Growth and Currency Fears Pound Markets

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Hannah Mia and Tanaya Macheel of CNBC report the Dow tumbles more than 900 points and the Nasdaq drops 4% on Friday to close out a brutal month:

U.S. stocks sunk Friday with the Nasdaq Composite notching its worst month since 2008, as Amazon became the latest victim in April’s technology-led sell-off.

The tech-heavy Nasdaq Composite fell nearly 4.2% to 12,334.64, weighed down by Amazon’s post-earnings plunge. The S&P 500 retreated by 3.6% to 4,131.93. The Dow Jones Industrial Average shed 939.18 points, or close to 2.8%, to 32,977.21.

The Nasdaq finished at a new low for 2022 and the S&P 500 did as well, with the main stock benchmark taking out its previous low in March.

Stocks closed out a dismal month as investors contended with a slew of headwinds, from the Federal Reserve’s monetary tightening, rising rates, persistent inflation, Covid case spikes in China and the ongoing war in Ukraine.

“The markets are trying to wrap around a lot of different cross-currents,” BMO Wealth Management’s Yung-Yu Ma said. “With the Fed raising rates and all the uncertainties that the global economy is facing, it’s hard to get excited about paying the multiples that currently prevail in a lot of places in the market.”

The Nasdaq fell about 13.3% in April, its worst monthly performance since October 2008 in the throngs of the financial crisis. The S&P 500 lost 8.8%, its worst month since March 2020 at the onset of the Covid pandemic. The Dow was down 4.9% on the month.

Technology stocks have been the epicenter of the April sell-off as high interest rates hurt valuations, and supply chain issues stemming from Covid and the war in Ukraine disrupt business.

Amazon on Friday sunk about 14% — its biggest drop since 2006 — after the e-commerce giant reported a surprise loss and issued weak revenue guidance for the second quarter.

“The current market performance is threatening to make a transition from a longish and painful ‘correction’ to something more troubling,” Marketfield Asset Management Chairman Michael Shaoul wrote.

“March 2020 for instance saw very sharp declines, but equally fast recoveries. The current episode looks much more likely to impose long lasting losses in investors that piled in during the 2021 rally, and is best thought of a ‘creeping bear market,’ that is steadily widening its net over prior market leadership,” Shaoul added.

The Nasdaq Composite sits in bear market territory, 23.9% below its intraday high. The S&P 500 is off its record by 14.3%, and the Dow is 10.8% lower.

Friday wrapped up one of the busiest weeks for the first-quarter earnings season and a particularly intense one for tech companies, which drove investor sentiment throughout the week.

Apple shares fell about 3.7% after management said supply chain constraints could hinder fiscal third-quarter revenue.

Intel fell 6.9% after the company issued weak guidance for its fiscal second quarter.

About 80% of S&P 500 companies have beat quarterly earnings expectations, with roughly half of the index’s members having reported results so far, according to FactSet.

“Despite what we view as a solid overall earnings period so far, the positive results look to be getting overshadowed by some of the broader concerns related to inflation and the Fed,” BMO’s Brian Belski said in a note to clients.

A hot inflation reading Friday underscored the difficult environment. The core personal consumption expenditures price index — the Fed’s preferred inflation gauge — rose 5.2% from a year ago.

Next week, investors are awaiting the Fed’s policy meeting, the April jobs report and a flurry of corporate earnings from the likes of Pfizer, Starbucks, Uber and more.

The S&P 500 is now down 13.3% in 2022. The Nasdaq is off by about 21.2%, and the Dow is nearly 9.3% lower on the year.

Mark DeCambre of MarketWatch also reports it's been a rough 4 months for stocks and the S&P 500 at risk of booking the worst start to a year since 1942:

To say that it has been a perilous stretch for bullish stock investors on Wall Street lately is a bit of an understatement.

Marked by stomach-churning volatility and bruising losses in once-popular technology trades, the S&P 500 is on track for the worst start to a year, through the first four months of 2022, in over 80 years, with the steepest decline in April since at least 2002 contributing to the unsettling, bearish tone. 

If the current, dour complexion of the broad-market S&P 500 holds through Friday’s close, the index, down 11.5% at last check, will register the most unsightly four-month period to start a calendar year since 1942, when it declined 11.85% (see table).  



The other major equity benchmarks aren’t faring much better. The technology-laden Nasdaq Composite is down 19%, which would mark its worst first four months since 1973, and a decline greater than 19.35% would represent the biggest such fall for the Nasdaq Composite since its advent in 1971.

The Dow Jones Industrial Average is off 7.7% to date in 2022, which would be the worst start to a year for blue chips since the COVID pandemic took hold in the U.S. in 2020, when it declined a whopping 14.69%.

Markets are slumping amid a litany of issues and sentiment that has been shaky, with a key measure of the U.S. economy’s overall health, gross domestic product, shrinking at a 1.4% annual rate in the first quarter, hamstrung by supply-chain bottlenecks and a widening trade deficit, though consumer and business spending were bright spots.  


In fact, personal-consumption expenditures, or PCE, the Federal Reserve’s favored measure for reading inflation, increased a seasonally adjusted 1.1% in March from the prior month, the Commerce Department said Friday. 

Worries surrounding the invasion by Russia of neighboring Ukraine have been amplifying unease about the health of the global economy, as lingering battles with COVID-19 continue to hamstring parts of the world, notably China.

Out-of-control inflation and a Fed that is eager to stamp it out with higher benchmark interest rates also have been a recipe for ferocious price swings.

However, there are some signs that inflation may be cooling. Overall inflation rose 6.6% in March from a year earlier, an acceleration from February, but the move represented a decline when factoring food and energy costs, with a rise of 5.2% last month from a year earlier, according to the government.  

It’s worth noting that, bonds, traditionally perceived as a place of refuge for investors as stocks fall, haven’t offered much comfort. The iShares 20+ Year Treasury Bond ETF  is down 19% so far in 2022 as benchmark 10-year Treasury yields  have climbed rapidly, nearing 3%. Bond prices fall as yields rise. 


Against that backdrop, is the outlook as grim as it has been over the past four months?

Baird market strategist Michael Antonelli said clients have been checking in intermittently amid the market tumult.

“We continue to remind them that the world is a crazy place, that there is almost never a time when returns are high and risks are low,” he offered.

“We also reiterate the fact that holding stocks in a bull market is practice, while holding them in difficult times is the Super Bowl,” he said.

Art Hogan, chief market strategist for National Securities, said that market moments similar to this current downturn test investors’ resolve, referencing the 17th-century Thomas Fuller observation that it’s darkest before the dawn. “We would offer up,” said Hogan, “that we are at or near that darkest place.”

There could be glimmers of light to come, in Hogan’s view, as the market becomes more inured to the Fed’s plan. The Federal Open Market Committee convenes its two-day policy gathering next week, May 3-4, when it is expected to hike rates substantially, possibly delivering an increase to the benchmark federal funds rate, presently in a range between 0.50% and 0.75%, by a half-percentage point or even more.

“Markets sold off in anticipation of the Fed’s first-rate hike in March, only to rally some 10% after the announcement,” Hogan said.

“We would not be at all surprised if we see a similar reaction after the May 4th communication, as the Fed policy fact will replace the Fed policy narratives that have been spooking the growth sector. Sell the rumor, buy the news,” the strategist said.

As far as strategies, Hogan said in a Friday research note, he recommends a “diversified equity allocation with a barbell approach with growth exposure on one end and economically sensitive cyclical exposure on the other end.”

A barbell strategy refers to an investing approach under which an investor invests across a risk spectrum ranging from higher risk to low risk, in an effort to achieve a more balanced portfolio.

Will be better for stocks next month? Who knows.

But sentiment appears to be improving.

The final survey of U.S. consumer sentiment in April slipped to 65.2, but that still marked the highest reading in three months and the first improvement so far this year. 

That could mean more green shoots in May for segments of the economy. The most recent report produced by the University of Michigan reveals that Americans felt better about falling gasoline prices and were more optimistic about the future.

Alright, it's Friday and I haven't covered these miserable markets in a couple of weeks so time to get to it.

The tweets below say it all:

I can go on and on but you get the picture, it's bearish news all over and the bears are out in full force on Friday warning of more carnage to come:

Now, I want everyone to take a deep breath and repeat after me: markets don't go down or up in a straight line!

Don't get me wrong, I'm bearish, been mostly in cash since the start of the year and I'll remain mostly liquid because I see this bear market lasting a long time, but even I know there will be explosive countertrend rallies in this bear market.

As a rule a thumb, whenever the Nasdaq drops more than 4% on a day when Amazon is down 14%, you hold your nose and buy because you know all the algos are doing exactly that.

And with the Fed set to meet next week, I predict there will be a lot of volatility and massive short covering ahead of the meeting (bears typically cover right before a Fed meeting).

These are games Wall Street plays, if you've been around long enough, you've seen it all and remain calm throughout.

But I'm not going to lie, the Nasdaq closed on a new low and that's never good news for overall markets because of the tech sector weights in all indexes:


Still, I wouldn't be surprised if the Nasdaq rallies back to its 20-day exponential moving average before it drops back down again:


However, don't be fooled, we are in a bear market and the 5-year weekly chart tells me the Nasdaq is likely headed below its 200-week exponential moving average (11,290) and from there, who knows, it might even reach 10,000 or below that level:

Once a stock, index or ETF heads below its 200-week exponential moving average, it's pretty much game over. Just look at the Ark Innovation ETF (ARKK):

Cathie Wood is praying Wall Street and "ESG Gods" somehow keep Tesla shares elevated because her other holdings like Teladoc (TDOC) are getting annihilated this year in what is shaping up to be another brutal year for hyper-growth stocks:

 
God forbid Tesla shares get sliced in half or worse, Ark Innovation is done (and so is the Nasdaq)!!

But the Fed is up next and typically we see maximum bearishness ahead of these meetings, so try to stay focused here.

Who knows, maybe the Fed will raise by 50 basis points and say something to calm markets down but with inflation running rampant, I really don't know what will calm markets down.

And then there are all the macro cross-currents:

— Holger Zschaepitz (@Schuldensuehner) April 29, 2022

The strength in the US dollar isn't exactly surprising:

  • The ECB is more concerned about the war in Russia than rampant inflation and hasn't started tightening yet despite mounting pressure.
  • The Bank of Japan on Thursday maintained its massive stimulus program and a pledge to keep interest rates low, reinforcing its resolve to support a fragile economy.
  • China is in stimulus mode as lockdowns weigh on its massive economy. 
  • Risk Off markets typically bode well for the greenback because when global investors are scared, they rush to buy USD assets and bonds.

It's the macro headwinds that should concern global investors a lot more than what is going on in the stock market.

In his latest weekly market wrap-up, FX Red Flag, Martin Roberge of Canaccord Genuity writes:

Despite Thursday’s strong bounce, equity indexes are down for a fourth week in a row. The rate-hike concerns, the growth concerns, the inflation concerns, and the geopolitical concerns are all still right there. But this week we have to add currency risks to the list with the DXY going vertical, rising another 2% and a huge 5% in April alone. Will the Fed really do 75bps in May and add fuel to the fire? Again this week, the ECB and BoJ reiterated their monetary status quo. Otherwise, it was a big week for earnings and reports have been mixed with probably as many beats as misses. One takeaway is that aside from Meta (formerly Facebook), earnings and guidance of the other FAANG stocks have been bleak. That said, the Q1 earnings season so far should be qualified very good with blended S&P 500 EPS growth at 10.1% vs. 6.4% at the start of the season. Elsewhere, bond yields are flat this week but credit spreads continue to widen and the LQD-US and HYG-US ETF are closing at new 52-week lows. As for commodities, they remain resilient given the US$ strength. Undoubtedly, supply disruptions arising from the Ukraine war and Chinese lockdowns are providing a bid.

This week our focus is on the volatility brewing in currency markets. What we are seeing today is quite unnerving and looks to us eerily like the environment that preceded the 1998 financial crisis. The same culprits – US-world monetary policy and growth divergences – are so wide that the US$ (DXY) has gone vertical, sitting at its pandemic-recession top ~103. Worryingly, our Chart of the Week shows that if 104 is taken out, the next resistance is not before 120, which was seen through the 2001-02 recession. This would imply the Euro falling below parity and the Yen going to 140. We believe world central banks are on a collision course. A policy pivot from the Fed, the ECB or the BoJ is needed to halt the plunge in the Euro, the Japanese Yen and in several EM currencies. However, the Fed and the ECB are unlikely to blink and the BoJ reinforced its commitment to its YYC strategy Thursday. With the hands of major central banks tied, the next big macro risk is that the US$ spiral continues and triggers another currency crisis which may eventually tilt the largest three economies to a recession. More colour on our views when we publish the May 2022 edition of our Quantitative Strategist next Monday. A webinar will be held Tuesday at 2pm.

 
Are we headed toward another currency crisis? I'm not convinced but it's a possibility.

More importantly, are stocks pricing in the full slowdown ahead?

In his latest weekly market comment, Francois Trahan of Trahan Macro Research is very clear, there’s more pain ahead;

The most common pushback to our bearish thesis has been about what's already "priced in". Surely, equity markets are "pricing in" something different than they were back in December when they were hovering near all-time highs. Can't disagree with that statement. Regardless, the S&P 500's return is still positive on a year-over-year basis AND while other leading indicators like the ISM are also lower, they remain well above the key 50 threshold. True, we are clearly discounting slower growth ahead. But also true – this is NOT what discounting a future recession looks like.

Historically speaking, in a Fed-induced slowdown, the stock market and other leading indicators, like the ISM, typically bottom within a month or two of each other. What we don't know is WHEN leading indicators will finally bottom. In order to answer that question, we first need to see the peak in interest rates, and then about 18 months after that we should see the trough in LEIs like the S&P 500 and the ISM. Sitting here in April of 2022 with mortgage rates still rising suggests that this bear market story continues into the fall of 2023, at the very least.

I realize that reading these bearish comments each week is not exactly uplifting. Still, those are the macro cards we were dealt: slower growth and high inflation. I would not be doing anyone a favor if I was to sugar-coat things here. This will get really ugly next year as we eventually feel the true impact of higher rates on the economy. Now, bear markets are NEVER a straight line so there should be opportunities for the market to rebound temporarily and for portfolios to be adjusted for the longer-term story. This week, we explore what the world typically looks like as the PMIs slip into the lower 50s in an effort to better understand what key themes investors will be focused on later this year. As always, we shall see what the future brings.

Take the time to read Francois's latest market comment, as usual, it's excellent. Here is a teaser:


Got that? Stay defensive in these markets and don't buy dips unless you're managing you risk and selling the rips!!

Lastly, for more deep market insights and a more bullish context, I urge all my institutional readers to watch the latest installment of Real-Time with Jordi Visser, where he discusses how growth fears are spreading within the market (also see listen to his latest podcast here).

In the coming months, he expects growth to come down, rates to follow, and bottlenecks to ease. As Jordi delves into various market indicators, he outlines why it is important for 10-year yields to stop moving higher while China is slowing down due to COVID lockdowns. Jordi asserts that China's COVID response policy and monetary action from Chinese central banks will be critical to watch in the coming weeks.

It's a great video worth watching and he goes over A LOT and really understands the macro currents too. Take the time to watch it here (I wish he posted these on YouTube so I can embed them here).

Below, Josh Brown, Ritholtz Wealth Management CEO, joins the 'Halftime Report' to discuss what's happening in the stock market during today's sell-off and why he thinks "there's no place to hide but cash".

Second, Carter Worth of Worth Charting looks at a terrible week for the markets and explains why he thinks there's more pain ahead for the S&P 500.

Third, Jonathan Krinsky, BTIG chief market technician, joins 'Closing Bell: Overtime' to discuss his views on the markets.

Next, for some bullish views, listen to Adam Parker of Trivariate Research and Jeremy Siegel, Wharton professor, as they join 'Closing Bell to discuss the market and the Fed.

Lastly, Teck Leng Tan, APAC FX & macro strategist at UBS Wealth Management, discusses the current state of markets, yuan depreciation and his outlook for currencies.

Update: No matter who you speak to these days, the big topic in the markets is the same: Are we headed for a recession later this year or next year? Listeners of this podcast will know that Weiss’s Jordi Visser has not been shy in speaking about this topic and in articulating the balance of probabilities associated with where stocks, crypto, and bonds are headed. 

In this episode, G3 checks in with Jordi to get his latest thinking on these topics and to learn more about the data he’s seeing that’s driving his assessment. Take the time to watch it here and learn why the probability of a recession remains low, according to him, and why he sees better days ahead, led by Chinese stimulus policies (but he also thinks US tech sector will remain weak).

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