One could look at the price action on Thursday and see the disappointment. I’m not sure this is the take-out. I see the higher gap opening for the S&P 500 for a second day in a row. I see the heavy selling in the afternoon, with the brief short cover in the closing bell…for a second day in a row. The fact is that over the past week and this week, which spans eight trading sessions, six of the openings (including all morning on the East Coast), regardless of direction, were indeed nothing more than fakes. Have you ever felt like we were being played? Like a Stradivarius?
Let it sink in. Stock markets reversed quite dramatically on Monday… from scary lows. The S&P 500, Nasdaq Composite and Dow Industrials, all at the close that day, had recovered to last Friday’s low (and closing level). This has put traders and investors in the position of looking for what we call confirmation of this Monday night rally, or its outright failure. Over the past three sessions, there has been a lot of give and take, a lot of volatility, but neither confirmation nor failure of what Monday offered.
What would confirmation look like? Nothing’s easier. We would need the major indices, even just one (S&P 500 or Nasdaq Composite; the Dow Industrials is too narrow and not tracked by enough money to count here), but preferably both, to rally above Monday’s close on high trading (advanced majority) volume. Failure would be a close below Monday’s lows. The S&P 500 returned three consecutive red daily candles, but each session’s low was found to be slightly higher than it had been the previous day. Here is what it looks like….
Not only that, but the highest volume day of the week so far has been the “up” day. While it may not look like it, these are near-term technical positives that could potentially be part of what we call “basis building” if Monday’s lows continue to hold and if we get this confirmation sought on the upside.
The Nasdaq Composite offered us a bit more volatility, leading the large caps in both directions, but as you see, even with the Nasdaq’s higher beta, there is still no confirmation or failure.
Incredibly, traders and investors had to weather a week that contained a much-anticipated policy statement from the Federal Open Market Committee (FOMC) and a slew of high-profile large-cap quarterly results, including what are probably the two most important. (for capital flows) of any earnings season, Microsoft (MSFT) Tuesday night and Apple (AAPL) last Thursday night. Both companies have done a tremendous job tackling supply chain and logistics issues and both have performed wonderfully on almost every level.
Oh, the market also had to overcome some weird headline-level macro data. Let’s take a look, shall we?
Economic stunner
On Thursday morning, the Bureau of Economic Analysis released its first estimate of fourth-quarter GDP. Let’s take an inside look at the seasonally adjusted annualized fourth quarter economic growth of 6.9% that crushed expectations that were mostly in the 5% to 5.5% range. We all knew that growth had slowed significantly in December and we expected that to have a bigger impact on the stock than it did.
There is no doubt that personal consumption (+3.3%) lagged in the quarter while consumption of goods stagnated completely (+0.5%). Consumption of services (+4.7%) was stronger than that of goods for a second consecutive quarter. Public spending was negative in the fourth quarter. Federal spending (-4.0%) contracted, as did state and local government spending (-2.2%). Exports were strong (+24.4%), but so were imports (+17.7%) as cross-border trade picked up during the holiday season. Gross domestic purchases increased by 14%.
The most interesting row, however, is Row 7 of Table 1. Gross Private Domestic Investment, which covers a lot, including buildings, intellectual rights, business expenses, and more. What this line, which printed up 32% for the quarter, was mostly made up of for the past three months is inventory building.
This means that retailers, wholesalers and manufacturers, knowing there were supply chain and logistics issues, were proactive in stocking up on what they could stock up ahead of the holidays. Do you know how much of that 6.9 percentage point impression was attributed to inventory buying alone? That’s right – 4.9 percentage points. The US economy even grew by 2% excluding inventories in the fourth quarter.
Now, of course, it’s unfair to make some kind of sweeping statement like that, diminishing fourth quarter economic performance. There will always be a build-up of inventory and this counts as economic activity, it promotes velocity. That said, it also puts an asterisk on the fourth quarter of 2021 and very likely puts overall economic growth at risk going forward.
What we don’t have good numbers for is how quickly this inventory was compiled. Did any of them miss the market? We know retail sales haven’t been particularly strong. We know that some items become obsolete if not used quickly. Will demand change as interest rates rise and fiscal support for households and businesses declines? Finally, will increased stockpiling persist as a routine business practice as global logistics remain challenging? Or does increased inventory suppress demand for such activity over the next six months? I guess we’ll know more when we know more. I view elevated fourth quarter “growth” as a direct threat to economic performance in the first half of 2022, and I hope our voting members of the Federal Open Market Committee will understand that this is not the type of growth that ignites a more hawkish green light. political position beyond what has been reported.
On that note…
As the Bureau of Economic Analysis put fourth-quarter GDP data on tape, the Census Bureau simultaneously released December data on durable goods orders. To say the least, December was horrible. New orders, which were expected to contract, were below those expectations, at -0.9% month-on-month. Excluding transport orders, the number fluctuates at +0.4% month-on-month, which reaches the consensus. The whispers, however, were higher. Excluding Defense, the figure is displayed at +0.1%. It was a serious failure. The street was looking for 1.0%+ on this metric. Overall, orders for core capital goods, which are considered by economists to be a proxy for private sector business spending, posted a 0.0% month-on-month performance. That’s right, flat. Expectations were 0.4%. Some economists wanted more. No one I follow was below 0.3% for this line. In other words, the Omicron variant of the SARS-CoV-2 virus, which only appeared in South Africa around Thanksgiving, had a considerable negative impact on economic activity at the end of the year.
fair warning
Beyond the stock markets, I see two markets immediately affected by the Fed Chairman’s press conference on Wednesday afternoon, which was seen as considerably more hawkish than was the actual statement or the additional page released that aimed to set out some ground rules for the possible implementation of quantitative tightening, so that “we” would not be surprised by the measures taken.
The first relates to US dollar valuations. I have received several questions from readers regarding inconsistent or in some cases even falling commodity prices since Wednesday afternoon. The U.S. Dollar Index (DXY) and the Wall Street Journal Dollar Index, which measure home team fiat currency against a basket of reserve currency peers, hit their highest levels since the start of summer 2020 on Thursday and continued to trade higher overnight.
This obviously puts US exporters and US multinationals in a more difficult situation at the start of 2022 than before. It also puts countries with emerging and frontier economies and foreign companies that have borrowed in US dollars in a difficult situation. In short, this is really not a positive development either at home or abroad. As global markets price in future rate hikes in both the US and UK, the Bank of Canada has been hesitant, while tighter monetary policy in the Eurozone is certainly not a certainty. . Don’t even look at the Bank of Japan or the People’s Bank of China.
Forward-looking US policy is also forcing some flattening of the US Treasury yield curve. While the 3-month/10-year yield spread is only starting to shrink and remains almost healthy…
…. the difference between the yields of the Two-Year Note and the 10-Year Note …
…. is now at its narrowest since October 2020. Not quite super unhealthy yet compared to where we’ve been in recent years, but definitely in a dangerous direction. Remember that these two gaps reversed in August 2019. While it’s true that none of us foresaw the pandemic, the United States (and the entire planet) entered an economic contraction early of 2020. Both gaps have always been key indicators of brewing issues, and remain so.
Note to readers: I ran into the limits of time and space. I will have to give Apple (which I have to cover for you) its own room at Real Money and Real Money Pro. I will see you soon.
Economy (all Eastern times)
08:30 – Personal income (December): Expected 0.5% m/m, Latest 0.4% m/m.
8:30 a.m. – Consumer spending (December): Expected -0.5% m/m, Last 0.6% m/m.
08:30 – PCE Price Index (December): Expected 5.8% y/y, last 5.7% y/y.
08:30 – Core PCE Price Index (December): Expected 4.8% y/y, latest 4.7% y/y.
08:30 – Employment cost index (Q4): Waiting for 1.2 q/q, last 1.3 q/q.
10:00 a.m. – U of M Consumer Sentiment (Jan-Fri): Flashed 68.8.
1:00 p.m. – Baker Hughes Oil Rig Count (Weekly): Last 491.
The Fed (all Eastern times)
No public appearances scheduled.
Highlights of Today’s Earnings (PSE Consensus Expectations)
Before the Open: (CAT) (2.26), (CVX) (3.14), (LHX) (3.26), (SYF) (1.41)
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