Are our old favorite tech stocks back in style?

Stocks had a mixed close after a turn-around session in which investors were concerned about a looming recession. Bond yields are telling a story about a sluggish economy in the future.

What is old is new. If you were a casual observer of yesterday’s markets, you were surely left scratching your head. Don’t worry, you are not alone…even the pros could be caught talking to themselves trying to find order in the chaos. Have you heard that we have an inflation problem? Have you heard that interest rates are rising? Are you aware that a recession might be on the horizon? I am sure you answered yes, yes, and yes…and flourished it with some sort of expletive.

Things have been moving quite rapidly lately and the markets are struggling to keep up, never mind attempting to factor in what might be next for the economy and the markets. For now, we take inflation as a given. I know that I needn’t repeat the economic numbers, because if you buy just about anything, you are well aware that things simply cost more than they have in the past. Alas, I will offer you a sliver of hope. Commodity prices have been a big factor in the painful rise in food prices. Grains, amongst other things, have hit multi-year highs as a result of planting conditions, labor shortages, high transportation costs, the war in Ukraine, and of course, soaring global demand. Higher grain prices, specifically on commodities like corn and wheat, not only show up in our grain-based food, but also in our protein-based food like chicken, eggs (or is it eggs, chicken), milk, pork, cheese…you name it. Commodities like corn and soy are a vital part of the feed used to raise livestock. Ok here is the sliver that I promised you. COMMODITY PRICES ARE FALLING. The Bloomberg Commodity Index is now down by some -18% from its early-June peak. That is almost bear market territory. Now, to be fair, the index is still about +20% higher than it was a year ago, but this recent move is certainly one in the right direction, offering some hope that food inflation may soon ease. Commodity prices have been falling in anticipation of weaker demand brought on by a potential economic downturn. Additionally, crop yields are higher as a result of better-than-expected weather conditions and increased planting to meet increased global demand. More supply and less expected demand are the opposite of what we have been experiencing for the past 18 months, which ultimately led to the inflation we are currently experiencing. Another obscure but interesting development is in the cost of transportation. Lots of domestically grown commodities are transported via river barge. Costs of barge transportation hit a multi-year high earlier this year, and those costs have recently declined sharply, by some -60%. Though we are not likely to feel it any time soon, these pullbacks in basic commodities are perhaps some green shoots of normalized inflation.

Similar to inflation, I am sure that, despite the economic numbers, you already know that consumers may be tightening their purse strings in anticipation of some rough seas ahead. If you are not feeling the pinch just yet, I will remind you that numbers do, in fact show, that demand is slipping and consumer confidence has dipped, in some instances, to all-time lows. Those are the early drivers of an economic slowdown. The pullbacks can be caused by inflation itself, higher borrowing, costs, or fear of recession…or all three. It doesn’t matter which, a slowdown in consumption portends slow GDP growth. While there has been no rush of economists shouting for recession, markets are certainly beginning to factor in its possibility. One of the clearest signals is in the Treasury yield curve, which just yesterday solidly inverted between 2-year and 10-year maturities. It briefly inverted earlier in the year, but yesterday’s move was an unmistakable response to a growing threat of recession. Yes, yield curve inversion occurred in many forms just prior to many of the past recessions. It happens when longer-maturity yields fall in anticipation of lower inflation and economic strife while shorter-maturity yields simultaneously stay put, governed by expected ongoing, tight monetary policy.

Finally, there is the Fed, itself. While many of us dream of sunny summer weekends with family and friends, the central bankers in charge of interest rates are baking away in those greyish, and likely sweltering, buildings that dot the nation’s capital. They are, indeed, in a tight place. They MUST fight inflation by raising, and talking about raising, interest rates. They have certainly been doing their jobs…lately, at least. They have been busy raising interest rates, selling bonds, and laying the groundwork for future, inflation-busting rate hikes. The challenge that looms over its head is the potential of pushing the economy into a recession, and as the possibility of a decline in growth rises, so do the stakes for the Fed. Surely the policy makers have taken note of the recent softening of consumer demand, falling confidence, declines in corporate debt-issuance (resulting from higher rates), and the weakening of commodity prices. Markets have been anticipating that the Fed is taking note and may slow down the velocity of its hiking. Forward rates now show an expectation of 3.27% for Fed Funds by year end. That is still +150 basis points higher than today, but it is -50 basis points lower than it was at the beginning of June. Equity markets too put in a vote for a lower-rate, possibly recessionary economy yesterday. Growth stocks, which have been hammered by rising yields over the past 9 months, rallied yesterday in anticipation of lower yields in the future. In converse, cyclical stocks in the Materials and Industrials sectors sold off in anticipation of… recession. Hang on and pay close attention, because lots will change in the days and months to come.

YESTERDAY’S MARKETS

Stocks started out in a tailspin as traders began the day with a solid fear of recession. Ultimately sharply declining yields and a yield curve inversion sent traders clamoring for growth stocks which led to a recovery rally in the growth-heavy indices. The S&P500 gained a scant +0.16%, the Dow Jones Industrial Average fell by -0.42%, the Nasdaq Composite Index jumped by +1.75%, and the Russell 2000 Index advanced by +0.79%. Bonds rallied and 10-year Treasury Note yields declined by -8 basis points to 2.80%. Cryptos gained by +5.96% and Bitcoin added +3.47%.

NXT UP

• ISM Services Index (June) may have declined to 54.0 from 55.9.
• JOLTS Job Openings (May) is expected to have pulled back to 10.9 million jobs from 11.4 million in April.
• FOMC Minutes from June 15^th will be released at 2:00 PM Wall Street time. Watch this one closely… it could be a market mover.