In mid-August, the price of natural gas peaked at $9.33. Predictions of a cold winter here and in Europe and the Russo-Ukrainian conflict have led many to predict natural gas shortages. The winter was generally milder than expected and supply lines continued to normalize, causing the price of natural gas to fall precipitously. Natural gas is about $2, down about 75% in six months. The chart to the right shows the extraordinary price drop. The bar graph on the left shows the average returns by month. It is not uncommon for prices to drop during the winter months.
While the current situation may seem extremely bearish, natural gas is approaching a 30-year low. The chart to the right shows the most recent 30-day yield with four negative sigmas. Statistically speaking, such an event should occur once every 126 years! Another reason we might expect better performance is seasonal returns. As we share, they tend to be positive from March to October.
What to watch today
- 8:30 Italian time: Chicago Fed National Activity IndexJanuary (-0.49 before)
- 8:30 Italian time: Annualized GDPQoQ, Q4 second estimate (2.9% expected, 2.9% prior)
- 8:30 Italian time: Personal consumptionQuarterly, Q4 second estimate (2.0% expected, 2.1% prior)
- 8:30 Italian time: GDP price indexQoQ, Q4 second estimate (3.5% expected, 3.5% prior)
- 8:30 Italian time: Core PCEquarter-over-quarter, 4th quarter second estimate (3.9% expected, 3.9% prior)
- 8:30 Italian time: Initial jobless claimsweek ending February 18 (220,000 expected, 194,000 prior)
- 8:30 Italian time: Continuous complaintsweek ending February 11 (1.696 million during the previous week)
- 11am ET: Kansas City Fed manufacturing businessFebruary (-2 expected, -1 prior)
The market sell-off continues
The market sell-off continued yesterday, with the market breaking through the initial psychological support at 4000. For now, the market continues to hold the support above the 50 and 200 DMA, as well as the uptrend line from the lows of October. Thus, the overbought condition continues to reverse, but more time is needed to create the next buying opportunity. One concern remains the Fed’s current hawkish stance, reiterated in yesterday’s release of the latest FOMC minutes. That means:
“Some attendees said they supported raising the target range for the federal funds rate by 50 basis points at this meeting or that they could support raising the target range by that amount. Participants in favor of a 50 basis point hike noted that a larger hike would move the target range more quickly to the levels they believe would allow for sufficiently tightening stance, taking into account their views on the risks to timely achievement of price stability.“
More importantly, the Fed also acknowledged that financial conditions have de-engaged from the Fed’s goal of tightening monetary policy to fight inflation.
“Participants noted that it was It is important that overall financial conditions are consistent with the degree of policy restraint the Committee is implementing to bring inflation back to the 2 per cent target”.
That comment suggests that the Fed will remain aggressive in fighting inflation for now, and markets are adjusting the terminal rate higher. All in all, this is not in favor of the stock market and the markets are starting to realize that.
Remain cautious for now.
Mass transit commuting and commercial real estate
The stunning graph below by Jim Bianco and Arbor Data Science shows that Chicago’s major commuter subway lines are failing to return to normal after the pandemic. Similarly, the second Washington DC Metro chart shows a similar pattern. According to the New York Post, “Only 31 — or 7.2 percent — of the city’s 425 subway stations surveyed had the same or increased ridership since 2019.” The work-from-home option that many companies offer their employees is reducing commuter traffic in major cities. More importantly, economically, it’s also starting to wreak havoc on the commercial real estate market. The Wall Street Journal recently reported rising default rates. According to the article, “The number of large office owners defaulting on their loans is on the rise, new evidence that more developers believe remote and hybrid working habits have permanently damaged the office market.”
The FOMC minutes from the last Fed meeting were mostly in line with the Fed’s statement from the meeting and recent speeches by Fed members. According to the minutes, a “few” members supported a 50 basis point rate hike, but most agreed that 25 basis points was appropriate. Fed Chairman Bullard and Mester acknowledged that they thought 50 basis points was appropriate last week.
There was no mention in the minutes of suspending rate hikes. Most importantly for equity investors, the Fed is concerned that easier financial conditions (eg, higher stock prices) will force them to hike rates more than expected. For minutes:
“A number of attendees noted that financial conditions had eased in recent months, which some noted may prompt a tighter monetary policy stance.”
Why own shares?
The chart below helps highlight an important decision investors should consider. Is a 5% risk-free return enough to justify exiting the stock market? The blue line is the earnings yield (EPS/price) of the S&P 500. So consider it the market yield if 100% EPS was paid to investors. The blue line is the annual Treasury yield. Gray shading shows the difference. As shown, the difference is now close to zero. Plus, it’s the lowest since the eve of the dot-com crash in 2000. As we shared in yesterday’s commentary, high valuations and margins argue that the 5% return on bills, without any risk, is undoubtedly worth considering.
The tweet of the day
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