Bananas Tell The Tale Remember way back when (last month, to be exact) I mentioned that April is - statistically - the best month of the year on average for S&P 500 returns?
Well, not this time.
Stocks are headed for their first losing month since October. The 30-stock Dow Jones Industrial Average is on pace for a more than 5% loss in April. The S&P 500 and Nasdaq Composite are headed for declines of more than 4% each.
Well, not this time.
Stocks are headed for their first losing month since October. The 30-stock Dow Jones Industrial Average is on pace for a more than 5% loss in April. The S&P 500 and Nasdaq Composite are headed for declines of more than 4% each.
What happened?
Our “best month of the year” was hit with a one-two punch. Inflation data in the first half of the month, including the anxiety-inducing Consumer Price Index (CPI), came in hotter than expected, showing inflation to be a stickier problem and dashing hopes of a predicted Fed rate cut as early as June.
Even as that number was tempered a bit, later in the month, by the personal consumption expenditures price index (CPE - the Fed’s preferred inflation metric) hitting closer to the target, the message was clear: persistent inflation raised the likelihood the Fed would stay higher for longer.
In fact, markets are now pricing in just one quarter percentage point cut in 2024, down from the six or seven anticipated coming into the new year.
Equities fell and bond yields rose in response to the reduced rate cut outlook.
Adding to investor worries, tensions in the Middle East escalated dramatically with the first direct strikes between Israel and Iran. Diplomacy and cooler heads appear to have stopped the tit-for-tat, at least for now. But the specter of an all-out war now hangs over the region.
Opinions: Down, Flat, Up
What’s In Store For May?
The Fed's FOMC meeting, taking place over April 30 and May 1, will be the key focus at the start of the month. All eyes and ears will be on Fed Chair Jerome Powell’s post-meeting comments tomorrow. The central bank is broadly anticipated to keep interest rates steady, but traders will be dissecting any increased hawkishness after the recent spate of hotter inflation reports.
Later in the week, we’ll see U.S. April payrolls and wage growth numbers, and worldwide manufacturing PMI releases.
The busiest week of corporate earnings is set to continue. Earnings were largely the backstop in April, countering the headwinds of inflation. The majority of S&P firms have beaten first-quarter profit estimates so far. With Amazon and Apple set to report Tuesday and Thursday, respectively, investors will be watching for more evidence that big technology profits can keep propelling the market.
And For What It’s Worth…
In a microcosmic example of the sticky inflation gripping the economy, grocery chain Trader Joe‘s recently increased the price of their fan-favorite bananas from $0.19 to $0.23 – per banana - much to the chagrin of its intense fanbase of customers. OK, some didn’t care. But others flooded social media with messages like “End of an era” and “Bananagate” and sad, angry, and exploding head emojis.
The 4-cent price hike comes after 23 years of stable pricing for the fruit that recently made the Trader Joe’s Product Hall of Fame.
As a side note, bananas occupy a particular niche in the lore of Trader Joe’s company history. Dan Bane, the former CEO, said the stores used to sell bananas by the pound, which is typical, but because the stores didn’t have scales, they were weighed and packaged at its warehouse. That changed after a conversation with a “nice little lady” customer at a Sun City, Arizona, store. The woman had looked through the banana display, but moved on. Bane approached her and politely inquired why she opted not to put any bananas in her cart.
“And she says to me, ‘Sonny, I may not live to that fourth banana’’ said Bane. “And so we decided the next day that we were going to sell bananas individually.”
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
Our “best month of the year” was hit with a one-two punch. Inflation data in the first half of the month, including the anxiety-inducing Consumer Price Index (CPI), came in hotter than expected, showing inflation to be a stickier problem and dashing hopes of a predicted Fed rate cut as early as June.
Even as that number was tempered a bit, later in the month, by the personal consumption expenditures price index (CPE - the Fed’s preferred inflation metric) hitting closer to the target, the message was clear: persistent inflation raised the likelihood the Fed would stay higher for longer.
In fact, markets are now pricing in just one quarter percentage point cut in 2024, down from the six or seven anticipated coming into the new year.
Equities fell and bond yields rose in response to the reduced rate cut outlook.
Adding to investor worries, tensions in the Middle East escalated dramatically with the first direct strikes between Israel and Iran. Diplomacy and cooler heads appear to have stopped the tit-for-tat, at least for now. But the specter of an all-out war now hangs over the region.
Opinions: Down, Flat, Up
- "When you look at the size and the scope and the scale of the rally off the October lows, and then you layer on top of it the stickiness of inflation, ... I wouldn't be surprised to see some dampener on the market for a little period of time," Dan Greenhaus, chief strategist at Solus Alternative Asset Management, told CNBC's "Closing Bell."
- Jim Lebenthal of Cerity Partners, a fellow notable in his ability to find blue sky in the most turbulent markets, predicts the S&P 500 will close out the year at 5,200 – only slightly up from where it is today, at roughly 5,060 – with a lot of chop between now and then.
- Fundstrat’s Tom Lee believes April was a temporary moment of pain. “I think there is upside to earnings, I think multiples can expand. I know this is going to be tough for investors to embrace, but I think something like 5,600-5,700 is probably where the S&P exits the year.”
What’s In Store For May?
The Fed's FOMC meeting, taking place over April 30 and May 1, will be the key focus at the start of the month. All eyes and ears will be on Fed Chair Jerome Powell’s post-meeting comments tomorrow. The central bank is broadly anticipated to keep interest rates steady, but traders will be dissecting any increased hawkishness after the recent spate of hotter inflation reports.
Later in the week, we’ll see U.S. April payrolls and wage growth numbers, and worldwide manufacturing PMI releases.
The busiest week of corporate earnings is set to continue. Earnings were largely the backstop in April, countering the headwinds of inflation. The majority of S&P firms have beaten first-quarter profit estimates so far. With Amazon and Apple set to report Tuesday and Thursday, respectively, investors will be watching for more evidence that big technology profits can keep propelling the market.
And For What It’s Worth…
In a microcosmic example of the sticky inflation gripping the economy, grocery chain Trader Joe‘s recently increased the price of their fan-favorite bananas from $0.19 to $0.23 – per banana - much to the chagrin of its intense fanbase of customers. OK, some didn’t care. But others flooded social media with messages like “End of an era” and “Bananagate” and sad, angry, and exploding head emojis.
The 4-cent price hike comes after 23 years of stable pricing for the fruit that recently made the Trader Joe’s Product Hall of Fame.
As a side note, bananas occupy a particular niche in the lore of Trader Joe’s company history. Dan Bane, the former CEO, said the stores used to sell bananas by the pound, which is typical, but because the stores didn’t have scales, they were weighed and packaged at its warehouse. That changed after a conversation with a “nice little lady” customer at a Sun City, Arizona, store. The woman had looked through the banana display, but moved on. Bane approached her and politely inquired why she opted not to put any bananas in her cart.
“And she says to me, ‘Sonny, I may not live to that fourth banana’’ said Bane. “And so we decided the next day that we were going to sell bananas individually.”
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
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