Tuesday, May 2, 2023

Morning Note: How Best to Clear "Muddy Water"

In our weekend video update I made mention of the manufacturing sector being already in the throes of a several month-long recession.

Yesterday's release of the ISM's April Manufacturing survey, while a titch improved (less contractionary vs March), essentially confirmed it. Here's from the report (I'll highlight the glaring UH OH!):

“The April Manufacturing PMI® registered 47.1 percent, 0.8 percentage point higher than the 46.3 percent recorded in March. Regarding the overall economy, this figure indicates a fifth month of contraction after a 30-month period of expansion. The New Orders Index remained in contraction territory at 45.7 percent, 1.4 percentage points higher than the figure of 44.3 percent recorded in March. The Production Index reading of 48.9 percent is a 1.1-percentage point increase compared to March’s figure of 47.8 percent. The Prices Index registered 53.2 percent, up 4 percentage points compared to the March figure of 49.2 percent.
"The five manufacturing industries that reported growth in April are: Printing & Related Support Activities; Apparel, Leather & Allied Products; Petroleum & Coal Products; Fabricated Metal Products; and Transportation Equipment. The 11 industries reporting contraction in April, in the following order, are: Furniture & Related Products; Wood Products; Nonmetallic Mineral Products; Electrical Equipment, Appliances & Components; Plastics & Rubber Products; Chemical Products; Machinery; Primary Metals; Computer & Electronic Products; Food, Beverage & Tobacco Products; and Miscellaneous Manufacturing." 


That "UH OH!" of course speaks to Fed Policy and market (interest rate) expectations going forward.

This from Wells Fargo Investment Institute's Darrell Cronk on Bloomberg this morning will sound very familiar to clients and regular readers:

"This risk/reward dynamic is not currently attractive."

"The two best-performing sectors in the month of April were healthcare and staples, both defensives, so you're seeing defensives start to take over."

"I think you've got to see the natural order of the cycle play out... Everybody knows this, but think about it logically: You have an inflation shock, followed by a rate shock, followed by a bear market -- which is where we are right now -- followed by a recession -- which is where we think we're going -- followed by rate cuts and then followed by the next bull market.

So you've got to get to that rate cuts and bull market... You know, history tells you, if you look at this, the bottom in the equity market -- in the S&P 500 -- doesn't come until after the first rate cut historically, and it's typically about 5 to 6 months after the first rate cut.

So you tell me... We don't think the first rate cut happens in '23, we think it probably happens in '24... But even if you take the most aggressive estimate for '23, and then spin forward for 5 or 6 months, you've still got awhile here where we need to kind of reset valuations and multiples to where the risk/reward becomes attractive."

Coincidentally, we upped our "healthcare and staples" exposure in early March.

Stay tuned...

Asian stocks were mostly green overnight, with 12 of the 16 markets we track closing higher.

European markets are getting hammered, with all but two (three others are closed) of the 19 bourses we follow in the red so far this morning.

US equity averages are down as well to start the session: Dow by 317 points (0.93%), SP500 down 0.88%, SP500 Equal Weight down 1.42%, Nasdaq 100 down 0.46%, Nasdaq Comp down 0.70%, Russell 2000 down 1.87%.

As for yesterday's session, US equity averages (save for small caps) finished slightly lower: Dow down 46 points (0.1%), SP500 down 0.1%, SP500 Equal Weight down 0.6%, Nasdaq 100 down 0.1%, Nasdaq Comp down 0.1%, Russell 2000 up 0.3%.

This morning the VIX sits at 15.27, up 13.50% (!!!).

Oil futures are down 3.74%, gold's up 1.01%, silver's up 0.21%, copper futures are down 1.43% and the ag complex (DBA) is down 0.39%.

The 10-year treasury is up (yield down) and the dollar is up 0.10%.

Among our 37 core positions (excluding options hedges, cash and money market funds), 5 -- GLD (gold), Dutch Bros, JNJ, LEMB (local currency emerging mkt bonds) and SLV (silver) -- are in the green so far this morning... The losers are being led lower by OIH (oil services stocks), MP Materials, XLE (energy stocks), EWZ (Brazil equities) and Albemarle.

Thinking about the Fed, and where we presently find ourselves, as I think about our morning quote:
“Muddy water is best cleared by leaving it alone.”
--Alan Watts

Have a great day!

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