Stocks dropped yesterday as talks between Russia and Ukraine ended with no agreement. Crude oil continued its climb as more and more pressure to cut off Russian supply caused traders to fear further inflation pressure.
Corrected. I haven’t broken this one out for a while now, but in light of the markets’ recent volatility, I feel that breaking the glass is appropriate. We are a boating family and I have lots of interesting stories involving boats, the wind, the weather, and…um, the water. If you haven’t piloted a larger boat, you may not realize just how difficult it could be. You see, for some strange reason, way back when, someone decided that proper boating etiquette requires one dock a boat stern first. In automobile terms that is the equivalent to backing your car into a parking spot. In case you never noticed, there are no lines painted in marinas, just lots of boats, neatly…and tightly spaced next to one another. These days, when the younger generation backs a car into a tight spot, they simply look at a back-up camera which has conveniently drawn lines to help guide the car into a spot. If they get too close to another car or a barrier, alarms sound, and in some cases the car might even apply the brakes automatically. There is nothing really like that in a boat, or at least there wasn’t when I was younger and learning to berth my family’s boat.
A boat’s movement is dictated by a number of factors. Of course, there are the engines and the rudders, but if you have never piloted a boat, you would not know that the wind and the current play a big role as well. If there is a breeze blowing across your bow, the boat will literally move with the wind. Likewise with a current running across your hull. Ok, so let’s keep it simple and say that those 4 factors affect the direction of your boat. I am sure that you noticed that you are only in control of 2 of them – your engines and rudders. You may have also noticed that, unlike cars, boats do not have brakes. Now that you know all of that, let me set the scene.
I am pulling the boat into the marina, there are young kids running all about the boat while adult passengers are lounging, conversing, and taking in the sights. I must focus, because one wrong move and I could end up colliding with another boat. I look at the flag on the dock and try to assess how fast and which way the wind is blowing; the flag keeps changing direction. I look at the surface of the water and attempt to determine the direction of the current. I look at the dock and notice that the tide is flowing which will also affect the currents. I spy our berth in the distance and it appears far too small for our boat. I must now pull up to the far side of the marina, pivot the boat and carefully reverse into the small space between two, even bigger…and more costly boats. Are you feeling the pressure yet? If not, imagine my father and my uncle perched in various spots on the deck yelling opposing directions at me, multiplying the tension. I put the boat in reverse and start to make my way toward the dock. Suddenly, the wind gusts and the bow (front) of the boat swings and puts me on course to hit another boat. I try to compensate by manipulating the engines, but that only makes the situation worse. Tension builds as another opposing wind gust twists my boat in the other direction. At this stage, I am trying everything… even things I was taught not to do. It is not looking good. Everything I do to remedy my situation just makes things worse. All at once, I spy the little piece of tape my father placed in front of the helm, on which he inscribed the words: “neutral is your friend.” That was it. I put the engines in neutral and took my hands off the helm and took a deep breath. Eventually, I was able to figure out which way the wind, the tide, the currents, and my momentum were going. Once that became clear, I was able to manipulate the engines and get back on course and ultimately dock the boat.
Yesterday, crude oil prices spiked in response to the possibility that the US and others will place a full embargo on Russian crude oil. Similarly, commodities in the grain complex along with industrial metals rose to higher heights. Rising raw material costs can cause consumer prices to go higher. Wait, aren’t we already dealing with 1980s-like inflation? The Fed is likely to raise key interest rates next week, which make borrowing more costly. The Dow Jones Industrial Average is in correction territory, and the Nasdaq is in bear market territory. Longer-dated treasuries are trading higher pushing yields lower, which should help growth stocks…but they continue to struggle. Did I mention that there is a war going on in Eastern Europe? How about the pandemic? Last Friday, we learned that the US economy produced 678k new jobs last month, far exceeding economists’ estimates. Additionally, the unemployment rate ticked lower. That is good news for the economy, but is it good for stocks or bad for stocks? Markets are very complex, and volatility is quite high at the moment. There are many factors affecting the daily, weekly, and even monthly direction of the markets and all those factors appear to be fluctuating and opposing. Here are some positive factors. According to Dow Jones Market Data, the Dow has historically gained some 8.7% on average in the 12-month period following a close in correction territory. Further, crude oil futures are currently in backwardation, which means that current prices are higher than future prices ($119/barrel today, $103/barrel for Sept. 2022, and $92/barrel for April 2023, for example). That means that oil traders expect prices to go down in the months to come. At times like this, when emotions are running high, I find that it’s best to take my father’s sagely boating advice: neutral is your friend. That means, try not to react, but rather wait to see a clear direction before acting.
YESTERDAY’S MARKETS
Stocks sold off yesterday with the Dow closing in correction territory after failed talks between Russia and Ukraine compounded inflation and Fed rate hike fears. The S&P500 fell by -2.95%, the Dow Jones Industrial Average traded lower by -2.37%, the Nasdaq Composite Index dropped by -3.62%, the Russell 2000 gave up -2.48%, and the S&P500 ESG Index declined by -2.99%. Bonds slipped and 10-year Treasury Note yields advanced by +4 basis points to 1.77%. Cryptos fell by -5.8% and Bitcoin gave up -3.05%.
NXT UP