They “have an AI roadmap” y’all! Forget the fundamentals of the retail business being what they are! WE HAVE AN AI ROADMAP! Problem solved!!!

It’s a new month and a new commentary but the second largest bank failure in the history of our nation happened in again April… for the second time in as many months. This time it was First Republic Bank which was subsequently auctioned off to JP Morgan Chase Bank.

If I told you in my last commentary that two of the three largest bank failures in the history of the United States (plus the failure of a relatively small crypto bank and a Global Systemically Important Bank or G-SIB) would happen in March, and then asked you to guess whether the market would be up, down or flat for the month – what would you have guessed?

My bet is that you would have guessed “down.” Perhaps you (like me) would have said, “down by A LOT.”

It would have been a smart bet. And you (and I) would have both been wrong.

As we all know, inflation has had everyone’s attention for the past year. For better or worse it still does. I remember a time not so long ago when I didn’t ever need to look at the date that the Bureau of Labor Statistics released its Consumer Price Index (CPI) data for the month… it was mostly a non-event. These days, you can plan on major volatility every month when the numbers come out. The higher the reported number the more likely the FED is to hike rates and the market plunges, and vice versa.

Projected Real FED Funds Rate = FED Funds - Y/Y CPI
Click Image to Enlarge

My projections are currently unchanged assuming only one more 0.25% rate hike in the March 22-23 meeting. Depending on CPI the next couple months the Real FED Funds Rate could go positive in May without further increases. That said, I think it is reasonably possible that the FED could hike by 0.50% in the March meeting, and then continue to hike after that.

My opinion is that CPI is yesterday’s news and the primary driver of the market over the next several months and quarters will be the impending recession.

The markets just finished their best January since 2001 with the S&P 500 up over 6% and the Nasdaq up over 10%… what could possibly go wrong?

Some of you might remember 2001. For those of us who don’t remember 20+ years ago that clearly, let me help you out. January 2001 was about the midway point of the stock market meltdown that followed “DotCom” bubble. That January, I was just about 5 months from graduating high school!

Leading up to that January, the S&P 500 was down about 20% from March of 2000 through its low in December 2000 and the Nasdaq was down over 50% over the same timeframe.

Sound familiar? If not, let me point out that the S&P 500 was down more than 20% last year at its low point while the Nasdaq was down 37% from its peak to its low in 2022.

So, what happened after that January rally over 20 years ago?

The S&P 500 Index* finished the month of December down 6.19%, more than erasing the gains from November. Despite at least three bear market rallies that saw the market rise 12%, 19% and 17%, respectively, the index finished the year 2022 down 19.48%. At its low, it was down 26.71% mid-day October 13th.

There isn’t really a better way to say… it was a brutal year. For many, the bear market rallies were particularly demoralizing as is often the case.

The S&P 500 continued to claw back some losses in November, finishing the month up 5.56%. This was the 5th calendar month of the year with a positive return, but the index was still down 14.17% for 2022 when the month ended.

A little more than halfway through December the market has given back all of its gains from last month and is presently down 19.30% for the year. The SPY ETF that tracks the S&P 500 index was down 6.63% in the past four days alone despite “Wall Street” getting exactly what it wanted as an early Christmas gift –CPI (inflation) came in lower than expected and the Federal Reserve Bank (FED) slowed the pace of its rate hikes…

The S&P 500 put in a fresh low for the year on October 13th (the day after we sent last month’s commentary) before rallying for the balance of the month to finish October up 8.13% (using the SPY ETF as a proxy). That left the market down 18.69% for the year.

Yesterday, the S&P 500 was up over 5% for the day, because the Consumer Price Index (CPI) was reported at 7.7% vs. an expected 8.0%. The Nasdaq was up over 7%!

For most people (including professional investors and portfolio managers), this creates an emotional response. It shouldn’t.

Remember, from June to August of this year, the S&P 500 rose nearly 20%, only to drop to fresh lows in last month.

A one-day 5% rally in stocks is signature bear market behavior. In fact, for perspective:

• During the 2008 bear market there were 19 days where the S&P 500 went up by more than 3% in a day (12% was the highest daily move).

• During the bull market of 2020, there were 0 days that the S&P 500 went up more than 3% in a day (2.6% was the highest daily move).

Could this turn into more than a one-day rally?

The FED is hiking rates in an economy that is probably in a recession with extremely high inflation.
We are by no means out of the woods yet. We are stuck in a painful bear market and there could be even more pain to come. But this bear market will not last forever...

“The reports of my death have been greatly exaggerated…”

The S&P 500 finished July up 9.21% for the month. That is still below where it closed for the month of May. So, even though it was a good month, 9.21% was not enough to recover all of what it lost by being down 8.64% in June…

The S&P 500 finished June down 8.64% for the month. That is a little better than where it sat at the lows on June 17th when it was down a little over 12% for the month and down over 23% for the year 2022…

“Charlatans are recognizable in that they will give you positive advice, and only positive advice, exploiting our gullibility and sucker-proneness… Yet in practice it is the negative that’s used by the pros, those selected by evolution… people become rich by not going bust (particularly when others do).”

…if it looks like a duck, walks like a duck, and quacks like a duck, it is probably a duck… or in this case, a bear. A bear market that is…

The FED has painted itself (and our country) into a corner. Either they tighten (raise rates) monetary policy into a slowing economy (GDP and CPI) which will make a recession worse, probably leading to massive unemployment and social unrest. Or, they act to save the stock market by easing monetary policy (cutting rates or printing money to buy more bonds) and leading to ever higher inflation.

All I can say is this: don’t count on the FED to deliver magical outcomes.

At Elevate, we aren’t afraid to take some money out of the market when we hit a predefined stop loss. It is vital to define how much you are willing to lose on a position before you enter it. When the market starts to drop and money is being lost, humans become emotional and make poor decisions. But that is where the opportunity lies…

Despite the strong two-day rally to finish the month, January was the worst start to the year for the Nasdaq (down 19% peak to trough) since 2008. And if not for that two-day rally, it would have been the worst start for the Nasdaq ever – and ever, as they say, is a very long time. As a result, you might have thought that the decline would have made some progress in normalizing valuations, but you would have been wrong…

Predictions are something we do for fun around here. That is not how we manage money. We follow strict rules and react to the market we are in, not the market we hope for. And doing so has served us well over the long term…

I wonder if Chairman (of the Federal Reserve Bank) Jerome Powell, reads my commentary. It wasn’t long after last month’s note that Mr. Powell changed his tune on inflation being “transitory” and shifted his stance toward “tapering” the central bank’s bond purchasing program faster than planned…

…prices were spiraling upward, almost out of control.
A vicious cycle was underway: Because prices had been rising rapidly in the recent past, workers demanded ever-higher wages.
As the nation’s central bank, the Federal Reserve was the agency best positioned to try to end that demoralizing cycle, but it would exact a cost…