Cap and Gown
Posted on Sunday, April 24th, 2022
I got a little nervous this week when I noticed that Diane had fastidiously cleaned out the laundry room and the pantry. She was jettisoning large amounts of garbage and I was afraid that I might be next. You can breathe a sigh of relief – or at least I can. She is going to keep me around. It was just your ordinary spring cleaning. I think that it might have been a bit more. Diane and Kevin went to Kennesaw this week to complete his college orientation day. Kevin also picked up his cap and gown from school. I have to admit I got a bit of a lump in my throat when I saw it. Things are moving a little too fast. We are planning a party for the extended family so getting the house cleaned is one thing but it just feels like so much more. Cleaning the house symbolizes the end of an era. I thought being an empty nester was going to be fun. While these times are exciting sometimes it seems to take on a bit of a heavy emotional air when I stop to think.
The air around the stock market got a bit heavy especially on Friday when Fed speakers came out in force to emphasize the need for faster rate hikes. Three different Fed officials let the market know that faster rate increases could be on the table. The market is now pricing in 10 more rate hikes this year. In fact, the market is pricing in 50 bps rate hike at the next two meetings. This is a bit quicker than the market would like and indicates that the Fed, who thought inflation was transitory, is now behind the curve and more likely to spin the economy into a hard landing.
Compounding the error, Chairman Powell told an audience at an IMF debate that “the US labor market is too hot… unsustainably hot.” The US stock market is starting to realize what we have been telling you for months. The Fed has its cap on this market. The higher that stocks go the more likely the Fed is to take a more drastic approach to raising rates which will, in turn, knock markets back down.
In the selloff on Friday we even saw energy stocks get hit which has been a rare sight of late. That tells us that it may have been more than just interest rates. We have told in earlier letters that when the Fed raises rates – stocks still tend to go higher in the interim. At least for the first 3 rate hikes. We think the market selloff on Friday may have had something to do with Japan’s interest rates, their bond market and their currency – the Yen. There were rumors that the Japanese asked the Americans for help in dealing with their falling currency. The Americans said no. That is when the selling in US markets really took hold. We were in the market in 1998 when the Asian currency crisis rocked the investing world. Currencies are big and move with great force. Imagine a wave of water. Most times it’s a normal small wave and we think nothing of it. What happens when a rogue wave hits? Water can be one of the most destructive forces on earth – so can currencies. The spiraling currency of the third biggest economy on the planet bears watching.
Stocks haven’t been this ‘expensive’ relative to bonds since April 2011. The last time that happened, bond prices went higher and stocks went lower. You know when in doubt we follow what bonds are telling us over stocks. We will go with bonds again and I would expect more of the same as 2011. Bonds are oversold and the gap between stocks and bonds is wide. I would expect stocks to go down here and bonds to go back up to close this gap.
We remarked last week that April is historically one of the best months of the year for equity returns. However, this April has been tough sledding. The S&P 500 slid further last week and is now down 5.7% on the month. We noted that we tend to look at seasonality much more closely when it does not work. If we expect the market to go higher in a time period and it does not – then we start to look both ways before we cross the street. Look both ways.
Longer term – We still see us still stuck in the 3800-4800 range on the S&P 500 for months to come. We closed on Friday around 4300.
“Short term volatility is greatest at turning points and diminishes as a trend becomes established.”– George Soros
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.