No nirvana for Carvana

Stocks sold off in a volatile session after some stronger than expected economic numbers appeared to give the hawkish Fed more latitude to… hawk. Bond yields were all over the place as the currency markets sought equilibrium in the wake of England’s wave of unexpected announcements.

The storm before the calm. Let’s start with the numbers. The VIX Index is the accepted measure of volatility in equity markets. Right now, the VIX is around 31, which probably means nothing to you, on its own. I will give you some context to help with that. Around this time last year, the index was in the high teens and got as low as 15 in late October. In March, earlier this year, the VIX spiked to 36 briefly then quickly receded to below 20. It would jump 2 more times to the mid-30s before it would retreat to around 20 in late summer. It didn’t spend a long time at those levels before ratcheting up into the high 20s, which brings us to where we are today. For the record, in the 8 years prior to the pandemic the index rarely spiked above 20 and spent most of its time trading around 15. So, it is clear, based on those numbers alone, that volatility is high in the equity markets. Further, it is clear based on recent volatility OF THE VOLATILITY INDEX ITSELF, that volatility is… er really high and that nerves are a bit raw right now. One last bit of numbers for you. At 31, the VIX projects daily market moves of around +/- 1.92%, weekly moves of +/-4.29%, and monthly moves of +/- 8.95%. Unfortunately, lately, more of those moves have been on the downside and the volatility, alone, is enough to dissuade the most adventurous investors from partaking.

The volatility is not limited to equities. It is present in the bond markets as well as the commodities markets. This all stems from high inflation and the Federal Reserve. Inflation has set in, and it stubbornly remains at 1980s levels, painful in and of itself. The Fed, whose job it is to fight that inflation, has taken a 1980s-style sledgehammer approach to fix the problem. The problem with that problem-fix, is that it TOO is painful, and if we get a 1980s-style result, we will end up in a recession. Typically, the Fed would not want to see the US economy enter a recession but based on all the words coming out of the mouths of all the guys and gals that vote on policy, the Bank seems hellbent on applying pain to the consumer, or as it puts it, “whatever is necessary to end inflation.” This one is on us. As you might expect, the stock market is not keen on having a recession which would lead to lower earnings growth and ultimately higher unemployment. But alas, that is what the Fed believes is necessary to tamp down inflation.

Now, in all this ominous stuff I hit you with in the past 2 paragraphs, there is some good news. The good news is that there are some signs that the Fed’s grip is starting to yield some results. These are early signs, mind you. More and more companies are announcing either job cuts or hiring freezes. That will ultimately cause the unemployment rate to rise. The Fed would like to see this as a tight labor market is a key driver of inflation. That corporate policy has not shown up in the economic numbers just yet, but it will, eventually. Weekly employment figures have actually been trending stronger, but the real proof will come in the monthly numbers; we will get a reading on those next Friday. Based on GDP figures we received yesterday, GDP growth still remains negative for Q2 making that 2 consecutive quarters of economic contraction… kudos Fed. In 2 weeks, we will begin to ramp up Q3 earnings season and based on some of the early announcers, it looks like we can expect to get some… less-than-positive results. Just last night Nike announced that it will have to lower prices to reduce swollen inventories. This is consistent with information we have been receiving from larger retailers. Yesterday, CarMax announced that it has experienced a decline in earnings, missing its Q3 estimates by -43.53%. The company attributed the slowdown to a shift in spending as consumers seek lower-cost vehicles or they plan to wait until inflation calms. You may recall that used vehicle sales was one of the initial catalysts of this current spate of inflation, dating back to early 2021. Yesterday, Micron announced an EPS beat but issued soft forward guidance. The company is slowing production to reduce a supply glut caused by lower demand… as in reduced spending on electronic equipment by consumers and corporate IT spending. Supply glut implies lower prices for memory, which the company believes will spur future growth, but lower prices NOW are exactly what the Fed is hoping for.

These are all early signs. It will take a bit of time for these to propagate through the economy and ultimately find their way into the economic numbers. On those, we will get the PCE Deflator later this morning, and the headline number is expected to have cooled a bit, but the core number, which excludes food and energy, is expected to tick slightly higher. This is the Fed’s preferred inflation gauger, so we expect that they will be paying attention while the rest of us sip our morning coffee. Lots of Fed officials will be speaking today, so if we are lucky, we may even get their takes on this morning’s number. These early signs of Fed success tell us that the Fed’s activity will ultimately pay off. Is the pain over? Nope. Will there be more pain to come? Yep. Will it end soon? Hopefully, but when it does, interest rates will come down fast, the yield curve will steepen, stocks will rise, especially those interest-rates sensitive ones which are causing us the most grief at the moment. Keep your chin up and stay focused, we are all in this together.

YESTERDAY’S MARKETS

Stocks fell yesterday as yield gained back some of Wednesday’s losses and fears of a global economic slowdown worried investors. The S&P500 traded lower by -2.11%, the Dow Jones Industrial Average lost -2.54%, the Nasdaq Composite dropped by -2.84%, and the Russell 2000 Index declined by -2.35%. Bonds gave up ground and 10-year Treasury Note yields added +5 basis points to 3.78%. Cryptos slipped by -0.39% and Bitcoin eased by -0.30%.

NEXT UP

• Personal Income (Aug) is expected to have grown by +0.3% after growing by +0.2% last month.
• Personal Spending (Aug) is expected to have grown by +0.2% after growing by +0.1% last month.
• PCE Deflator (Aug) may have slowed to +6.0% from +6.3%.
• Fed speakers today: Barkin, Brainard, Bowman, and Williams.
• The week ahead: PMIs, Factory Orders, Durable Goods Orders, JOLTS Job Openings, and the monthly employment numbers. Please check back in on Monday for calendars and details.