below) or your 401k/403b funds if you don’t want to be someone’s lunch.
Beyond Ukraine, interest rates are on everyone’s mind. St. Louis Federal Reserve President James Bullard was out spooking markets again, repeating his call for more aggressive actions by the Fed to fight inflation than just a boring old quarter of a point hike at every meeting for the foreseeable future.
However, rather like the embarrassed parents of a bratty child acting up in front of their dinner guests, other Fed Presidents rushed out to basically say, “Oh that James Bullard! He just talks before he thinks sometimes, don’t worry about anything he says”.
The release of the Producer Price Index (PPI), the measure of wholesale inflation, showed continued upward pressure on prices, rising 1.0% in January alone, double the anticipated increase. Year-on-year, the wholesale inflation rate (the increase in the cost of raw materials entering factories, rather than the Consumer Price Index, which measures the price increase of finished goods leaving factories) remains at 9.7%, pretty much the same as the previous month. Expectations had been for it to fall to around 9.1%.
The Fed will definitely have taken note of the PPI numbers. And investors will have taken note of the Fed taking note of the PPI numbers and likely drawn the conclusion that this may only have emboldened the central bank to become more aggressive with its interest rate increases.
But the number was released on a day when the headlines out of Eastern Europe were somewhat positive and drove markets temporarily higher. But this surge was only temporary as the news narrative completely reversed the following day, in a perfect example of what I was talking about earlier.
Retail sales crushed estimates, soaring 3.8% in January. But is this a time when good news becomes bad news? It could be. These numbers can easily be interpreted as telling us that the economy is just too hot. It means the public’s willingness to pay up for goods and services is still strong, for now. That’s hardly going to help with the inflation problem. And for how long can the American consumer sustain this blistering pace of spending money?
Once again, I want to emphasize that this is absolutely NOT the time to be making big asset-changing decisions about your investments. Money with short term time horizons should not be heavily invested in risk assets anyhow and you should keep adding (maybe at a slightly quicker pace for a while) to money assigned to longer term horizons.
More Americans are returning to restaurants, stadiums and the skies—but not the office, as a large divergence appears in the way people are beginning to “normalize” their lives. Remote work remains the choice even as the Omicron variant retreats. In ten major cities, an average of just 33% of the workforce returned to the office during the first week of February, admittedly up from 23% a month earlier but still much lower than the 41% who returned in the first week of December, before the full force of Omicron hit. Movie theaters are 58% as full as before the pandemic, restaurants over 70% as full and planes about 80%. And that is true even in cities like New York, where the infection rate is now falling to where it was at before Omicron appeared on the scene.
The group previously known as Facebook braced for yet another body blow as Google is set to announce its own measures to make it more difficult for advertisers to track consumers on mobile phones and devices that use Google’s Android operating system. As a reminder, Meta/Facebook blamed Apple’s similar tracking-blocking technology for a catastrophic earnings report earlier this month that obliterated a quarter of the value of the firm in minutes, causing the biggest one-day collapse in market capitalization that any company has ever suffered in history. The stock has already fallen over 36% in a little over two weeks.
The long list of privileged, bubble-dwelling public figures (Boris Johnson, Prince Andrew, Justin Bieber, R. Kelly, Mario Cuomo, Novak Djokovic, Aunt Becky and Felicity Huffman and many more) who clearly believe that the laws that apply to the rest of us “little people” do not apply to them has now been unsurprisingly joined by Elon Musk who is bizarrely claiming that the Securities and Exchange Commission (SEC) investigation of him for clearly and brazenly breaking securities laws and fining him was “harassment”.
Maybe Elon was just in a grumpy mood, after all he had a bad week. His net worth fell by many, many millions in just a couple of days as TSLA stock got torched. He got heavily slammed for weirdly tweeting an image of Hitler in his support of the now-dispersing anti-vax Canadian truckers, yet another safety probe of Tesla vehicles’ faulty braking systems was initiated and the car maker’s brand crashed to 23rd place out of 32 (and behind that of Ford) in rankings published by Consumer Reports in its most recent annual automobile brands consumer popularity survey (Subaru came in first place with Jeep in last, in case you were interested).
Under The Hood:
As discussed earlier, it is easy to become distracted by media headlines and narratives, both geopolitical and mostly uninformed hot financial takes. Remain laser-focused on the market’s primary directional trend and what is actually happening to all stocks in the market under the surface.
Last week, I noted in my report how Mid Caps were becoming infected with the Small Cap malaise. Well, just a week later, there is now early evidence of accelerating weakness in Large Caps and increased boldness among sellers of Large Cap stocks. The Percent of Large Cap Stocks 20% or More Below 1 Year Highs is now closing in on the historically significant 20% level and has not been this high since late 2020.
So while above-the-surface indicators (the market indices) seem undecided about where to go with sharp falls, big bounce-backs and periods of quiet (sometimes all in the same day!), the picture below the surface is much clearer and it ain’t pretty. The Percent of Total Stocks Within 10% of Their 1 Year Highs now numbers less than 30%. A robust level for this indicator is at least 50% and preferably much higher.
The Percent of Total Stocks Above Their 10-Week and 30-Week Moving Averages is now way below where it should be in a healthy market and only a little above readings characteristic of a full-on bear market.
And we don’t even have an over-sold bounce to immediately look forward to, Relative Strength Index (RSI) readings are still around 40 and the market is not considered to be short term over-sold until this reading falls below 30.
Indeed, hardly any of the technical readings I look at are pointing to anything positive for stocks and this will need to change in order for any move higher to be sustainable. I’m keeping an eye out for such signs of a turnaround and will report them when I see them (I promise!) , but right now everything still points to caution.
The upcoming week ..
U.S. stock and bond markets will be closed for Presidents’ Day on Monday.
The reporting of Q4 2021 earnings resumes on Tuesday, of interest next week will be those from Home Depot, Lowe’s, Moderna, Etsy, Coinbase, Dell, Medtronic, Alibaba, eBay, TJ Maxx, Newmont Mining, Agilent Technologies, Norwegian Cruise Lines, Liberty Media, Anheuser-Busch and Occidental Petroleum.
The economic data highlights next week will include January’s Durable Goods orders, often seen as a proxy for business investment and Personal Income and Spending. America’s consumers are expected to have spent more and earned slightly less compared with the prior month.
We will also get a peek into the psyche of both businesses and regular Americans when the confidence indexes for purchasing managers and consumers are both released, looking to stabilize from significant dives the previous month.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
Relatively speaking ..
- Last week’s best performing US sector: Consumer Staples (two biggest holdings: Proctor and Gamble, Coca-Cola) - up 1.01%
- Last week’s worst performing US sector: Energy (two biggest holdings: Exxon Mobil, Chevron) after a six week run in first place as the best sector - down 2.78%
- The NASDAQ-100 and the S&P 500 performed equally badly last week
- Emerging Markets fell less than International Developed which in turn fell less than US Markets
- Large Cap fell far harder than Mid and Small
- Growth stocks performed worse than Value
Technical corner ..
- The proprietary Lowry's measure for US Market Buying Power fell by 1 point while that of US Market Selling Pressure rose by 9 points.
- SPY, the S&P 500 ETF, is still below both its 20-day moving average and its 50-day and remains well below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 40, readings above 70 indicate an over-bought condition and below 30 is considered over-sold. SPY ended the week 9.1% below its all-time high (12/27/2021).
- QQQ, the NASDAQ-100 ETF, is still below its 20-day moving average, and its 50-day and remains well below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 40, readings above 70 indicate an over-bought condition and below 30 is considered over-sold. QQQ ended the week 15.5% below its all-time high (11/19/2021).
ARTICLE OF THE WEEK:
Each week I'll link to an interesting article I have come across during the week.
This week: Like the author of this article, I believe that when it comes to investing, reading fawning books and articles about the (sometimes ridiculous) habits and practices of apparently successful people which often downplay the factor of being born on third base and/or the concept of pure luck, is probably a lot less instructive than studying the most common causes of investor failure.
FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia (may be edited at times for clarity)
FACTOR ETFs (also known as Smart Beta ETFs)
Trackers and “regular” exchange-traded funds (ETFs) that pursue a simple, passive strategy of following a specified market or index have become extremely popular in recent years, as it has become common knowledge that classic stock picking does not always work.
A pure tracker that entails “buying a market,” such as the S&P 500 or the FTSE in the U.K., has its disadvantages. Although highly transparent, investors are completely exposed to the market in question and all its vicissitudes. It is not surprising, therefore, that hybrid models have emerged that are still tracker ETFs but are deliberately biased in one or more respects. These are often referred to as Factor ETFs or Smart Beta ETFs.
These ETFs are fairly new, so there is not much of a track record. However, the logic is sound enough that a prudent investment could pay off. Make sure that you understand exactly how the products work. The more an ETF deviates from the pure index (benchmark risk), the more appropriate it may become for more sophisticated and active investors or those having their assets professionally managed.
There are various ways of using these concepts in practice. Commonly, these are value, size, low volatility and momentum. One institutional user of these types of ETFs said that it was “to provide clients with portfolios that are liquid, transparent, low-cost, and backed by years of academic research." Factor ETFs reduce the costs of traditional actively managed funds by providing a low-cost product that's still well-researched and can provide greater-than-market returns, he said.
(Note: Many Anglia Advisors professionally-managed portfolios make use of Factor ETFs)
This material represents an opinionated assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of any future results. It should not be relied upon as research or investment advice. The user of this information assumes the entire risk of any use made of the information provided in this or any other Anglia Advisors post or other communication.
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Clients of Anglia Advisors may maintain positions in securities and asset classes mentioned in this post.
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