Edition #222
Pivot? Yeah Right...
Investors,
I’m in Miami this weekend for various meetings, so I’ll have limited availability over the next few days. To the premium team, I’ll be posting the “Premium Market Analysis” report on Monday. Thank you for your patience.
Nonetheless, there were key economic & market developments that I want to review.
Macroeconomics:
There are two primary aspects that I want to highlight regarding the macroeconomic situation:
The labor market.
The FOMC policy decision & Jerome Powell’s press conference.
As I write this newsletter, we have yet to receive the nonfarm payroll data for September, but we did receive the September JOLTS data, ADP private payrolls, and initial unemployment claims. Each of these new data points are cumulatively reaffirming the same dynamics that I’ve been highlighting all year: the labor market is extremely resilient & tight.
Regarding JOLTS, there were 10.7M job openings at the end of October vs. 10.3M in September. This increase caught market participants by surprise, with median estimates of “only” 9.8M job openings. Investors were overwhelmingly expecting to see weakness in job openings, so this caught the market offsides by indicating that there is growing demand for labor. Regarding total openings, I think it’s vital to acknowledge the historic relationship between the monthly figure and the Nasdaq-100:
These variables have a clear correlation, potentially indicating that JOLTS should steadily come down alongside the Nasdaq. However, it’s very possible that this process takes much longer than market participants are currently expecting. It’s almost as if people expect to see job openings plummet, but I think this is unreasonable in the current economic environment. Despite anemic levels of economic output in Q1 & Q2 2022, gross domestic income & retail sales remain strong. If businesses see that consumers are still spending, why would they necessarily stop hiring? Corporate balance sheets are historically strong, providing a cushion if operating performance stalls. In addition, real Q3 GDP grew at an annualized rate of +2.6% on a headline basis. Was it a perfect GDP report? No, but it paints a rosier picture than the two consecutive quarters of negative real GDP growth that we experienced in Q1 & Q2.
While I believe that JOLTS will decline, I expect this process to happen gradually.
As a final thought on this topic, it’s worthwhile to point out that the quits rate remains at 2.7% (historically high) while the layoffs rate was stable at 0.9% (historically low). This further confirms the resilience of the labor market, with dynamic opportunities for workers to find better positions, and employers who are unwilling to depart from their current workforce. From my perspective, these two factors are likely to keep wage growth relatively elevated.
Switching over to the FOMC policy decision, it was no surprise that the Federal Reserve decided to raise the federal funds rate by another +0.75% (+75bps) on Wednesday. On Tuesday, the market was pricing in more than an 85% chance that this would be the outcome of the meeting. Shockingly, markets celebrated the initial release of the announcement based on one key sentence of the press release:
“In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
Financial markets interpreted this single sentence as an indication that the Federal Reserve was going to pivot, causing risk assets to launch higher. However, that interpretation turned 180° once Powell’s press conference started 30 minutes later… Prior to the press conference, I shared the following perspective on Twitter:
This shifting of the goal post highlights the fragility of the market right now, which came to light as soon as Powell provided in-depth comments and fielding questions from media members. His comments were overwhelmingly perceived as being hawkish, or holding an aggressive stance on monetary tightening, in order to combat inflation. Here were some aspects that stood out to me:
Powell reiterated the Fed’s commitment to fighting inflation, as he’s done in all 2022 meetings. Specifically, he expressed that there is more risk in doing too little than doing too much. In plain english, this means that the Fed would prefer to overtighten rather than let inflation run too hot for too long.
Powell said that the Fed needs to see “inflation coming down decisively”, but that a series of lower inflation prints is not a prerequisite to slowing the pace nor to pausing. In my view, this means that a deceleration in the rate of inflation is not sufficient to pivot/pause/slowdown rate hikes, which will be dependent on a wide range of economic data (GDP, PMI, labor market conditions, etc.). Essentially, the Fed needs to see confirmation of broader economic data weakening congruent with inflation sustainably declining. If you take anything away from this newsletter, please let it be this point. This also hints that the Federal Reserve is focusing on the alternative measures of inflation that we’ve been highlighting here at Cubic Analytics. These include median CPI, trimmed-mean CPI and sticky price CPI. Each of these metrics continue to accelerate while YoY headline CPI has decelerated since the June 2022 data.
Finally, Powell acknowledged what the future path of monetary policy would be in the event that the Federal Reserve does overtighten, thereby causing a recession or financial crisis. He specifically cited their policy response to the COVID pandemic, doing whatever necessary to “support economic activity strongly”. This importantly foreshadows that the Fed will eventually revert to doing what it does best: purchase assets like Treasuries, MBS, and corporate bonds in order to artificially suppress interest rates and boost financial market liquidity. We’re not in that environment today, and we likely won’t be there for some time. At the very least, we confirmed what their playbook is.
As a summary of Powell’s press conference, I shared the following perspective:
Stock Market:
On October 30th’s Edition #221, I shared that the Dow Jones Industrial Average ended the week by retesting critical price structure & highlighted the following chart:
While I acknowledged the possibility of a breakout from this channel, I transparently communicated that I had been reducing risk as price approached this level. Sure enough, the Dow Jones has been rejected on this level to a “T”.
I don’t know how deep this rejection will continue, but it’s clear to me that this channel structure is unequivocally valid. This could imply a further decline to the lower-bound. Conversely, if/when price can break above the channel, that could provide bullish momentum. In the meantime, I expect price to chop around within this range. As we discussed in last week’s premium report, I expect to see heightened volatility in the market based on the exclusive study that we discussed. So far, the study is proving to be valid so I’d recommend that you check it out here:
A major sign of concern that I’m sensing is the complete bearish momentum for mega-cap technology stocks. The former leaders of the market: AAPL 0.00%↑ GOOGL 0.00%↑ MSFT 0.00%↑ AMZN 0.00%↑ META 0.00%↑ and NFLX 0.00%↑ are all plummeting. To measure their underperformance, I prefer to use $NYFANG as the gauge of the mega-cap tech market. Unfortunately, I believe it's hinting towards more downside for the broader market:
The NYSE FANG+ Index hasn’t traded this low since July 2020, hitting fresh YTD lows during the 11/3/22 session. The price structure is completely different than the Dow Jones at the present moment, though the overall bearish trend is consistent. Quite simply, I cannot imagine seeing a sustained broad market rally until $NYFANG also participates. FANG+ could also be foreshadowing where the broader market will go next.
Bitcoin:
BTC & crypto are trading as expected, amidst broader market pressure. Considering that I’m skeptical about short-term stock market rallies, I am similarly skeptical that crypto will be able to sustain upside momentum in this environment. This environment is extremely grueling, leaving investors with minimal excitement. The fact of the matter is on-chain metrics, TA, and crypto-specific news aren’t going to show us the way out of the bear market.
This isn’t the message that most people want to hear, but it’s the uncomfortable truth that must be accepted. Generally, this has been my message for some time, echoing that we must simply wait for a more favorable monetary policy environment.
Coincidentally, I posted this Tweet on the exact day of the current YTD lows. For what it’s worth, while I acknowledge that the lows might be behind us, my base case scenario is for BTC to produce new YTD lows. I believe we are still far away from a formal Fed pivot, so I continue to believe that long-term accumulation & a steady DCA schedule into Bitcoin is appropriate right now. From my perspective, I don’t know when the Fed will reverse course, but I do know that I want to increase my Bitcoin holdings. Continuing to steadily increase my exposure over time, with a long runway of capital, is how I’m solving this dilemma.
Best,
Caleb Franzen
DISCLAIMER:
My investment thesis, risk appetite, and time frames are strictly my own and are significantly different than that of my readership. As such, the investments & stocks covered in this publication are not to be considered investment advice and should be regarded as information only. I encourage everyone to conduct their own due diligence, understand the risks associated with any information that is reviewed, and to recognize that my investment approach is not necessarily suitable for your specific portfolio & investing needs. Please consult a registered & licensed financial advisor for any topics related to your portfolio, exercise strong risk controls, and understand that I have no responsibility for any gains or losses incurred in your portfolio.