12/14/21

STOCKS – GS

MACRO – SPY

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Stocks fell sharply to start the day, with S&P 500 trading lower by 1.3%. Around 2 PM, the buyers came in and managed to cut the loss in half, with the S&P 500 ending the day down by around 75 bps.

It was a telling day, with a big gap lower following the hotter than expected PPI print. Using the old measure from around 1915, the Producer Price Index showed that wholesale prices rose by almost 23% in November. This measure was retired about a decade ago from the headline, but I still like to use it. Nearly every time the PPI reached a level of 10% or higher, it has been accompanied by a recession within 2-years. The exception being 1934 and maybe 1951.

It appears the recession has come as the Fed jacked the Federal funds rate higher.

Looking through this lens explains why bond yields are doing what they are doing, which is moving lower on the back-end of the curve. Essentially, the bond market is telling us that the Fed and higher prices will do what they always do, cause a recession, or at the very least, a significant economic slowdown.

Since 1965 returns in the S&P 500, when the PPI has reached more than 15%, have not been good. In November 1974, PPI hit 23.4%, the S&P 500 had already started falling, going into that PPI peak and was down nearly 50% from January 1973 until it bottomed in October of 1974. The PPI hit almost 17% in February 1980, and the S&P 500 fell about 27% from November 1980 until August 1982. The PPI hit 17% in July 2008 and lost nearly 57% from October 2007 until March 2009.

It doesn’t mean that history has to repeat itself this time, but I’m not too fond of the odds of the Fed making a soft-landing here, and the bond market doesn’t appear to either. This is why the 10-year minus the 2-year spread is breaking down and looks like it is ready to fall off a cliff on its way to just 50 bps.

S&P 500 (SPY)

In the meantime, the S&P 500 did finally break support today at 4,665. The index fell sharply to 4610, where it found support but failed to fill the gap. I think there is a good chance we have completed waves 3 and 4 today and that tomorrow we resume lower, maybe towards that 4,590 area.

Goldman (GS)

Goldman may finally be ready to drop below $375 and head towards $352. It has a sort of double top bearish reversal pattern forming. We won’t know for sure about the double-top pattern until it breaks $352.

That’s all for today.

Mike