Stocks had a mixed close following a wild session of ups and downs as inflation fears and strict Fed continued to overhang markets. Producer prices moderated slightly, but they are still high, and they came in above economists’ expectations.
Risky business. So, what is it that is causing markets to move today? That is a fair question and usually the first one I get when confronting…just about anyone, these days. You read my note on most days and the answer to the question is usually tucked in between the missives on my exploits as a home chef, an avid garden watcher, a grocery shopper, a boater, a music appreciator, etc. I like to keep it interesting when sometimes the answer is so simple that it may not even warrant an entry. There is an old Wall Street inside joke that when a client calls and asks, “why is the market down,” the trader answers with “there are more sellers than buyers.” You may be chuckling (most likely not), but the reality is that the trader’s tongue in cheek answer is usually an accurate account.
Markets have been quite volatile lately and for good reason. Inflation is sky high, economic growth appears to be slowing (but not in danger), the Fed is slamming on the brakes while pretending it isn’t, the world is at economic war with Russia who is hellbent on the destruction of Ukraine, stocks have just come off a period of super-high valuations…the list goes on and on. The result of all those issues is a pile of unknowns and worry, which has resulted in extranormal daily market swings that have even the most seasoned money managers on edge. An inflation number is larger than expected and the conclusion is that the Fed will be more aggressive, and stocks fall. A Fed official says “we won’t be aggressive, I promise,” and stocks rise. Europe threatens to completely embargo Russian oil or Russia cuts off a gas pipeline and energy prices rise, inflation fears reignite, and stocks go down. Makes sense, buy why the extreme swings, especially in tech stocks?
Investors have an interesting relationship with technology stocks. Many of you dipped your toes in the water with tech stocks in the late 90s and rode them up into Y2K only to get beaten up in the dotcom bubble burst. Further losses would occur through the brief recession in 2001 and for the year that followed, but then things started to pick up, slowly but surely. You were being paid back for suffering through the ups and downs of the previous years. From its post-recession lows in 2002, the Nasdaq rose by +130% until The Great Recession, through which the Nasdaq lost -31%. What happened after that would set the stage for today’s nauseating-at-times volatility. The tech-heavy Nasdaq rose by +366% from the end of the 2008 recession through the beginning of the 2020 pandemic recession. But for a few minor sideways moves and 1 brief dip in late 2018 tech appeared to be unstoppable. It was quite lucrative to own tech stocks through that period. The problem is that investors began to think of technology stocks as being low risk. “Buy the dip and let ‘em rip” would have yielded you fantastic returns. Treasury bonds, which are, in fact, the least risky asset in the world, featured such low yields that investors shunned them altogether. Why would you invest in a boring bond with a 2% yield when you can make +1500% by owning Apple? Making matters worse, megacap tech shares appeared to be infallible, always recovering from routs. This false sense of security was only accentuated during the pandemic. When it appeared that tech would make its final curtain call in March of 2020, it came back…with a flash. The Nasdaq bounced off its March 2020 lows only to return a whopping +134% through its peak in late 2021. Tech could simply not fail.
Surely, something changed in November of last year that caused the Nasdaq to fall some -29% since. I am here to tell you that nothing has changed. Tech stocks, or all stocks for that matter, are risk assets. One cannot achieve a +1500% return without some risk. If you owned Apple through that period, you were taking risk, though you may not have realized it. But wait…if we look back – carefully, we may find some clues. Oh, now we remember. Apple lost more than -40% in 2012/2013. That was not the only big loss. Another -30% drawdown came in 2015/2016, and yet another -36% in late 2018. So, maybe Apple’s recent -19% drawdown is not so extraordinary after all, considering all those past drawdowns and the +2779% gain it posted from the end of the 2008 recession through today…drawdowns included. Stocks are not riskless. Picking quality stocks can minimize pain, but occasional pain is the price we must pay for astonishing gains.
Stocks had a volatile session as traders attempted to digest and address the hotter-than-expected PPI release that reminded them that inflation is not going away so fast. The S&P500 slipped by -0.13%, the Dow Jones Industrial Average gave up -0.33%, the Nasdaq Composite Index gained +0.16%, and the Russell 2000 Index jumped by +1.24%. Bonds gained once again and 10-year Treasury Note yields fell by -8 basis points to 2.84%. Cryptos fell by -5.13% and Bitcoin advanced by +0.51%.
- University of Michigan Sentiment (May) may have slipped to 64.0 from 65.2 owing to pullbacks in both current and future expectations.
- Next week, earnings season begins to wind down. In addition, we will get some regional Fed reports, Retail Sales, Industrial Productions, housing numbers, and the Leading Economic Index. Please check back on Monday for calendars and details.
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