“There is nothing noble in being superior to your fellow man. True nobility lies in being superior to your former self.”
- Ernest Hemingway
Well, we made it. The last day of the quarter is here.
This quarter had some action for everyone. It was filled with an epic rally in commodities, a bond rout for a lifetime, an initial sharp sell off in most risk assets, and then (of course) a fierce bear market rally.
When all was said and done, this is what the U.S equity scorecard looks like:
- Leading the charge to the upside were Energy +40% and Utilities +4.1%; and
- Trailing far behind the pack were Technology -7% and Communications -10%
From our perspective, the Quads didn’t nail every move, but generally that was what we might have expected from a quarter that started as #Quad4 and then morphed into #Quad3 as inflation continued its acceleration.
Looking back at the quarter, the most challenging part for me was the last move. I wasn’t expecting such a sharp rally to begin shortly after Russia invaded Ukraine. But to those who did nail every move, congratulations to you!
Now the job is to play the game in front of us. To those of you who have access, we will be laying out the investing game plan for the quarter ahead with our big Q2 Macro Themes Call today at 11:00am ET. If you’d like access, ping our institutional sales team at .
Without stealing the thunder from our presentation later today, Q2 is solidly set up as a #Quad4 environment. Currently, we have a 77% conditional probability of that economic environment (decelerating growth and inflation) prevailing in Q2. Historically, a #Quad4 preceded by #Quad3 with the Fed tightening has not been kind to secular growth and high beta stocks.
Back to the Global Macro Grind…
Given the challenging comparisons in Q2 and beyond, the reality of slowing growth is easy enough to conceptualize. In fact, for 2022 in aggregate government spending (mostly stimulus checks) will drop $1.3 trillion, which is roughly 6% of GDP.
So that is your starting point for a deceleration in growth.
The most significant question in the short term may be related to inflation. Given the epic rip in commodities in Q1, many will get sucked into believing they can never go lower. To be fair, there are legitimate shortages in some areas of commodities (more on that below). That said, in the last few weeks, we have started to see some cracks in the commodity bull run.
This morning we get some more help on the disinflation portion of our thesis with the White House suggesting they are going to release a million barrels of oil per day from the Strategic Petroleum Reserve and mulling releasing up to 180 million total barrels. This would be the largest release ever from the SPR. With WTI down -6% this morning, this is obviously already creating some disinflation.
If implemented in totality, this will take the SPR to its lowest level since the mid-1980s. While certainly likely to be helpful to cap oil and gasoline prices in the short term, it is really just a further reduction in already low U.S. inventories.
Coming into today, U.S. oil inventories were already -14% below their 5-year average for this time of year and down -17% from 2021. Ultimately, unless production increases commensurately with demand this release is likely to be nothing more than a band-aid. Ironically, lower prices via a SPR release are only going to keep demand elevated.
Conversely, if the Fed continues on its aggressive path of interest rate hikes (currently 8 more hikes are priced in for 2022), we should start to see some legitimate slowing of demand. Take the U.S. housing market as an example.
Last week, the 30-year conforming mortgage shot to 4.8%. This was the largest 1-week increase since July 2011 and takes mortgage levels back to 2018 levels. In fact, in February, payments on a new mortgage were up some +25% Y/Y. The lumber market appears to be sniffing this out as lumber prices are down close -30% in the last month.
As homes get more expensive for the new buyer, it should curb demand but also further cut into the consumer’s ability to spend discretionary dollars. On the last point, we saw another decline in disposable income in the final Q4 GDP report yesterday at -5.6% Y/Y. As financial conditions tighten, this is likely only set to continue.
With money getting more expensive and no stimulus check waiting in the mailbox, there isn’t going to be a lot of extra money to invest in DOGE coin or meme stocks! But then again, maybe it is time to get to a more noble style of investing focused on profits, real growth, and not money dropped from the skies.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 30yr Yield 2.41-2.61% (bullish)
UST 10yr Yield 2.16-2.53% (bullish)
UST 2yr Yield 1.89-2.43% (bullish)
High Yield (HYG) 80.18-82.98 (bearish)
SPX 4 (bearish)
NASDAQ 13,471-14,662 (bearish)
RUT 1 (bearish)
Tech (XLK) 146-164 (bearish)
Energy (XLE) 71.91-79.47 (bullish)
Gold Miners (GDX) 36.78-39.49 (bullish)
Utilities (XLU) 70.57-75.22 (bullish)
Shanghai Comp 3164-3298 (bearish)
Nikkei 26,429-28,814 (neutral)
DAX 14,007-14,793 (bearish)
VIX 18.06-28.33 (bullish)
USD 97.76-99.31 (bullish)
Oil (WTI) 99.01-116.90 (bullish)
Nat Gas 4.63-5.93 (bullish)
Gold 1 (bullish)
Copper 4.51-4.83 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
