Tuesday, February 27, 2024

Morning Note: The 'F' Word -- And Your Weekly Results Update

If you're getting tired of hearing about inflation, or the potential lack thereof going forward, sorry, this will be a top topic of discussion for I suspect many years to come.

As for the time being, recent "hotter" than expected CPI and PPI -- potentially PCE this week -- notwithstanding, I do believe that before the current cycle runs its ultimate course, those who, on behalf of their stock positions, pray for dis(or de)flation will indeed see their prayers answered in the affirmative.

Thing is, beyond the knee-jerk rally that'll no doubt come on "cooler" inflation data and sweettalk from the Fed, there's, alas, that 'F' word that'll ultimately be rolling off the tongues of many a Wall Street analyst, economist, market guru, yada yada!

That word being Fundamentals!

You see, there's this thing called a profit margin, which measures the space between what a company spends to produce its wares and the price at which it charges its customers... And of course when we're talking in(dis or de)flation, we're talking about the latter.

You know where I'm going with this:  If inflation's ultimately coming down, the overall pace of price increases is by definition coming down as well... And if recession indeed arrives along the way, we're no longer talking the pace of price increase, we're talking outright price declines in many venues... Venues where, for one example, the cost of labor has risen at an historical pace these past few years.

And what happens to profit margins in such a scenario? Stock prices? Jobs in general? 

Now, don't get me wrong, the rate of price increases -- or prices outright coming down -- is never a bad thing when we're talking about the consumer, as a consumer... It's what it potentially signals that we have to pay attention to... I.e., if, as it tends to be, it's representative of a weakening economy, then of course it implies something potentially not-good when it comes to the consumer's employment prospects, and, not to mention, their 401(k) values.

No predictions here folks, just risk-assessment! 🤓

Stay tuned...

Here's your weekly sector, region and asset class results update:

Asian equities were mostly higher overnight, with 10 of the 16 markets we track closing up.

Europe's mostly red so far this morning, with 14 of the 19 bourses we follow trading down as I type.

US equity averages are (save for the Dow) are mostly up to start the session: Dow down 105 points (0.27%), SP500 up 0.07%, SP500 Equal Weight up 0.17%, Nasdaq 100 up 0.23%, Nasdaq Comp up 0.29%, Russell 2000 up 0.90%.

This morning the VIX sits at 13.68.

Oil futures are up 0.49%, nat gas futures are up 3.67%, gold's up 0.26%, silver's up 0.60, copper futures are up 0.24% and the ag complex (DBA) is up 0.18%.

The 10-year treasury is up (yield down) and the dollar is down 0.01%.

Among our 36 core positions (excluding options hedges, cash and money market funds), 24 -- led by EWZ (Brazil equities), XME (base metals miners), URNM (uranium miners), EWM (Mexico equities) and SLV (silver) -- are in the green so far this morning... The losers are being led lower by XLV (healthcare stocks), Johnson & Johnson, SPTL (long-term treasuries), XLP (consumer staples stocks) and EWU (UK equities).

This will sound very familiar to clients and regular readers/viewers:
"We can’t say with any certainty at all that stocks are at a market peak. We can also say with complete certainty that present conditions mirror what a market peak looks like."

"We can’t know the future, but it’s straightforward to examine history and do math. Presently, market conditions have a stronger positive correlation with historical market peaks, and a stronger negative correlation with historical market lows, than 99.9% of instances across history."

--John Hussman

Have a great day!

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