The week and the month began with investors shifting their attention away from March's banking turmoil and back to the risk of a recession that could drag down consumer spending, thereby corporate profits and thereby stock prices. And the holiday-shortened week provided plenty for them to focus on.
Unexpected output cuts from the Organization of Petroleum Exporting Countries (OPEC, see EXPLAINER: FINANCIAL TERM OF THE WEEK below) were announced on Monday after oil prices dipped in March amid the banking stress and fears over the global economic outlook.
Unsurprisingly, oil prices and oil stocks soared to start the quarter’s first trading day, as did the odds of another quarter point hike by the Federal Reserve next month. That’s because higher oil prices is a potential blow in the Fed’s battle against inflation, a fight it had looked to be slowly winning.
The White House got very grumpy about the move. It was apparently made clear through diplomatic channels that, given the cost of living issues in the US and broad market uncertainty, it considered this production cut as “ill-advised”.
Pretty much all the economic data released before the big one (the Jobs Report on Friday) implied that the economy isn't just lifting its foot off the gas pedal, it may now be stomping on the brakes.
The US manufacturing activity index fell to 46.3, to its lowest level since it completely collapsed back in those frightening dark days of May 2020. Numbers below 50 indicate contraction and by this index, manufacturing has now been contracting for four straight months. The overall reading has fallen to this level only sixteen other times in the index’s history dating back to 1948. In twelve of those sixteen instances, the economy was either already in a recession or fell into one shortly after.
Employers seem to be finally pulling back from their breakneck, hire-at-all-costs approach of 2022. The Job Openings and Labor Turnover Survey (JOLTS) for February showed a very sharp 632k decline in job openings to a much lower total of 9.93 million with declines across all industries and sectors. Estimates had been for 10.45 million openings. This represents over 2 million fewer job openings than there were a year ago. For context, however, the pre-pandemic record-ever high in job openings was around 7.5 million. Another example of how the pandemic broke data.
We also learned that service industry expansion was coming to a screeching halt and that factory orders were disappointing.
The market seemed somewhat confused and appeared unsure which way to react. There was push-me/pull-you pressure being exerted on stock prices from two distinctly different camps.
The optimists’ case was that all this recession-pointing data took a lot of pressure off the Fed to keep raising rates and that the absolute worst case for the next meeting in early May would be one final quarter of a point hike (71% probability, see FEDWATCH TOOL below) but with a pause and no increase at all still very much on the table (29% probability). Good for stocks.
However, an increasingly common narrative is that it’s economic data, not the banking situation and not the Fed, that will mostly determine whether the next 10%-15% move in the S&P 500 is higher or lower.
That’s because the major unknown for investors is whether the economy falls into a recession or not. It’s not how much more the Fed hikes rates (we know it’s not much more, if at all), and it’s not whether the government will rescue depositors in the case of other regional bank failures (we pretty much know that they will).
On that basis, the pessimists’ case is that bad news about the economy is now simply bad news which means likely lower corporate earnings and less tolerance for risk by investors. Bad for stocks.
We then had the rather strange and unusual situation on Friday of the all-important Jobs Report coming out at 8:30am ET on a day when the stock market was closed for a holiday and therefore unable to immediately react.
Payrolls grew by 236k in March, totally in line with estimates and below the upwardly-revised 326k in February. The unemployment rate somewhat surprisingly ticked lower to 3.5% and average hourly earnings rose 0.3%, pushing the year-on-year increase to 4.2%, the lowest level for that reading since June 2021.
Although still elevated by historic standards, this increase in jobs was the smallest of the entire post-pandemic economic recovery and definitely appeared to fall into a “Goldilocks” sweet spot of not too hot (which could embolden the Fed to definitely keep raising rates) and not too cold (stark evidence of a recession).
OTHER NEWS ..
Layoffs soaring .. US employers have recently dealt with higher borrowing costs and moved to reduce expenses by increasingly laying off staff, according to executive coaching firm Challenger, Gray & Christmas.
US employers announced 89k job cuts last month alone, a 15% increase from February and a rise of over 300% compared to March 2022, continuing a trend seen all year so far. For Q1 2023, layoff announcements skyrocketed by almost 400% from Q1 2022.
Technology workers have been the hardest hit, with 38% of all layoffs so far this year coming from that sector. Over 100k employees have been laid off from tech firms so far in 2023, a massive jump from the same period last year.
Poor reward .. The reward offered for owning stocks over bonds hasn’t been this small since before the 2008 financial crisis. This reward is known as the Equity Risk Premium (ERP); the gap between the S&P 500’s earnings yield and that of the 10-year Treasury Bond currently sits at around 1.6 percentage points, a low not seen since now-notorious convicted crypto shiller Soulja Boy first suggested that we crank that in 2007. That is well below the average gap of around 3.5 percentage points since then.
The reduction is a potential challenge for stocks going forward. Owning stocks needs to promise a meaningfully higher reward than owning bonds over the long term. Otherwise, taking the higher risk of owning equities relative to holding risk-free US Treasury bonds would begin to stop making sense from a risk/return standpoint and liquidation of stocks for the purchase of bonds would likely accelerate, driving stock prices lower.
UNDER THE HOOD ..
Only 25% of the stocks in the S&P 500 are currently outperforming the index. Read that again, it’s a remarkable statement. This low level has only been reached a few times in history. This is the very definition of a market (as determined by a headline index) being propped up by just a relative handful of very large (mostly tech or tech-adjacent) stocks.
This degree of concentration is confirmed by the fact that the smaller the capitalization index, heading down from Mega Cap to Large Cap to Mid Cap to Small Cap to Micro Cap, the weaker the price performance. This makes uncomfortable reading for the bulls as sustainable turnarounds have historically been led by stocks on the smaller end of the capitalization spectrum.
Prime technical indicators getting back towards news highs would be a minimum requirement for an improved environment, but that is simply not what is in place today. The probabilities therefore favor a continuation and even a possible acceleration of the primary trend which is still a downward one, which could still possibly take prices back down to, and maybe even break through, those lows of October last year.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
AVERAGE 30-YEAR FIXED RATE MORTGAGE ..
6.28%
(one week ago: 6.32%, one month ago: 6.65%, one year ago: 4.72%)
Weekly data courtesy of: FRED Economic Data, St. Louis Fed as of Thursday of last week.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months) ..
↑Bullish: 33% (22% a week ago)
↔ Neutral: 32% (32% a week ago)
↓Bearish: 35% (46% a week ago)
Net Bull-Bear spread .. ↓Bearish by 2 (Bearish by 24 a week ago)
Weekly data courtesy of: American Association of Individual Investors (AAII).
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Weekly sentiment survey participants are usually polled on Tuesdays and/or Wednesdays.
FEDWATCH TOOL ..
What are the latest market expectations for what the Fed will announce re: interest rate changes (Fed Funds rate) on May 3rd after its next meeting?
↔ No change .. 29%
(one week ago: 52%, one month ago: 0%)
↑ 0.25% increase .. 71%
(one week ago: 48%, one month ago: 61%)
How does the market view the probability that interest rates (Fed Funds rate, currently 4.875%) will be at/above (≥) the following rates at year-end?
≥ 4.00% .. 95%
(one week ago: 96%, one month ago: 100%)
≥ 4.25% .. 74%
(one week ago: 77%, one month ago: 100%)
≥ 4.50% .. 37%
(one week ago: 46%, one month ago: 100%)
≥ 4.75% .. 10%
(one week ago: 14%, one month ago: 99%)
Data courtesy of CME FedWatch Tool. Calculated from Federal Funds futures prices as of market close on Friday.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com:
- Last week’s best performing US sector: Healthcare (two biggest holdings: UnitedHealth Group, Johnson and Johnson) - up 4.4% for the week
- Last week’s worst performing US sector: Industrials (two biggest holdings: Raytheon Technologies, UPS) - down 2.2% for the week
- The proprietary Lowry's measure for US Market Buying Power is currently at 161 and fell by 10 points last week and that of US Market Selling Pressure is now at 160 and rose by 9 points over the course of the week.
- SPY, the S&P 500 ETF, remains above its 50-day and 90-day moving averages and its long term trend line. SPY ended the week 14.4% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, remains above its 50-day and 90-day moving averages and its long term trend line. QQQ ended the week 21.3% below its all-time high (11/19/2021).
- VIX, the commonly-accepted measure of anticipated stock market risk and volatility (often referred to as the “fear index”), implied by S&P 500 index option trading, ended the week 0.3 points lower at 18.4. It remains below its 50-day and 90-day moving averages and its long term trend line.
ARTICLE OF THE WEEK ..
Trading options as a retail investor is one of the quickest and most efficient ways to destroy your wealth by basically handing it over to Wall Street market makers. The data is in.
EXPLAINER: FINANCIAL TERM OF THE WEEK ..
A weekly feature using information found on Investopedia to try to help explain Wall Street gobbledygook (may be edited at times for clarity).
ORGANIZATION OF PETROLEUM EXPORTING COUNTRIES (OPEC)
The term Organization of Petroleum Exporting Countries (OPEC) refers to a group of 13 of the world’s major oil-exporting nations. OPEC was founded in 1960 to coordinate the petroleum policies of its members and to provide member states with technical and economic aid. OPEC is a cartel that aims to manage the supply of oil in an effort to set the price of oil on the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries.
OPEC, which describes itself as a permanent intergovernmental organization, was created in Baghdad in September 1960 by founding members Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Apart from these five founding members, other current members of the cartel are:
Libya (joined in 1962)
United Arab Emirates (1967)
Algeria (1969)
Nigeria (1971)
Gabon (1975)
Angola (2007)
Equatorial Guinea (2017)
Congo (2018)
It is notable that some of the world’s largest oil producers, including Russia, China, and the United States, are not members of OPEC, which leaves them free to pursue their own objectives.
The headquarters of the organization are in Vienna, Austria, where the OPEC Secretariat, the executive organ, carries out OPEC’s day-to-day business.
According to the OPEC website, the group's mission is “to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic, and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry.”
The organization is committed to finding ways to ensure that oil prices are stabilized in the international market without any major fluctuations. Doing this helps keep the interests of member nations while ensuring they receive a regular stream of income from an uninterrupted supply of crude oil to other countries.
There are several advantages of having a cartel like OPEC operating in the crude oil industry. First, it promotes cooperation among member nations, helping them alleviate some degree of political hostilities. And because the organization's main goal is to stabilize oil production and prices, it is able to exert some influence over production from other nations.
OPEC’s influence on the market has been widely criticized. Because its member countries hold the vast majority of crude oil reserves (80.4%, according to the OPEC website), the organization has considerable power in these markets. As a cartel, OPEC members have a strong incentive to keep oil prices as high as possible while maintaining their shares of the global market.
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