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It was a ferocious sell-off on Friday after the Dow Jones Industrial Average plunged more than 1,000 points on a hawkish message from Federal Reserve Chair Jerome Powell. This all began in Jackson Hole Wyoming where Fed Chair Powell delivered a whole heap of pain, warning “there’s no quick cure for fast rising prices” In a few short sentences he sent markets into a downward spiral erasing 2 weeks of gains. The Dow finishes the week off 4.2 % the S&P 500 declines 3.8% now a likely75-point rate hike in September hits the NASDAQ particularly hard sliding 4.4%. It motivated traders to contemplate the implications of higher interest rates held in place for longer than markets were counting on. So, what are our thoughts? We believe the Fed. In fact, we believe what they say about rates are going to be higher for longer and we are starting to see some evidence of a revaluation of the cuts in 2023, suggesting that the economic slowdown is deepening. We think there's more to go on that front and it is likely to continue to fuel equity volatility from here. 

Meanwhile, a heated debate rages on whether the Fed can steer a soft landing, as investors attempt to come to grips with often conflicting economic reports such as rising inflation and a sturdy labor market. Recent US economic data has been promising, bettering the possibility of the Fed accomplishing a soft landing. But we feel markets may have gotten ahead of themselves in pricing in this story line.
 
I was listening to, Fundstrat’s Tom Lee today on CNBC’s “Halftime Report” that he sees “a lot of evidence this is turning out to be a soft landing,” adding that markets have priced in a recession. But let us remember that never in the last 80 years has there been inflation over 5% that didn’t end in a recession.

Energy stocks are completing the week at new multi-month highs. Some names are finishing out at new multi-year highs, like Occidental Petroleum. Warren Buffet must be smirking as his move to own 50% of Occidental Petroleum is paying off gaining 15% for the week. And a few are even making new all-time highs, like Cheniere Energy. Meanwhile in Canada rising oil stocks rescued the TSX from big declines only off 1% with names like Suncor Cenovus and Imperial oil all finishing over 5% WTI closes at $ 93 per barrel
This is great news for those who own energy. Despite the selling pressure in stocks today, Energy continues its unwavering strength. It's good if you own it. But with energy representing just 4 % of the S&P500 and zero of the Nasdaq 100. A lot of investors just don’t have any exposure unless they have assets in in the TSX, some folks don’t have the ability to own energy stocks. Others simply do not even know how little they own. And many just don't to care own it at all for ESG or political reasons. The truth is it is one of the few sectors that is positive for the year.
When inflation is on the rise, commodities are usually doing well. Even with the slightest rise in breakevens recently, commodities across the board have dug in and caught higher. Natural gas hit fresh 14-year highs, cotton trading halted limit up, and grain markets resolved higher from critical support levels. This is the type of market behavior we would expect in a rising rate environment. And it confirms our structural market outlook and our commodity super cycle thesis.
The following chart outlines how the recent market has begun erasing the strong 50% retracement off the June lows.

The first thing that stands out is the lack of relative weakness coming from energy and utilities on all time frames, an uncommon event. So, what path do we think the markets will take. A choppy one ahead of the US mid-term elections. As persistent inflation and rising interest rates will weigh on consumer discretionary stocks and growth stocks that have declining earnings or none at all. As demonstrated by by the recent dismantling of Peloton earnings in its lates forecast. It’s not the kind of company that you want to be invested in at the moment as the fitness equipment maker is bleeding cash. Oh yah… and there are plenty more of those non-starters. We like energy, materials, and utilities as well as quality tech like the Apples and the Microsoft’s of the world. Health care which is not very correlated to the overall economy would be our defensive pick alongside of short term cashable’ s that adjust upwards in a rising rate environment. So, I guess we must hang onto the adage,
 “No Pain No Gain”

Have a great weekend! Ian

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