Good morning contrarians!
Stocks are a bit lower after another major day of gains on Wall Street. The Russell 2000 led major U.S. indexes with 2.6% gains, followed by the Nasdaq (+1.8%), S&P 500 (+1.2%), and Dow Industrials (+1%).
As of 0630, the Nasdaq is leading the drop, down about 0.6%. Other U.S. indexes are down a little less. Stocks in Europe are dropping as well, led by the DAX in Frankfurt which is off about 1.4% at midday.
Bonds are mixed, with the yield on the 2-year is down about 2 basis points to trade around 2.33% whilst the 10-year is up less than 1bps to 2.41%. The 2-year/10-year briefly inverted yesterday, which means the yield on the 2-year moved higher than the 10-year’s. More on that in the bottom line.
Commodities are seeing some bids, with WTI crude oil up a little less than 2% to trade around $106/barrel. Industrial metals palladium, aluminium, zinc, and nickel are all up multiple percentage points. Copper is up 1%. Cryptos are about flat, with bitcoin changing hands around $47,200.
Economic Data
A couple of economic data releases today, both before the open, neither particularly noteworthy. ADP nonfarm payrolls are out at 0815. Not to be confused with the Bureau of Labor Statistics’ nonfarm payroll report, which is out Friday morning, the ADP data sometimes deviates quite widely from the more closely-watched BLS data. For this reason people appear to have stopped taking it seriously. Whatever reaction there is by markets will usually be minor and quickly reversed. For what it’s worth, economists expect 450,000 new jobs this month, down a bit from the 475,000 seen in February.
Then we have fourth-quarter GDP at 0830. This is a significant data point, but it is entirely backward-looking. As forward-looking mechanisms, markets have no use for this, though the talking heads on CNBC and elsewhere will certainly make a big deal of it. Here economists expect annualized growth of 7.1%, a dramatic improvement over the 2.3% seen in the third quarter.
Later tonight we have China PMIs out at 2130. The expectation here is for the manufacturing PMI to drop below the 50 line that separates expansion from contraction, to 49.9 to be exact. It’s been there before this cycle, most recently in October, Last month the figure was 50.2.
Kansas City Fed President Esther George speaks at the Economic Club of New York at 1300.
Marijuana Decriminalization
The House of Representatives meet to consider the so-called MORE Act (Marijuana Opportunity Reinvestment and Expungement Act) starting at 1300. This would create provisions for banking and consumer packaged goods sales on a federal level. The measure is expected to head for a full House vote on Friday, where it may even pass. It faces much tougher odds in the Senate (and may in fact be a non-starter, at least in its current form).
Still, this has moved marijuana stocks, with the Alternative Harvest ETF (MJ) advancing by 10% this month. It’s still down more than 50% over the last 12 months though, so one would figure there is still plenty of upside if we do get around to federal decriminalization. And if the politicos can get rid of daylight savings time, then maybe they can actually produce sensible legislation. Talk about a contrarian take!
The Bottom Line
It takes an average of 20 months from the time the yield curve first inverts until the onset of a recession. That would be late 2023. It’s been as quick as six months or as long as 24 months. So this doesn’t really tell us anything, other than that a recession is coming at some point. But we already knew that.
Of course, markets and the economy don’t move in lockstep. But once investors get a sense that a recession is incoming, they adjust their portfolios: tech and growth stocks get dumped, and safe-haven plays like bonds get bought. Sometimes certain staples get bought too.
Looking at past cycles, we can see that the craziest part of the bull market sometimes comes after the yield curve inverts. That was certainly the case in the late-90s, as the yield curve inverted in June 1998, a solid 33 months before the recession started. This would explain why some analysts have been predicting that this cycle’s biggest melt-up for stocks is still ahead of us.
What’s your stance on this? Let me know your thoughts by replying to this email or posting a comment below. Whatever your views, just make sure you do your own research and make your own decisions.
The Yield Cure Inverteth: Daily Contrarian, March 30