Stocks stage an intraday rally, Fed behind the curtain

• Stocks stage an intraday turnaround.

• Treasuries - 7’s, 10’s, 20’s and 30’s all kiss and pierce 3%.

• The FED goes behind the iron curtain…details tomorrow at 2 pm.

• Morgan Stanley calls for S&P 3800 or 8% lower from here.

• Try the Vegetable Paella.

Good Tuesday morning…. Stocks began the month a bang!  Early morning futures suggested higher stock prices and then the bell rang – and stocks advanced, pulled back, advanced again and then plummeted after the latest macro data point – ISM Manufacturing showed an unexpected slowdown – coming in at 55.4 vs. the expectation of 57.6 – and that coincides with the latest GDP report that went negative last week and then the 7’s, 10’s, 20’s and 30 yr. treasury’s all pierced 3% - adding new pressure on stocks…..and at one point it felt like a ‘free fall.

Stocks put in NEW lows at about 2:30 pm…. sending the media into a ‘meltdown frenzy’…Morgan Stanley running with the headline that we should not be surprised to see the S&P trade as low as 3800 – if things get bad…. saying that
“Investors have very few places to hide…. the market has been so picked over at this point, it is not clear where the next rotation lies.  In our experience, when that happens, it usually means the overall index is about to fall sharply with all stocks falling in unison.”

Well, that is not good……

And then when it felt like the bottom was about to fall out – something funny happened on the way to the forum…….the algo’s suddenly found ‘value’ in stocks and initiated all kinds of BUY orders in large mega cap names that then enveloped the broader market….all the excitement starting at about 3:30 pm…..by the time the closing bell rang – all the indexes that were well into negative territory went positive, leaving investors scrambling.  The Dow added 85 pts, the S&P up 24 pts, the Nasdaq added 200 pts, the Russell up 18 and the Transports ahead by 45 pts.

Now – which sectors do you think found the most action?  Bingo – you guessed right…. Communications – XLC rose 2.8%, Retail – XRT rose 3%, Home Builders – XHB added 2.2%, Semiconductors – SOXX rose 3.4%, Consumer Discretionary – XLY up 1.5%....do you understand why?  Because all of these industries (along with others) are all down better than 20% ytd…. They are the industries that have individual names that have gotten slammed – many of them down more than 30% ytd….so hello!!!  When the algo’s kick in – where do you think they are going to look for ‘opportunity’?

Next -

As noted, – we saw 3% yields across a range of treasuries….and that was not helping the tone early on….as investors continue to try and understand what is next for the FED. Look, it is a jittery market – that is clear….and the jitters will continue until we get clarity from the FED.

Now tomorrow we should get something….50 bps for sure, but what will be the guidance?  What will Jay say about the next move and the move after that.  IF inflation is his prime concern now (his words not mine) – then it will be difficult to see how he cannot continue down the road of higher rates....because in order for him to 'tame' inflation he will have to raise rates at a faster pace and in larger increments to get to where he needs to be….which is most likely higher than the current published inflation rate (which is 8.5%)….Capisce?  And when the latest elevated PPI (producer price index) report (+11.2%) makes its way through to the CPI (Consumer price index) then investors will be wishing that inflation were ‘only 8.5%’.   The next CPI report is due on the 11th….and right now – when I look at the estimate on my Bloomberg – guess what?  There is not one yet…. the column is blank…. which means only one thing.

So, all of this volatility should not be a surprise – let me remind you about the math – that I put in yesterday’s note…. because this is nothing more than a math problem.  As the mathematical inputs change, the answer must change – and then valuations change and then investors need to decide what is the proper multiple that works for that changed environment.  As interest rates rise and as the economy slows, as earnings come under pressure, as the macro data weakens – the multiple that investors are willing to pay for stocks declines…It is not rocket science, it is just math. 

The current 2022 full year S&P P/E multiple estimate 18.2 x’s …which is down from year end 2021 of 24.6 x’s and the 2023 estimate is 16.6 x’s…  Now, yes those can and will change (in either direction) as we move through the year – but you do see the trend, right?   And as interest rates and inflation move higher – those multiples will come under pressure which means prices will come under pressure as well – that is all.

So here is the trick for you……in that rising rate, inflationary environment – what do you do?  Well, that depends on who you are?  That depends on your age, your risk profile, your assets, your job, your family, your needs, etc.….which is why it is always hard to just have a blanket answer to that question…..if I were 30, it would be one answer, but I am 60, so the answer is different……again – it’s a MATH problem….my inputs are different than yours – so my answer will be different than yours.  Which does not mean my answer is correct and your answer is incorrect – they are BOTH correct!  Call me to discuss.  

This morning – US futures are teasing the unchanged line…. Dow futures up 21, the S&P’s up 3, the Nasdaq up 7 and the Russell up 2…. today begins the FED negotiations…. they are behind the iron curtain and unless someone ‘leaks’ the discussion – we will not be certain until we are…and that is tomorrow at 2 pm.  Now, what will be of key interest is how the FED will unwind the $9 trillion balance sheet…. that is more important than what we hear about a 50-bps hike.

Eco data today includes Factory Orders of 1.2%, Durable Goods of +0.8%, Cap Goods Ordered of +1% and the JOLTS Job Opening report of 11.2 million available jobs…

10 yr. treasury yields are now pushing 3+%.... but continue to trade on either side of it…. My sense is that once we get the definitive news tomorrow – yields will remain above 3% from here on out…. It is hard to see how they will not.

Oil is trading at $104/barrel up from yesterday’s $102/barrel as the European Union firmed up plans to choke Russian supply – Germany the long holdout now saying they are prepared to back an immediate embargo on Russian oil.  Record US exports of oil are also leaving supply voids here in the US and that is also causing prices to spike higher.  Watch for today’s release of US inventory by the API (American Petroleum Institute) for last week. And then tomorrow we will get more data from the Energy Information Administration. The call is for both of these reports to show a decline in crude of 1.2 million barrels and a decline in diesel and heating oil inventories of 1.2 million barrels as well.  Gasoline stockpiles are expected to decline by 300k barrels.  These declines will put upward pressure on prices.

Look – at the end of the day - markets were in an oversold position – which does not mean they cannot go lower; it just means that it can and remain volatile for a while…. And you can see that if you look at the VIX (fear index) which has surged by 85% in the last week.  Now a retreat in the VIX will see stocks advance and it would not be a surprise to see that happen if we do not get any surprises from the FED.   

The S&P closed the day at 4155 after testing as low as 4062 – putting a new intraday low - piercing the February low of 4114…….Surges and selloff will be the name of the game for now…and if the mood turns positive, I would expect to see stocks advance considerably – just because they are in an ‘oversold’ position and any sense of relief will produce a ‘relief rally’. 

Vegetable paella 

Like traditional paella – this dish is easy to make, and you can easily increase the amount of ingredients to feed a large number of people.  It features no meat or fish is only veggies and rice – made with the traditional paella seasoning.  Try it – You will like it.

If you do not have a Paella Pan – no worries…you can use a large nonstick frying pan to accommodate this typical Spanish rice dish.

You will need: Olive oil,   1 red & 1 yellow bell pepper, chopped,  6 scallions thinly sliced,  5 cups vegetable broth,   3 cloves of garlic – minced,   1 tsp. crumbled saffron threads,   1 cup short-grain white rice – like Goya, or Vitarozz,  3 cups broccoli florets,   1 cup fresh (or frozen) baby peas,   1 cup halved grape or cherry tomatoes,   12 pitted green olives – cut in half,  12 pitted black olives – cut in half,   1 lemon, cut into wedges,   ¼ cup chopped fresh parsley.

Begin by heating olive oil in the large nonstick skillet over medium heat.  Add bell peppers, garlic and scallions, cook 5 minutes. Next add the broth.   Stir in saffron, bring to a boil.  Add rice and stir - reduce heat to medium-low, cover and cook for about 10 mins.

Next – add the broccoli, peas, tomatoes, and olives over rice. Cover, and cook for about another 10 mins…or until rice is fluffy and tender. Remove from heat.  Let rest, covered, 5 minutes.  Taste and adjust for seasoning.   You can present this on a large family style platter garnishing with lemon wedges and chopped parsley.