The Bear Surfaces after 24 Months of Hibernation
The cash equities markets are closed today for the federal holiday. Although equity futures are trading about 0.8% higher this morning, the S&P 500 dripped 5.8% last week having its worst week since the initial pandemic shutdowns in March 2020. The S&P500 sits down -23.4% from the peak, now squarely in official bear market territory. The S&P500 has now given up its gains since the beginning of 2021. However, already four times in the past 13 years, the market has pulled back so severely that it gave back 2-3 years’ worth of its prior gains. Those periods were? August of 2015, January of 2016, December of 2018, and March of 2020. Each time the markets went on to make new all-time highs over the next six to twelve months.
Last week was a chaotic one in interest rates and the US Treasury markets as 10-year yields initially jumped to 3.5% on the Fed’s 75 basis point rate hike, before ending the week at 3.23% on Friday, up just 7 basis points on the week. Corporate credit spreads widened further. Economic slowdown fears also hit “Dr. Copper”. Lumber prices, as we have previously discussed, have led all commodity moves now for a few years. Lumber prices have now been chopped in half since the start of the year and are down almost -70% from their panic highs of $1700/board ft reached 15 months ago in the second quarter of 2021. However, lumber now looks to be troughing in a “FIFO” (First In-First Out) manner. Our team suggests you build the fence you might have been putting off for the last 2 years.
Oil prices slid 9% last week to below $110 a barrel, while U.S. natural gas prices tumbled 21% to below $7 MMBtu, as a fire-related shutdown at a Texas LNG export facility led to a backup in natural gas inventories. This is all good news for the inflation outlook, but we need the progress to be sustained throughout the summer months.
Chair Powell makes his 2x a year trek to Capitol Hill on Wednesday and Thursday. He will be grilled about four-decade high inflation and the potential recession needed to tame it. Powell has already suggested the size of July’s rate hike at between 50 and 75 bps, though one can’t rule out an even larger move if we get more bad surprises in the next round of inflation/inflation expectations reports.
The economic data continues its streak of underwhelming reports versus economist expectations. The Citi U.S. Economic Surprise index now sits at a -65 reading. While depressing to most following the reports, one must note that readings approaching -70-75 have marked the lows (ex: the Covid lockdowns) the last 12 years in economic slowdowns and have been near to previous stock market lows, albeit it many investors wait for the reports to “beat” a lowered bar.
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