[Rock] Powell [Hard Place]
What the Market? - May 2 2022
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What the Market?
As a lifelong Jets fan, I would not wish that fate upon anyone. Mr. Market, know you’re not alone in knowing what a 4-week losing streak feels like. However, unlike the goddamn Jets, we still have faith in you Mr. Market, just keep your head up - we’ll find some good news. Yes, big tech didn’t come and save the day this time but that’s okay. Yes, Q1 US GDP figures were um, less than ideal. Yes, you should pour yourself a double to take the edge off, maybe some J. Riddle. We’ve got more economic news coming in this week, brace yourselves - more volatility is coming.
What’s driving the market?
Ya, gotta be quicker than that: The FOMC meeting this week will be the talk of the street after markets traded lower in response to an additional 50bps rate hike last Wednesday. The rate hike would mark the largest hike since 2000, and signaling that the Fed is beginning to realize that they are running behind inflation. Analysts are currently expecting the benchmark interest rate to close the year out between 2% and 2.25% (about 50 bps above what was expected in March). Moreover, the Fed is also expected to start winding down its balance sheet in what is known as quantitative tightening (process of selling off assets).
Once upon a midnight dreary, I pondered inflation, and stagflation: If Edgar Allan Poe were to write poetry for an economist, then quoth the Raven, stagflation. Stagflation occurs when the economy begins to contract while inflation continues to accelerate. Last week, that’s exactly what we saw as Q1 US GDP came in at -1.4% vs. +1.1% consensus. This is a nightmare scenario for the Fed, as you can’t fix one problem without exacerbating the other. Monetary policy suggests raising interest rates to slow down an economy but slowing down an already contracting economy jeopardizes the labor market. Powell and Biden find themselves stuck between a very hard rock and a very hard place heading into the midterms with GDP projections dropping to 3.0% for the year. However, while it is important to monitor the potential of longer-term stagflation it is not time to ring the alarm. Q4’21 came in at a hot 6.9%, a slowdown was expected, and consumer spending actually increased 1.1% in March. The Fed must have had this potential scenario in mind, but unlikely that they thought it would arrive so unfashionably early.
What’s an investor to do?
We know you're wishing that inflation would go away, but inflation is here and it's here to stay (for a while longer). This week, my morning BEC SPK Hot went up $1 too, and like you all, we ain’t happy.
The strategy remains the same - it’s time for defensive, flight-to-quality investments. Truth be told, Elon Musk actually summed up some of the best investing advice for the times this week:
It’s always extremely painful to watch your portfolio sink deeper into the red, more so when you’ve been sticking to your guns for a while and trusting the long-term prospects of the companies in your portfolio (This is BABA for us, amongst many other of our portfolio staples…). Remember bad times will pass, and remember you are here for the long haul. If your picks were good, they will eventually recover. However, if you bought Zoom, Lemonade or Peloton (I mean…a stationary bike with an iPad at 25x sales?).
Remember that sitting in cash is (slightly) better than investing for the sake of investing (if you have any doubts, the S&P and Nasdaq lost 8.8% and 13.3% in April, respectively, or about yearly inflation in one month, give or take a few digits). Flying to quality will continue. Building up some exposure to corporate bonds will likely help you balance out and stop the bleeding a bit. Just remember to take a couple of deep breaths before checking your portfolio this week.
Keep an eye on the economy
April Jobs Report: To be released on Friday, this report will close out the economic backdrop and we are all hoping to see a strong labor market. Unemployment is expected to remain at 3.5%. Analysts expect a slight slowdown in job creation compared to March, adding 391k jobs (vs. 431k last month).
See here for the full economic calendar
The Curious Investor
No deep-dive this week
Emerging Ideas: Nothing new this week
Moodys, S&P, Starbucks, Hilton, Clorox, MGM Resorts, Avis, Estee Lauder, Pfizer, KKR, Apollo, Match, Lyft, Yum!, Moderna, Marriott, Spirit Airlines, Etsy, Vulcan Materials, Zoetis, Kellogg’s, Shopify, Wayfair, Block, Zillow, DoorDash, Under Armour, Virgin Galactic, AirBnB.
What we’re vibing:
Bonobo Tiny Desk. If you haven’t heard of British DJ and producer Bonobo, you are in for a treat. Bonobo is known for his downtempo electronic music and constant boundary-pushing. Bonobo’s music ranges from trip hop (brainchild of electronic music and hip hop) to nu jazz (electronic music and jazz had a baby). Aside from this live performance for all audiences, you should check out his album, Migration.
The Culture Map by Erin Meyer: Recently recommended by a colleague, Meyer’s book aims to decode cultural differences. The book is a guide through subtle (and sometimes not so subtle) differences that exist between people from different backgrounds and upbringings. The highly visual and fairly interactive book is loaded with practical advice that will be helpful for anyone working with multicultural teams.
A content guide to investing (books, books, books!)
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