What to make of the Fat Tuesday sell-off...
Yours truly, and most of the people involved in the 4717 know the feeling of waking up on Ash Wednesday and feeling – in more ways than one – like hell. One of the driving forces behind this dispatch is, as far as we know, still somewhere on Canal Street. His wife doesn’t seem concerned, so neither are we.
Your investment portfolio may not be feeling much better. The Dow dropped 500 points, for that matter, every index got clobbered. Like any cocktail likely to make you want to shave your tongue the next day, the sell-off was a combination of a couple of factors. The one getting all the blame is that inflation, up 3.1%, was higher than expected. While it didn’t help, but inflation has been higher than that for two years. The unfortunate bump was boosted by the strong news on the jobs front, wage rises and purchasing indexes. Taken together, what you got was all the forces that would normally boost inflation are doing just that, if only slightly.
The second order effect is that all those investors who’d baked the price of a rate cut in late March are suddenly second guessing themselves. Any Southerner with vaguely Bourbon creole sensibilities knows that a lively Mardi Gras jolly is no place to start second guessing yourself. Bad things happen. To wit, Fat Tuesday’s nasty sell-off.
To put it all in context, the S&P500 is still up 25% for the year and the NASDAQ up better than 40%, and the economy still seems to be pumping along by most metrics. There are some worrying signs: the an equally weighted S&P500 – as opposed to market cap weighted) is down slightly for the year. During the festivities, Coca Cola announced a drop in revenues, owning largely to a drop on people drinking it’s products at home – while restaurant sales remained steady. If Coca-Cola is drifting from something Americans drink like water to an occasional treat, it’ll do wonders for the obesity, diabetes and flatulence, but it is a troubling early warning sign for the economy. That credit card delinquencies creeping up won’t help, either.
The yields on the 10-year treasuries rose to 4.315% this week, so whatever else is going on, the spreading geopolitical grease-fire isn’t causing a flight to safety.
While we’re indulging in the grim meat-hook reality that traditionally accompany the day after Mardi Gras, consider that in the past 11 Fed rate hike cycles, a recession has started two years out. The current cycle started in March of 2022. Now, these averages are just that, averages, but the quants love to calculate these things. So if you are wondering, that recession is coming next month. That isn’t likely, simply because there is still an awful lot of excess cash in the system, so the wheels aren’t coming off the float for a while longer.
Mardi Gras is over, and lent is a time for reflection. Time to assess the damage. Or embrace the chaos.