Climb Every Mountain

Climb every mountain.  Stocks rallied yesterday, helped by a strong weekly jobs number.  Value stocks continue to draw investor favor over growth stocks, as traders ride the recovery wave.

N O T E W O R T H Y

Bubbly, frothy, foamy.  It can get quite brutal as it brings out the true animal spirits in all of us.  At an early age, most of us probably got our first lesson on survival playing this game.  I am referring to musical chairs.  The teacher would set up two rows of chairs, back-to-back, as the students assembled around them.  The music would start playing and we would all circle around the chairs. At first it was fun and easy, you simply had to follow the pack. Sure, there was risk of the music stopping and being left chair-less, but at the early stages, the risk was low because there were so many chairs – and plenty of less-skillful opponents to outrun.  As the game ground on and the number of chairs decreased, the risks also increased.  To win you had to be strategic.  One of my classmates, Staci was really good at it.  She would always keep one hand on the chair backs while staring her opponents right in the eye, and when the music stopped, she would throw herself into one of the remaining chairs almost always hip checking and knocking one of us onto the floor.  The stakes were high, it was a matter of survival, and Staci knew it.  

I often write about the Fed’s body language and its carefully crafted messages.  Jerome Powell saved the markets from the worst December since The Great Depression by literally uttering one sentence.  He has used his words over and over throughout his term as Fed Chair.  The majority of the time his missives served to calm the markets in one way or another.  When Powell took the helm in February of 2018, the ship appeared to be sailing smoothly.  His predecessor, Janet Yellen had overseen 5 rate hikes, the first since The Great Recession.  Powell’s stewardship enacted 4 more rate hikes in a single year… until stocks sold off by some -16% in December.  Now, the official job of the Fed is to keep inflation in check and unemployment low, referred to as its Duel Mandate.  A dropping stock market would not necessarily be of critical concern to the Central Bank.  But wait, there is a technicality with that statement.  There happens to be a correlation between stock market performance and consumer confidence.  When the stock market is going up, consumers, whether they own stocks or not, tend to be more confident.  Confidence leads to spending, which leads to economic growth, which leads to more jobs…aha… found it.  Powell sought to calm markets with words by interlacing his comments with dovish language. He learned to sing and the markets loved his tune.  It was the beginning of a rally in which stocks would add around +44% in 13 months.  The rally would end in February of last year with the onset of the pandemic.  The steep drop in stocks in March of last year would only turn around once the Fed stepped in with massive monetary stimulus and a congressional fiscal stimulus package.  It was then up to the Fed to keep spirits high until the economy could right itself.  Powell and the Fed did just that, promising more never-ending stimulus and near-zero rates. Stocks loved that tune, specifically growth stocks which were less affected by a down-cycle economy… and low bond yields.  At one point the Fed Chair began to verbally pressure Congress into bringing further fiscal stimulus, which it did… twice more.  The rally and the music played on.  All at once, investors became nervous about inflation resulting from the quickly recovering economy.  That fear caused bond yields to rise and the stock rally to pause.  The Fed stepped in with words to calm the market, stating that any inflation would be temporary.  The Fed has been quite clear that it has no intention to pull back support any time soon.  For those keeping track, the S&P500 has now rallied by +78.7% since its December 2018 low when Chairman Powell first learned just how powerful his mere words could be.  Stock valuations are on the high side by historical standards.  Investors have piled into equities, betting on a strong economy.  Their hopes have now become a reality. Earnings season has so far produced outstanding results and economic numbers are pointing to a recovery.  All of these realities are baked into stock valuations and they have been proven, and now investors are faced with having to decide what future development would help take stocks even higher.  

If one listened carefully to Chairman Powell recently, you could sense his discomfort with stock values.  It is very subtle, but it is there.  Fed members speak regularly, and while all of the members have their own points of view, their main message is always unified, and that message continues to be one of ongoing support for low rates with no plans to curb bond purchases any time soon… and a subtle hint that lofty stock valuations are on their radar.  Yesterday, the Fed released its financial stability report which highlighted investors’ risk appetites stretching valuations. The report mentioned so-called meme stocks (AKA Reddit stocks), the SPAC bonanza, and of course, the record pace of IPOs.  Last week in his post-FOMC press conference, Chairman Powell actually used the “F” word… that being Frothy, when asked about GameStop’s stock and Dogecoin.  His choice of words, always careful, has sent a message, and last night’s report underscored that message. Clearly the Fed is not going to do anything to derail the rally and positive consumer sentiment when the economy is in such a tender state.  One thing is clear however, there are not many chairs left in the middle of the room, so if the music stops, things could get a bit uncomfortable. Getting back to my winningest classmate Staci (with whom I am still friends).  I once tried a new strategy to unseat her.  I kept my eyes fixed on the the teachers hand which held the needle on the record.  If I saw her muscles tense up in preparation of pulling up the needle, I would instantly hurl myself into the remaining chair.  It didn’t work… Staci was still faster than me.  Stay focused. 

THE MARKETS

Stocks rallied yesterday on a solid weekly jobless number.  Value shares led the way higher and growth stocks followed rallying strongly into the close.  The S&P500 climbed by +0.82%, the Dow Jones Industrial advanced by +0.93%, the Russell 2000 Index was unchanged, and the Nasdaq Composite Index added +0.37%.  Bonds rose and 10-year treasury yields were unchanged at 1.56%.

NXT UP

– Change in Nonfarm Payrolls (April) is expected to show the addition of 1 million jobs after 

916 k were added in March.

– Unemployment Rate (April) is expected to have fallen to 5.8% from 6.0%.

– Next week we will continue to get earnings in addition to JOLTS Job Openings, CPI, PPI, Retail Sales, Industrial Production, and University of Michigan Sentiment.