Apr 24 • 7M

Tough Love.

04/24/2022. Catch up with all you need to know from the entire previous week in financial markets in less than ten minutes every Sunday by reading or listening to my weekly market review.

 
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In Angles, Anglia Advisors founder Simon Brady CFP® talks about financial markets. This podcast is informational only and should not be used as the sole basis for making any investment decision.

In the first part of last week, the stock market indexes continued on their merry way, skipping through the meadow picking wildflowers, finding reasons to be cheery. The mask mandate got struck down, oooooh - let’s buy some airline and cruise stocks! Russia is having difficulties in Ukraine, this whole conflict will be over soon, yaaaaay! Earnings seemed pretty decent (even if they were reporting on a quarter that still had all-time low interest rates in place), let’s buy some Proctor & Gamble and Tesla. Americans are still spending money like it’s water, so let’s back up the truck and load up on some Macy’s and JC Penney. It’s easy, this stock picking game, isn’t it?

It’s almost like Fed Chair Jerome Powell then decided that enough was enough, that some tough love was in order and (metaphorically) angrily barked at the market; “Hey, do you not see what is going on here? Do you think we are not serious about raising interest rates and ending virtually-free money for corporations worldwide? That we are going to back down? Perhaps if we started talking about at least a 0.50% or maybe even a 0.75% increase in interest rates at our next meeting on May 4th and then again at subsequent meetings to get to a Fed Funds rate of 3% or more by Christmas, that might get some of your damn attention!”

What he actually said was a little more diplomatic, but the message was the same; “It is appropriate in my view to be moving a little more quickly … I also think there’s something in the idea of front-end-loading ..” the removal of stimulus. Some of his foot soldiers, Federal Reserve Bank of St. Louis President James Bullard, Chicago President Charles Evans and San Francisco’s Mary Daly all sounded incrementally more intent on aggressively raising interest rates, also floating the idea of imminent increases of as high as 0.75% as a possibility.

This is just a matter of two or three weeks after everyone just accepted that 0.25% would be the extent of any rate increase. The markets immediately priced in an increase of less than 0.50% at the next meeting in the first week of May at just a 4% probability.

The scales seem to suddenly fall from investors’ eyes as it seemed to dawn on them that the Fed really did mean what they have been saying for months. Big gains from early in the week swiftly turned to heavy losses in the second half especially among the already-crushed tech/no-profit growth stocks, the “2020 darlings”, which seem to all be embarking on yet another major leg lower. It’s truly astonishing how far many of these have free-fallen and how they continue to fall even further.

But we also saw almost a 1,000 point skid in the “boring” Peloton-free, Paypal-free Dow Jones Industrial Average index on Friday - its worst single day decline since some of the darkest days of COVID back in October 2020.

The downward pressure was exacerbated by Netflix stock going up in smoke as an expected increase of over 2m subscribers in Q1 2022 suddenly became a fall of 200k when the data was released and the firm announced that it expects to lose over 2m more subscribers over the current quarter. This resulted in a mind-boggling Facebook-like collapse of about 38% of the value of the company in just 40 minutes on Wednesday morning and ending the week even lower than that.

As recently as November 17th last year, Netflix was valued at over $300 billion. About two weeks ago it was worth about $173 billion. As of now, it is valued at less than $96 billion.

So that makes two of the mega cap constituents (Facebook/Meta and now Netflix) of the small cohort of stocks that has acted as the momentum engine for the headline indexes while the average stock has been battered that have been crushed by bad earnings news. The size of the cavalry is getting smaller now and if the dominoes keep falling and the likes of Microsoft (MSFT) or Apple (AAPL) become infected, then things might turn really ugly with the indexes which are essentially built on sand right now. Both those stocks are sliding towards historically important support levels. Watch them closely.

Powell’s comments also sent the 10 Year Treasury rate higher on its seemingly inevitable march to 3.0% and beyond. Which brings us to the super-important question; why are market interest rates (which may react to Fed rates but are not controlled by the central bank but rather by major financial market participants) like the 10 year Treasury rising and what does this really mean? Unfortunately, the answer does not read like a fast-paced thriller, but please bear with me for this is important.

Market rates rise when bonds get sold. Bonds are under assault now for a number of reasons; the trajectory of where the Fed is taking short term interest rates is obvious and investors don’t want to pick up pennies from in front of a steam roller.

But another big factor is that the two largest sources of demand for US bonds are both rapidly drying up at the same time, 1) the Fed aren’t buying them any more as a matter of policy, and 2) foreign buyers don’t need to buy them any more as their own interest rates are finally high enough (in some cases, finally moving from negative to positive!) to now keep their investments domestic rather than having to go to the US.

I personally think that investors might be unpleasantly surprised at how low bond prices may go before they’re finally considered “done”. After all, most of us have packed the non-stock portion of our portfolios with bond funds of some kind, a strategy that worked perfectly well for 40 years. Of course, we won’t know what this low point is until months after it happens. And by then, it’ll be pretty useless information.

The fact that the 10 year rate is rising so much faster than the 2 year rate (the inverted yield curve seems an age ago) shows that the market believes that central banks (worldwide, not just in the US) could well lose their fight with inflation, which could lead to extreme rate rises in the future as a last-ditch effort. So the movement of the 10 year Treasury rate is sending out a very clear message that investors need to heed.

Inflation or recession? Pick your poison. The 2s/10s relationship basically tells you what Mr. Market thinks is the state of play in that battle.

The higher the 10 year moves relative to the 2 year, the more the market believes the problem of inflation is going nowhere any time soon as the central banks are getting their asses kicked in their attempts to bring it down. If it turns back down, however, and the gap between the 2 year and 10 year begins to narrow and maybe even converge and cross over, that means that market fears about slowing growth and possible recession are back on the agenda.


Other News:

Not much global optimism .. The World Bank slashed its global growth forecast for 2022 to 3.2%, down from 4.1%. The bank said the cut was mainly due to the impact of Russia’s invasion of Ukraine. The largest single factor in the reduced growth forecast was from a projected economic contraction across Europe and Central Asia. Earlier this month, the World Bank projected that Ukraine’s annual GDP would sink by 45% as a result of the carnage on its soil and that Russia’s GDP would fall 11.2% because of sanctions. 

The International Monetary Fund mostly agreed, once again cutting its own 2022 and 2023 economic growth outlook, this time to 3.6% for both years, amending its already-lowered expectation from back in January of 4.4% for this year and 3.8% next year.

Mixed bag for housing .. The average U.S. home price reached a record $375,300 in March, up 15% from year earlier and a new record high. The jump in prices came as sales of previously-owned homes actually declined in March, falling 2.7% from the prior month and 4.5% from a year earlier, likely not unrelated to 30 year mortgage rates now sitting above 5%. The somewhat-flawed Housing Starts number jumped to 1.79 million, experiencing its biggest monthly increase since Shakira assured us all that her hips don’t lie in summer 2006.

Elon, Twitter, blah blah blah .. I have made the executive decision not to provide any further oxygen to this ridiculous theatrical nonsense. If you want to get your fix of deep, informed analysis of this really important story then check out TMZ’s Instagram feed or watch a couple of well-researched and educational videos by the financial experts on Fin-Tok.

In the immortal words of Ken Jeong last week; “Yeah, I’m done”.


Under The Hood:

During the recent rally from short-term oversold conditions, most of the the strong did get stronger (with a couple of high profile exceptions), but the weakest stocks showed no sign of recovery whatsoever. Indeed, indicators of this subset continue to show that half of all stocks remain in traditionally defined bear market territory (20% below their highs) and the number of stocks in this situation is actually growing. This is at the same time that the S&P 500 index got back to within a few percent of its all-time high early last week, driven by a tiny number of mega-cap names and a rush to Energy and defensive sectors like Utilities, Materials, Consumer Staples etc.

This evident market selectivity is a cause for concern and while short-term oversold conditions will likely continue to lead to periodic bounces from time to time, the intermediate term remains fraught with risk.

Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.


The upcoming week’s calendar .. 

The busiest week of first-quarter earnings season is coming up. A whopping 165 S&P 500 companies are scheduled to report their results for Q1 2022 next week.

Most of the big guns will be among the headliners: Apple, Microsoft, Alphabet-Google, Amazon and Meta-Facebook as well as lesser entities such as Coca-Cola, McDonalds, Exxon-Mobile, UPS, Ford, Paypal, Pepsico, Intel, Boeing, Qualcomm, GE, Mastercard, Visa, General Motors, 3M, T-Mobile US, Caterpillar, Warner Bros, Comcast, Activision Blizzard, Chipotle and (drum-roll) .. Twitter!

Notable economic data out next week includes the first advance estimate of Q1 US GDP (expected to come in at 1.7%,vs 6.9% in Q4 2021) and Consumer Confidence Index for April.

====

THE WEEK:

Relatively speaking ..


- Last week’s best performing US sector: Real Estate (two biggest holdings: Prologis, American Tower) - up 1.2%

- Last week’s worst performing US sector: Communication Services (two biggest holdings: Facebook, Google) - down 7.7%

- The NASDAQ-100 once again significantly underperformed the S&P 500

- International Developed Markets fell the least, followed by US Markets with Emerging Markets bringing up the rear

- Small and Mid Caps again finished the week ahead of Large Caps

- Growth massively underperformed Value

Technical corner .. 

- The proprietary Lowry's measure for US Market Buying Power fell by 12 points while that of US Market Selling Pressure rose by 9 points

SPY, the S&P 500 ETF is just below both its 50-day moving average and its 90-day and is also below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 45**. SPY ended the week 10.9% below its all-time high (01/03/2022)

QQQ, the NASDAQ-100 ETF, is below both its 50-day moving average, and its 90-day and is also below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 41**. QQQ ended the week 19.4% below its all-time high (11/19/2021)

** RSI readings below 30 indicate an over-sold condition, possibly primed for a technical short term rebound and above 70 is considered over-bought, possibly primed for a technical short term decline.

Industry Groups and Sectors Showing Strongest Chart Trend Patterns: Aerospace, Metals, Oil & Gas, Publishing, Retail-Food, Retail-Department Stores**, Utilities

** Newly added last week


ARTICLE OF THE WEEK:
Each week I'll link to an interesting article I have come across recently.

This week: The hottest, smartest investment out there right now is not a cryptocurrency, weed stock or NFT. It just might be a particular type of US government bond.


FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia (may be edited at times for clarity).

PRICE/EARNINGS RATIO (P/E RATIO)

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

P/E ratios are used by investors and analysts to determine the relative value of a company's shares in an apples-to-apples comparison. It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time. P/E may be estimated on a trailing (backward-looking) or forward (projected) basis.

P/E Ratio = Earnings per share / Market value per share​

To determine the P/E value, one must simply divide the current stock price by the earnings per share (EPS).

The current stock price (P) can be found simply by plugging a stock’s ticker symbol into any finance website, and although this concrete value reflects what investors must currently pay for a stock, the EPS is a slightly more nebulous figure.

EPS comes in two main varieties. TTM is a Wall Street acronym for "trailing 12 months". This number signals the company's performance over the past 12 months. The second type of EPS is found in a company's earnings release, which often provides EPS guidance. This is the company's best-educated guess of what it expects to earn in the future. These different versions of EPS form the basis of trailing and forward P/E, respectively.

The price-to-earnings ratio (P/E) is one of the most widely used tools by which investors and analysts determine a stock's relative valuation. The P/E ratio helps one determine whether a stock is overvalued or undervalued. A company's P/E can also be benchmarked against other stocks in the same industry or against the broader market, such as the S&P 500 Index.

Sometimes, analysts are interested in long-term valuation trends and consider the P/E 10 or P/E 30 measures, which average the past 10 or past 30 years of earnings, respectively. These measures are often used when trying to gauge the overall value of a stock index, such as the S&P 500, because these longer-term measures can compensate for changes in the business cycle.

The P/E ratio of the S&P 500 has fluctuated from a low of around 5x (in 1917) to over 120x (in 2007 right before the financial crisis). The long-term average P/E for the S&P 500 is around 16x, meaning that the stocks that make up the index collectively command a premium 16 times greater than their weighted average earnings.


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This material represents an opinionated assessment of the market environment based on assumptions at a specific time and is always subject to change. It is not intended to act as a forecast of future events or a guarantee of any future results. The material is insufficient to be uniquely 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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