Yesterday, although the S&P 500 stumbled into the close, eight of the eleven sectors finished higher, led by Materials and Financials. The index was higher most of the session but gave up with less than two hours of trading. It was unable to withstand increasing losses in Communication Services and Technology.
S&P 500 Index | -0.54% | |
Communication Services XLC | -1.34% | |
Consumer Discretionary XLY | +0.12% | |
Consumer Staples XLP | +0.43% | |
Energy XLE | +0.19% | |
Financials XLF | +1.28% | |
Health Care XLV | -0.25% | |
Industrials XLI | +1.05% | |
Materials XLB | +1.34% | |
Real Estate XLRE | +0.49% | |
Technology XLK | -2.42% | |
Utilities XLU | +1.41% |
Tug-of-War
It was always going to be a push-pull kind of session, where selling in Technology weighed on the NASDAQ. Rotation into value buoyed the S&P 500 initially and gave a Herculean boost to the Dow Jones Industrial Average.
In the end, it seems as if panic shifted the selling pressure and mass exodus from those once sizzling stocks. I think many are over-sold. But broken stocks are vulnerable, especially as the crowd is moving in the other direction.
Value continues to steamroll overgrowth, which has enjoyed a three-year run that made the last two weeks almost unbelievable, except it was bound to happen at some point. The main issue continues to be a weakness in mega-cap names, and now each sell triggers more selling. The good news for equity investors is money isn’t leaving stocks. And it’s critical for all sectors.
Value versus Growth: Two Week  |
Value versus Growth: Two Week  |
Inflation Expectations
According to the New York Federal Reserve, expectations for inflation climbed to 3.10%. It is the highest level since July 2014. Back then, inflation expectations were declining, which is not the case this time around.
To see the chart, click here.
Wealth Effect
In the aggregate, household wealth accumulation reflects two factors: saving from current income and changes in the valuation of previously owned wealth. -NY Federal Reserve |
So much of the Federal Reserve models revolve around consumer expectations of inflation and the so-called wealth effect. Fed Chair Powell and Treasury Secretary Yellen have pushed Congress to “go big,” knowing the rescue plan was full of pork and political payoffs, all in the hopes of maximizing money sent to households.
It underscores the limits of Fed money printing. It has a history of getting bogged down at banks and with large institutions rather than American households. Much of the prior fiscal bills during the age of Covid-19 have been saved or used to pay down bills. If Powell thought people were reluctant to spend before, he should have checked the mood with the recent hammering of Tesla (TSLA) shares.
The Fed needs the wealth effect to be alive and well, and it’s moving in the opposite direction. I continue to see Powell blinking sooner rather than later. He had the perfect storm to unleash animal spirits from the ground spring of the wealth effect. Now, that’s slipping away.
Wages
Wages have been higher. Last year came with a caveat, considering all the lost jobs in leisure and retail were the lowest-paying occupations.
All the pieces are in place. The Fed has to rescue the market. Not as a mandate, but to keep the rest of their obligations intact.
To see the chart, click here.
Portfolio Approach
We added three positions to Consumer Discretionary, two yesterday and one this morning. We took profits in Industrials.
Today’s Session
Ten Year Relents – For Now
Equity futures, particularly stocks on the NASDAQ are cheering the pullback in the ten-year bond yield, but I’d like to see it get below the trendline.
Still, if the argument for panic was the velocity in which yields have risen, a seven-basis point pullback helps to erase the psychological angst.
The market is also getting a boost from the new growth modeling at OECD, which sees global growth now at 5.6% from the last assumption of 4.2%. The United States 2021 growth is seen growing at 6.5% from 3.2%.
To see the chart, click here.
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