The New Normal? | The Daily Peel | 4/1/22

Market Snapshot

I’ll spare you the April Fool’s jokes because obviously, I’m a very serious guy writing a very serious newsletter. 

After the worst quarter in two years, the major indices are trying to string together a third consecutive positive week for the first time in 2022. Gold wrapped up its best quarter since September of 2020 as fears of contagion in Eastern Europe spread like a scorching case of Herpes. Speaking of ESG, Black Gold is up more than 34% this quarter as commodity markets thrash to meet demand without the gas station masquerading as a country. 

Our first loser yesterday was the S&P, down just over 72 handles or 1.57%. Next, the Dow slipped 1.56%; finally, the Nasdaq shed 1.54%. 

Let’s get into it.

Banana Bits

• Joey B is at it again: the Big Guy is looking to release more of that sweet, sweet crude to both calm consumers and cool oil prices.
• Slightly more respectfully than blatantly telling constituents to have fun staying poor, Australia’s PM tells those looking for rent relief to just buy a house instead.
• Any Cubs fans in the crowd? Chicago PMI, a barometer of manufacturing activity in Chicagoland, beat consensus estimates.
• Just like Will Smith memes, Western sanctions on Russia are still happening; for now, Russia’s Central Bank has been successful in avoiding a complete collapse.
• Daddy JPOW’s favorite inflation metric, the PCE Index, is up again to 6.4% year over year. 
• As celebrities pivot into the blockchain space, one has to wonder if there might be a bubble.
• Even as states sit on tens of billions of unspent federal $$$, Joey B is leaning on Congress to approve additional emergency Cov-19 funds…which begs the question: what’s a few billions amongst friends?
• Here’s a twofer: Ukraine is radicalizing the postage stamp and has awarded a medal to the infamous soldier who told a Russian warship to respectfully f*ck itself.

Macro Monkey Says

Mixed Messages — If you follow the Fed closely, you’re probably recognizing that Daddy JPOW’s team isn’t speaking with the swagger of a residential real estate agent in a leased BMW (with a big swinging deck, obvi) that we’ve come to expect from the Fed.

The Fed, like any good government entity, typically portrays the nation’s economic future with a hint of optimism. That’s not what we’re hearing lately, though: in a financial landscape shrouded in uncertainty associated with Russia’s war in Ukraine, debates over the level of monetary restraint needed to curb inflation, and persistent tightness in global supply chains, the Fed has a tough hand to play in this game of recession poker. Several prominent monetary policymakers have gone as far as to say that harsh policies and slower than desired economic growth might be required to tame the raging inflation beast. 

There has been a lot of chatter about a yield curve inversion. But is it warranted? It is worth talking about, sure. Is it worth panic-selling and hiding your money under your mattress? Not yet. The yield curve is determined by two major drivers: expectations for inflation and the Fed’s monetary policy outlook. A two/ten-year inversion tells us one thing for sure - investors expect that interest rates or inflation will be higher in two years than in ten. 

Yield curves tend to invert during periods of intense, throbbing inflation. That throb basically sums up the inflationary environment after this 1Q2022. Yield curve inversion is one of many signals of recessionary headwinds.

Lucky for the Fed, both new and continuing jobless claims are relatively low, especially when compared to the beginning of the pandemic; these levels are probably the lowest we have seen since before you were born. Another boon for the Fed is a labor market with literally millions of open jobs waiting for any warm body to fill them. This type of labor market can help prevent a wage-price spiral, which, if realized, could result in devastatingly prolific inflationary pressures for the global economy. 

Another significant macro-level uncertainty is the unwind of the Fed’s balance sheet, which is larger than at any other time in history. At March’s FOMC meeting, the Fed announced that it would discuss putting its balance sheet on a diet in future meetings, but there is debate amongst experts over the level of effect this will have on inflationary pressures and the economy’s health versus consistent and firm rate hikes in the coming months. 

I left my crystal ball at home, but a few things are certain. The first is that Daddy JPOW has a handful of tough decisions ahead. Next, interest rates will rise, and the Fed will unwind its balance sheet. Will we have a recession? Will policy changes effect a soft landing? While the Fed’s inherent put is no longer on the table, only in time will we see the true effects of policy changes in the macro environment.

What's Ripe

Floating Petri Dishes ($CCL, $NCLH, $RCL) — After 2+ years of Cov-19 fears and a damning CDC DO NOT TOUCH warning about cruising, the floating Petri dish is back! 

The CDC finally dropped its travel warnings for travel aboard cruise ships. During March, the CDC dropped its tiered warnings for cruises twice, originally from “high” to “moderate,” ultimately landing without a warning yesterday. 

Carnival, Royal Caribbean, and Norwegian experienced a nice bump during a down day, ending up 3.16%, 2.82%, and 3.11%, respectively. 

Epam Systems, Inc. ($EPAM) — If you’ve watched Silicon Valley on HBO, Epam is basically that, but with a Slavic accent… or at least that’s how we think it is in our minds. 

Epam’s stock has taken a beating amid uncertainties surrounding the conflict in Ukraine. As the outlook in Ukraine has started to appear less dire, Epam has slowly rebounded in the last few weeks, showing a nice pop yesterday up 1.23%.

What's Rotten

UiPath Inc. ($PATH) — Even after a nice little beat on the top line and a fatty beat on the bottom line, UiPath got absolutely schwacked on Thursday. 

After seeing some significant beats over the past year, the Romanian software company, now headquartered in NYC, is down about 70% in the last year. Its forecast really did them in this quarter, sending its stock plunging 25.65%.

Advanced Micro Devices ($AMD) — AMD is a fan favorite around WSO, but something with AMD stinks. Following a downgrade and price target slashing by Barclay’s, shares of AMD took a steaming dump on Thursday. When the dust settled, AMD ended down 8.29%. 

Thought Banana

Worst Quarter in Years — A wise man once said, “Stocks don’t always go up.” I think I’m not alone in saying that I regret overlooking this advice. Another smart old dude said that bears make money too. I can’t remember who said it, most likely because I was watching TikToks. 

After the worst quarter in a few years, it’s time for some of us to lick our wounds and reflect on what we’ve learned. Let’s think about some of the general trends we’ve been living through this quarter.

• Everything doesn’t suck. Unless you’re China, lockdowns and other restrictions, knock on wood, are mostly behind us. That probably means that the reopening trade is too. Sorry, Peloton, you need to be a real company and make some money now that we don’t have to wear our chin-diapers on the treadmill. 

• Crypto doesn’t necessarily hedge against inflation, serve as a replacement asset class for gold, or inversely correlate with the performance of the more traditional investing venues. This tightening cycle is just getting started, and the broader rotation away from pandemic safe havens is over. There’s probably a lot more to learn about BTC or ETH as a major asset class as a component in your investing toolkit. 

• Risk appetites change over time. After a long while of consistent tailwinds, perhaps expecting deep OTM calls to always print is unwise. It’s not a regulator’s job to convince you to change your risk attitude. You do you, boo. 

• High gas prices kind of suck, and people lose their minds over it. The world still runs on fossil fuels, even as we look to ESG-ly pivot towards a more sustainable, earth-friendly planet. Europeans are literally pooping their pants thinking about their electricity bills for this summer if it’s a scorcher, and I bet that next winter’s heating costs will be equally as colonoscopic. 

The thing that keeps me up at night is the macroeconomic uncertainty surrounding both policy decisions at the Fed and events beyond anyone’s control. 

How long will this thing in Ukraine continue? What are market expectations for the Fed as it unwinds its balance sheet? Will a handful of consecutive 50 bps rate hikes crush our souls? Will growth stocks take it in the face from Daddy JPOW as interest rates rise? If I knew the answers to these questions, I’d be writing a totally different Peel today, Apes. 

Hopefully, you learned something this quarter. $hit has been weird, but all hope is not lost. I’m a big proponent of learning from my losers so that in the future, those lessons show up less often. Here’s to hoping we can help share some of those lessons with you.

Wise Investor Says

“Volatility gets you in the gut. There’s no question that when prices are jumping around, you feel different from when they’re stable.” — Peter Bernstein