Gold was up $80 an ounce at its peak yesterday, and nickel prices catapulted higher, shown below, as the surge in commodity prices continues. The combination of sanctions on Russia and investors chasing commodities is benefitting the price of many materials such as gold and nickel. Russian President Putin further fueled prices yesterday by banning the export of “products and raw materials” outside of the Russian Federation until December 31st. Gold and nickel gave up early gains as the stock market started rallying in hopes that a humanitarian ceasefire agreement might lead to peace.
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What To Watch Today
Economy
- 7:00 a.m. ET: MBA Mortgage Applications, week ended March 4 (-0.7% during prior week)
- 10:00 a.m. ET: JOLTS job openings, January (10.950 million expected, 10.925 million during prior week)
Earnings
- Sonder Holdings (SOND) to report adjusted losses of 26 cents on revenue of $68.20 million
- CrowdStrike (CRWD) to report adjusted earnings of 20 cents on revenue of $410.48 million
- Asana (ASAN) to report adjusted losses of 28 cents on revenue of $105.33 million
This Market “Feels” Like It Wants To Rally
The market “feels” like it is waiting for any piece of good news to unleash a rather substantial technical reflexive rally towards the 50-dma. Any easing of tensions with Russia, a breakthrough in negotiations to a ceasefire, etc., would probably do the trick. However, in the short term, we are on a weak “sell signal” as the market just now approaches oversold conditions. Therefore, there is certainly more downside risk to the “Russia invasion” lows.
We continue to suggest using any rally as an opportunity to clear risk in portfolios. With the Fed prepping to hike rates, the economy slowing rapidly, and now surging commodity prices, the entire setup for a continuation of the previous bull market remains unlikely.
NFIB Sentiment Declines
While gold and nickel are surging, small business sentiment surely isn’t. The latest NFIB survey showed an unsurprising decline in confidence by small businesses amidst the backdrop of inflation and the Russian invasion of Ukraine. Importantly, confidence is now at levels that are considered pre-recessionary.
Along with the decline in confidence is now the loss of confidence to hire employees and pay higher wages. As we noted previously, it is only a function of time until companies begin to focus on profit margins which are highly deflationary for the economy. That process has likely started as sales expectations are declining rapidly.
Gold Miners or Metal Miners?
GDX, the gold miner ETF, is up 28% this year thus far. Clearly, inflation and the rising gold prices are helping gold miners. Miners of gold and silver and nickel, copper, and ore have been on a tear. Many metals investors seek to profit from surging metal prices and gain a hedge against inflation. If you are considering an investment in miners and choosing between industrial metals and precious metals miners, consider the graph below. The graph charts the ratio of GDX to XME (S&P metals and mining ETF). As shown, the ratio is near decade lows. The ratio signals that a move from industrial miners to gold miners might be a smart move.
The Drawdown is Normal, So Far
The media may be sparking a slight panic amongst equity investors, but the reality is that the current 12% drawdown in the S&P 500 is normal. The table below from Charlie Biello shows the maximum drawdown in each year since 1928. The median for the nearly 100 years of data is -12.8%. The only caveat is that the year is only two months old, and the market has already tagged the long-term median drawdown.
How Do Stocks Typically Perform in Major Geopolitical Events?
The Russian invasion of Ukraine started on February 24th but the war drums were banging in January. Since the start of the year, the S&P 500 is down 12% and the NASDAQ down 19%. The table below helps us put the decline into perspective versus other critical geopolitical events. As shown, the current event ranks near the top in terms of losses.
While the media blames Russia as the cause for the market’s slide, we believe it has more to do with the Fed. Tomorrow is the last day of QE, and in a week, the Fed is likely to raise interest rates. Liquidity from the Fed and the federal government is vanishing. We think Russia is a concern for stock prices but more so in how it aggravates already high inflation figures. Typically we might expect the Fed to hold off raising rates during a significant geopolitical event. In fact, history says they would be much more likely to reduce rates. This time, Russia’s action generates more inflation than would have been otherwise, and the Fed has to take action. As we show and state below, this time might be different.
This Time Might Be Different
The Fed meets next Wednesday and is widely expected to begin raising rates at that meeting. Samantha LaDuc and @DataTrekMB, in the Tweet below, explain why this coming action will potentially occur in a very different environment than what the Fed and investors are accustomed to.
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