The Weekend Edition # 35

Welcome to another issue of the Weekend Edition. 

Thank you to all who’ve read and subscribed to the newsletter this week!

Just a note, that there will be no newsletter next week because I’ll be on holiday.

This week we cover:

• Market Recap

• Macro - The Fed Meeting

• Around the Markets - Restaurant shakeups

• The Week Ahead

• Closing Thoughts

Let’s dive in ⬇️

Market Recap - Mar 14 - Mar 18, 2022

Certainly an interesting week in the market, with the indices plunging heavily on Monday and later making quite the recovery, closing green 4 days in a row. The Nasdaq plunged over 20% from it’s high, taking out February lows and technically entering bear market territory. That was short lived!

The strong rally has pushed most of the indices above their 50-day moving average, although they still remain under the 200-day moving average.

Even the Russell 2000 small cap index recovered, up over 5% for the week. The Nasdaq Composite certainly made a stronger recovery than the S&P 500. Here’s a ratio chart of the Nasdaq to the SPX. Growth stocks seem to the leading the way but, the markets still remain in a larger down trend.

The VIX and the VXN (Nasdaq Volatility Index) have both come down below 30, signaling quite a bullish sentiment.

Is this a short lived bear market rally or a beginning of a confirmed uptrend? 

It’s still not clear. Market breadth indicators still don’t have a strong enough push to the upside and the bond markets are not signally a strong uptrend. How the market performs next week will be crucial to the trend.

Commodities have had a wild week as well, influenced heavily by geopolitical issues and the news. The price swings have been quite large and most commodities pulled back before stabilizing somewhat toward the end of the week.

• Gold didn’t take out it’s previous highs and now we’re forming that double top on the weekly that I wrote about last week. We could see some downward pressure on prices for sometime. But, overall I’m still bullish in the medium term.

• WTI and Brent Oil both made sharp pullbacks and then a recovery. WTI coming down to $93.53/bbl before closing at around $104/bbl. Oil inventory data came out much higher than anticipated, which led to some of the easing as well.

• Soft Commodities have also pulled back. But, the real shortage probably has not shown up just yet. Most of the commodities to be exported out of Russia and Ukraine over the past several weeks, have already hit the seas. So the real test of the commodity shortage is yet to come. These countries are now in the Spring planting season, which is bound to be disrupted reducing the supply for the coming season. The increase in energy and fertilizer prices will also affect the harvesting of these crops. Cotton and Corn are the largest users of both energy and fertilizer.

While commodities have pulled back on the week, the long term uptrend still remains in tact. There’s been a shortage brewing for a while now. The lack of investment in the commodity sectors are catching up and we may see a structural upward shift in the prices of commodities.

Macro - The Fed Meeting Recap

The Fed raised rates by a 25bps (0.25%) as expected. But, what’s interesting is that the dot plot now shows 6 hikes for the year and 4 hikes for next year. That’s very aggressive and the stock market’s immediate reaction was to tank.

But, as the press conference rolled on, people seemed to like what the Fed Chair had to say. There was quite a reversal and the market hasn’t stopped going up.

The discussion on reducing the balance sheet size was limited - only that a discussion will take place at the next meeting.

Concerns over a recession were dismissed as the Fed’s consensus is that the economy is in a very strong position because of the low unemployment rate.

Be that as it may, tightening too soon could change all of that. But, we’ll just have to wait and see whether they can actually hike so aggressively and reduce the balance sheet at the same time.

The spread between the long end of the yield curve and the short end continue to come down. While the whole yield curve has shifted upwards, parts of it remain inverted. We’re getting very close to a complete inversion.

With economic growth slowing, stagflation becomes are real concern. Although, this seems to be debated by most. Supply chain issues persist. The geopolitical situation + rise in Covid cases in China, Vietnam and Hong Kong, are sure to cause even more increases in input prices. This cannot be fixed by increasing rates.

There’s also the risk that tightening conditions will cause pressure on the labor market and cause a wage spiral. I’d written about this a couple of weeks ago. Tightening conditions with no way to control input costs will mean companies will reduce staff. There’s only so much pricing power that companies have to raise prices. And higher prices will not be met with much enthusiasm either. It becomes a vicious cycle.

Around the Markets

Restaurant Shakeups

Starbucks’ CEO Kevin Johnson is stepping down and being replaced by none other than Howard Schultz, for the third time. The company hasn’t stated any reasons for him leaving but one can only imagine it may have something to do with the unionization.

Wingstop CEO also resigned and is heading to a more obscure company called Salad & Go. Wingstop did really well during the pandemic but, comps are getting more challenging and it remains to be seen how they perform through the next few quarters.

The Week Ahead

Earnings of the Week

Closing Thoughts

Something I hadn’t considered, but I do think that there will be more changes to come in companies. As the comps get more and more challenging, companies with limited pricing power will be faced with tough decisions. I won’t be surprised if we see more unrest among employees and more senior management leaving jobs.

We have a challenging few months ahead. While the last 4 days gave us no indication of that, I won’t be surprised if the markets do turn around. I think what we are seeing is perhaps a knee jerk reaction to news that was already anticipated. I may be dead wrong but none of the macro, fundamental or technical indicators suggest we’re starting another leg of bull market.

Here’s wishing you a happy weekend and safe investing. 

Please take a moment to share and subscribe, if you found this newsletter useful.

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers

None of the above is Investment Advice. I may or may not have positions in any of the stocks mentioned. I have no affiliation with any of the companies that are mentioned.