Gloomy Like The 1970s?
The Dow Jones Industrial Average fell on Friday and notched its fifth straight week of losses as investors remain cautious about the war between Russia and Ukraine.
The Dow fell 229.88 points to 32,944.19, dragged down by losses in Nike and Apple. The S&P 500 fell 1.3% to 4,204.31. The technology-focused Nasdaq Composite fell 2.2% to 12,843.81.
Russian President Vladimir Putin said Friday that “certain positive shifts” have occurred in the talks between the Kremlin and Ukraine. However, a ceasefire has not been negotiated. Meanwhile, President Volodymyr Zelenskyy reportedly said Ukraine has reached a “strategic turning point” in its war with Russia.
U.S. President Joe Biden also called for an end to Russia’s status as a preferred trade partner, while Congress passed a funding bill that includes $14 billion of Ukraine aid.
“Stocks are looking at another red week, as hope for a ceasefire, only to be disappointed, has added to the uncertainty,” said Ryan Detrick of LPL Financial.
The Dow posted a five-day losing streak, as the Russia-Ukraine war continues to be an overhang on financial markets. The S&P and Nasdaq fell for a second straight week.
For the week, the Dow lost 2%. Meanwhile, the S&P fell 2.9%, and the Nasdaq slid 3.5% this week.
“Potentially good news from favorable comments regarding cease fire negotiations from Putin but investors are unsure how much weight to put on this given some of his previous comments which turned out to be hollow,” said Jim Paulsen, chief investment strategist for the Leuthold Group.
However, Bank of America said Friday that stock declines related to the war could have bottomed.
“The S&P 500′s -12% decline from its peak suggests much of the froth has been taken out,” said Savita Subramanian, equity and quant strategist at Bank of America Securities. “Stocks are largely pricing in the geopolitical shock, where the S&P 500 fell 9% from peak-to-trough since Russia-Ukraine headlines in early Feb, similar to a typical 7-8% fall in prior macro/geopolitical events.”
The moves came amid another day of higher energy prices. West Texas Intermediate crude, the U.S. benchmark, rose 2.9% to around $109 per barrel, while international standard Brent crude moved 2.9% higher to around $112. To be sure, crude prices are well off the highs seen earlier in the week.
Metals prices except for copper fell sharply. Palladium futures tumbled 4% to $2,803.50 an ounce. Agricultural commodity prices turned mixed and bond yields were mostly higher, though only slightly.
On the data front, the University of Michigan consumer sentiment index sunk to 59.7 in March, down from 62.8 in February, according to the report released on Friday. This marks the weakest print since September 2011.
“News that consumer confidence sunk even lower this morning as household fears about inflation intensify have ramped up worries about a serious U.S. economic slowdown or perhaps even a recession,” added Paulsen.
Elsewhere, Rivian slipped 7.6% after missing estimates for the fourth quarter on the top and bottom lines, while DocuSign sank 20.1% after issuing weak guidance for the first quarter and fiscal year.
Certain tech names dragged on the Nasdaq on Friday and continued their weakness since Monday. Zoom Video fell 5%, bringing its weekly losses to nearly 10%. Meta Platforms fell 3.9% and lost 6.2% for the week.
Lewis Krauskopf, Devik Jain and Sabahatjahan Contractor of Reuters also report Wall Street slumps in broad swoon to end bumpy week:
Major U.S. stock indexes stumbled on Friday as tech and growth shares led a broad decline and investors worried about the conflict in Ukraine while attention turned to the Federal Reserve's policy meeting next week.
At the end of a volatile week, indexes had opened higher after Russian President Vladimir Putin said there were "certain positive shifts" in talks with Ukraine, without providing any details, but stocks then faded during the session.
All 11 S&P 500 sectors ended down, with communication services falling 1.9% and technology dropping 1.8%.
“After we saw a bounce in the middle of the week, there is still too much uncertainty out there,” said Matt Maley, chief market strategist at Miller Tabak. "The market has had a tough couple of Mondays so I think the short-term players want to take some chips off the table."
The Dow Jones Industrial Average fell 229.88 points, or 0.69%, to 32,944.19, the S&P 500 lost 55.21 points, or 1.30%, to 4,204.31 and the Nasdaq Composite dropped 286.15 points, or 2.18%, to 12,843.81.
The benchmark S&P 500 fell 2.9% for the week, and logged its second straight weekly decline. The Dow fell for a fifth straight week.
On Friday, declines in shares of megacap growth companies such as Apple Inc and Tesla Inc dragged on the S&P 500. Apple fell 2.4% while Tesla dropped 5.1%.
Meta Platforms shares fell 3.9% as Russia opened a criminal case against the Facebook parent after the social network changed its hate speech rules to allow users to call for "death to the Russian invaders" in the context of the war with Ukraine.
President Volodymyr Zelenskiy said Ukraine had reached a "strategic turning point" in the conflict with Russia, but Russian forces bombarded cities across the country and appeared to be regrouping for a possible assault on the capital Kyiv.
Regarding developments in the Ukraine crisis, “you just don’t know what you are going to see so there’s no reason to go into the weekend with a risk-on attitude,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.
Growth stocks also came under pressure as the U.S. 10-year Treasury yield hovered near 2%.
Stocks have struggled this year as concerns about the Russia-Ukraine crisis have deepened a sell-off initially fueled by worries over higher bond yields as the Fed is expected to tighten monetary policy this year to fight inflation. The S&P 500 is down 11.8% in 2022.
The U.S. central bank is expected to raise rates at its March 15-16 meeting.
A survey showed U.S. consumer sentiment fell more than expected in early March as gasoline prices surged to a record high in the aftermath of Russia's war against Ukraine.
Declining issues outnumbered advancing ones on the NYSE by a 2.83-to-1 ratio; on Nasdaq, a 2.54-to-1 ratio favored decliners.
The S&P 500 posted 13 new 52-week highs and 16 new lows; the Nasdaq Composite recorded 36 new highs and 274 new lows.
About 13 billion shares changed hands in U.S. exchanges, compared with the 13.6 billion daily average over the last 20 sessions.
The big news today was that US consumer sentiment fell more than expected in early March as gasoline prices surged to a record high in the aftermath of Russia's war against Ukraine, boosting one-year inflation expectations to the highest level since 1981:
The third straight monthly decline reported by the University of Michigan on Friday pushed consumer sentiment to its lowest level in nearly 11 years. It said 24% of respondents "spontaneously mentioned the Ukraine invasion in response to questions about the economic outlook."
The University of Michigan's preliminary consumer sentiment index dropped to 59.7 in the first half of this month, the lowest reading since September 2011, from a final reading of 62.8 in February. Economists polled by Reuters had forecast the index falling to 61.4.
U.S. consumer sentiment near 11-year low; near-term inflation worries mount https://t.co/C7GMmq1U1o— Leo Kolivakis (@PensionPulse) March 11, 2022
It's pretty gloomy out there, war in Ukraine displacing millions of innocent people, gas and energy prices are up significantly, inflation at a 40-year high, stock markets are retrenching, and we are just getting out (hopefully) of another Covid wave hoping this bloody pandemic is finally coming to some end (endemic).
It feels like we are reliving the 1970s again except now we have social media platforms so we can collectively post our misery on Twitter, Instagram, Tik Tok and elsewhere.
The good times are over. The Fed is getting ready to raise rates next week as the US economy slows and Goldman Sachs now puts the chance of a US recession over the next 12 months at 20-35%:
More Wall Street firms are revising lower their US growth expectations for this year. GS now puts the chance of a US recession over the next 12 months at 20-35%. https://t.co/8YMJl5HCcT— Lisa Abramowicz (@lisaabramowicz1) March 11, 2022
Mark Mclellan, Chief US Bond Strategist at Alpine Macro concurs writing this in his latest comment on Recession Risk and Undaunted Fed:
"Stagflationary forces continue to intensify. The risk of a Fed policy mistake and recession is growing. Fed policymakers appear undaunted by the war and will have a high tolerance for financial market stress in the current inflationary environment."
You should read his comment but he ends with a chart that caught my attention:
I agree, the high yield market is still in La La Land, completely detached from reality. There is no significant credit event priced in, there's no fear that rising rates will hit many zombie companies that aren't going to be able to make their debt payments, nothing of that yet.
But it is slowing and you see a slowdown materializing which isn't good for the economy or stocks:
In his latest comment, The Coming Wave of Credit Downgrades Could Be Epic, Francois Trahan of Trahan Macro Research writes:
The events in Ukraine and their fallout have completely overtaken investor mindshare and financial markets in recent weeks. I realize that I am stating the obvious here, but I wanted to acknowledge that so I can focus on the other forces at play for equities and the economy. The reality is that it was already a challenging backdrop for stocks in 2022 before any mention of the Fed and/or Ukraine. The exhaustion of pandemic stimulus in conjunction with tightening in the pipeline (rise in market rates AND inflation) alone was enough to weigh on leading indicators, including equities, throughout 2022. That on its own would have been a challenge for stocks this year.
The Ukraine-induced rise in oil prices (and other commodities) complicates things further for the stock market/economy. It almost guarantees that inflation accelerates beyond the four-decade highs of 7.5%. Note that post-WWII, the U.S. economy has never seen CPI accelerate above 5% without having a recession. We were already well above those levels before the latest events. I think you can figure out where this leads. Then, we have the Fed which has now tied its policy stance to inflation readings. Surprisingly, for me anyway, Chairman Powell's latest comments do not appear to show any hesitation as to what lies ahead for monetary policy. The Fed still seems intent on tightening until inflation is under control.
In summary, EVERY anticipatory indicator we use to forecast PMIs was pointing to an extended downtrend this year BEFORE Ukraine and/or the Fed. In that context, it is difficult to see how the U.S. economy avoids a recession next year. There are multiple consequences to this forecast for a significant slowdown ahead and we have covered many of these in our work this year. This week we review the outlook for rating downgrades, a common event heading into slowdowns, and highlight a framework for identifying companies likely to be downgraded. We hope you find this helpful. We fear that it will likely be extremely relevant at some point later this year.
Francois is also right, the US economy was slowing BEFORE the crisis in Ukraine. That conflict is only adding fuel to the inflation fire and if prices at the pump stay at these elevated levels, there's no way the US and rest of the world will avoid a major recession.
Again, it feels like the 1970s, high inflation, low growth but admittedly, this is the new economy dominated by tech firms so it's hard to envision a 70s-style shock in the economy.
But a recession is coming and the market is telling you to prepare for it.
I'm just waiting to see the housing market buckle, then you'll know for sure a recession lies ahead.
Even the stock market is telling you a recession lies ahead.
It feels like we are at the beginning of a bear market.
The only good news this week was the February 24th low on the Nasdaq of 12,588 held on Tuesday morning, then there was a massive rally on Wednesday as everyone was expecting dovish ECB comments on Thursday but when it titled hawkish, stocks went right back down.
And they continued to go down today.
Will the Fed say something dovish next week? I doubt it, it will however increase rates by only 25 basis points and will move gradually.
Fed Chairman Powell doesn't care if stocks sell off but he is petrified of a credit event seizing credit markets.
A lot of this is already priced in the market, so don't be surprised if stocks have a relief rally next week once the Fed announces.
What happens after that is anyone's guess.
In his latest comment, Martin Roberge of Canaccord Genuity writes:
With so many investors growing nervous about a potential recession, we looked at past S&P 500 declines above 10% and analyzed forward returns from the 10% correction mark in a rising Fed funds environment. Our objective is to map the path of the stock market under soft- and hard-landing scenarios. Our Chart of the Week suggests the outcomes. First, from the 10% correction mark (SPX = 4,305) and regardless of the economic outcome, the S&P 500 is up ~8% on average one year out (blue line). However, if Fed hikes do not lead to a recession, the one-year S&P 500 average forward returns jumps to ~15% (green line). Conversely, a recession scenario sees the S&P 500 rolling over and dropping ~7% below the 10% correction mark. That said, we feel the most compelling observation in our chart is that no matter one’s view on the economy, in a rising Fed funds environment 10% declines should be bought, as the S&P 500 is up ~5% on average five months after the dip. This means that a tradable rally is likely not a question of if but when. April to June seems to be the window. Then, forward returns diverge markedly whether we head into a recession or not. Thus, we see investors having until this summer to formulate their economic outlook and then decide to sell rallies or stay put equities.
It remains to be seen whether the worst is behind us, the weekly chart on the S&P 500 ETF (SPY) doesn't exactly inspire me:
And the Nasdaq ETF (QQQ) even less so:
On individual stocks, you could have made nice gains buying some stocks right before earnings (SNAP, SQ, JWN, BBBY for example) but they popped and rolled over which is typical in a bear market.
And some stocks continue to get obliterated in this market like Chinese ADRs:
And last year's high-flyers like Docusign and Zoom:
Like I warned you a few weeks ago, these aren't the markets to go chasing Chase Coleman and company, you need to be aware of major downside risks.
Alright, let me wrap it up there, wish everyone a great weekend!
Below, CNBC's Eunice Yoon joins 'Squawk Box' to break down why Honk Kong shares of dual-listed companies fell during Friday trading.
And Jim Lebenthal, Cerity Partners chief equity strategist, joins the 'Halftime Report' to discuss his view on oil and the markets.
Lastly, Mark Lehmann, JMP Securities, joins 'Closing Bell' to discuss what investors are paying attention to in the markets.