AFMC - Head Fake: Irrational Fear Still Grips The Market
2023-10-31 07:30:00 ET
Summary
- Fed week this week and the ritual continues.
- Armageddon continues on hold, rebuffed by continuing good economic and earnings reports.
- A few words about inflation.
- If you believe the Fed’s rhetoric, the 10-year US Treasury note near 5% yield is the deal of the decade.
I composed this piece on the weekend. Even with today's strong market, it continues to be very relevant. The head fake may be today's market. Even though most sectors of the market caught a bid today, it again was large-cap and mega-cap that won the day.
Fed week ritual continues
In March 2022, the Fed under the command of Jerome Powell began to quickly and relentlessly march short-term rates higher, up from 20 basis points (2/10 of 1%) to a current reading of 5.33%. That is up from 3.08% one year ago . Over the entire 19-month period, the " nattering nabobs of negativism " (i.e., the media and punditry corps) have been calling for disaster in the economy and market. To quote a media advertising icon of an earlier time, I ask, " Where's the beef? " (Clara Peller)
Nonetheless, the ritual of fear-mongering and speculation continues as the market waits for the next tablets from on high (Fed comments) to be delivered at 1 pm ((CDT)) Wednesday... very silly.
As we still wait for the axe to fall, money has continued to be funneled into a tiny bunch of the largest-cap growth and tech stocks in the market and out of everything else. Although the S&P 500 and Nasdaq are still above their October 2022 lows, the rest of the market, as represented by the S&P 400 mid-cap and Russell 2000 indices, are in real bear markets. Both have broken down from their October 2022 lows (which I thought at the time adequately discounted an economic slowdown). They are both down now at least 20% from the all-time highs recorded in 2021. They are down so much because conventional group-think says that because of their size they would be more vulnerable to the long-awaited economic crisis (brewing for the past 19 months).
Meanwhile, the S&P 500 is still up over 7% year-to-date, in very large part due to its cap-weighted concentration in the "Magnificent Seven" stocks - Apple ( AAPL ), Microsoft ( MSFT ), Alphabet ( GOOG , GOOGL ), Amazon ( AMZN ), Nvidia ( NVDA ), Tesla ( TSLA ) and Meta Platforms ( META ). This is not a very healthy look, and they appear to be feeling the weight of their top-heaviness. The Mag 7s have shed more than $1.2 trillion in value since their July peak. That $1.2 trillion equals about 25% of the total market capitalization represented in the S&P 400 and Russell 2000 indices combined.
" Wall Street's "Magnificent Seven" May Be a Mammoth Liability for the Stock Market " (Motley Fool)
So this time, as we head into Fed week, market participants are selling everything... small-cap, mid-cap and even the safe and sound (not sensitive to economic swings) "magnificent seven" names. Thanks to ETFs, there appears to be no sense of ownership of individual companies, only the idea that if the market and the news makes one a bit queasy, no problem, one can sell their whole portfolio quickly and be away from the mess. This leads to weakness in a lot of good companies for no fundamental reason.
Armageddon continues rebuffed
With third-quarter 2023 GDP in at +4.9% and unemployment at 3.8% (up just slightly from 3.5% a year ago), I guess the doomsayers last year kinda missed their mark. And job creation in September, whew, was 336,000 vs. economists' expectations of 170,000. The predicting business is very hard.
Of course, this good news is terrible news because it means the Fed may have more work to do. So-called investors are beginning to vote with their feet. Certain segments of the market are beginning to take on a panicky look even though the facts on the ground would continue to indicate a healthy economy, even in the face of rapidly rising rates. For many stocks, a recession has been well-priced in. This sets up real opportunities for those willing to take the notion of fundamental investing seriously.
A few words about inflation
I have been a long-time big fan of Seeking Alpha contributor Scott Grannis, former chief economist at Western Asset Management.
My paraphrase of his most recent piece on inflation is that if you peel back the curtains, it is not as bad as Fed or pundit rhetoric would have us believe. I commend this post from the Califia Beach Pundit to your attention: " Growth And Inflation Update: Not Much To Worry About ."
My sense on what Chairman Powell has said of a hawkish nature is more to jawbone inflationary expectations down... a bark that is worse than its bite.
The 10-year Federal Reserve Note looking interesting
If you believe the Fed rhetoric, the 10-year yielding close to 5% has to be appealing. If the Fed is successful at driving inflation down to 2%, today's buyer is getting a huge real return vs. inflation (300 basis points). Even if 3% turns out to be right number for inflation, the real return on the 10-year is huge. I believe that if the Fed persists on its 2% inflation goal, it will create economic softness, which would bring flight-to-safety buyers to the note (pushing the price up and yield down). Ergo, we may be at or near the peak yields on the UST 10-year.
Final thought
Based on the facts that exist currently in our economy, the irrational fear that has crept into the market is unjustified. It is in times like these that you need to get a little greedy a la Warren Buffett's mantra: "Be greedy when others are fearful and fearful when others are greedy."
What's your take?
For further details see:
Head Fake: Irrational Fear Still Grips The Market