Between the Fed, geopolitical concerns, and earthquakes, markets have been a little shaky this week. I don't know if it's a long overdue pull-back or just some coincidental factors leading up to some weakness in equities.
The inspiration for this week's musings is the 1987 movie, "Predator." This film had an "R" rating, which, of course, required me to sneak into the movie theater to see it when I was only fourteen (but, I digress). This film helped cement Arnold Schwarzenegger as a bona fide action star. Here's some trivia about the film:
The film was a commercial success, earning nearly $100 million worldwide at the box office on a $15 million budget. Clearly, this was before Arnold would command much higher salaries as the star of a movie.
While the day scenes were filmed during the heat of the jungle, night scenes were filmed during freezing cold temperatures. This was especially hard on Schwarzenegger when he was required to be covered in mud while being chased by the Predator. He shivered non-stop on set, which required multiple takes and slowed the production down.
The original casting called for Jean-Claude Van Damme to play the Predator, however, he constantly complained that the Predator suit was too heavy, that it was causing him to pass out from the heat, and that he wasn't going to appear on screen without the suit on. He was replaced early in the production of the movie.
The helicopter pilot seen at the end of the film was Kevin Peter Hall. He actually played the Predator as he was 7 ft, 2 in tall and had to wear the 200 lb suit. The director, John McTiernan, gave Hall the brief on screen role because of his tireless work as the Predator, and the fact that the Predator only appears in 8 minutes of screen time.
Jesse Ventura and Schwarzenegger were constantly trying to one-up each other during the filming. Part of the shooting for the film took place before Arnold's wedding to Maria Shriver. Ventura would continually ruin takes to delay filming causing Arnold to miss the wedding rehearsal. Ventura once poured water on himself while at the gym to make Arnold think he was working out harder and longer than Arnold. This caused Ventura & Schwarzenegger to try to beat each other into the gym each morning by arriving earlier and earlier prior to each day's filming. In the wardrobe department, Ventura was delighted to find out that his arms were one inch bigger than Arnold's. Arnold made a bet with Ventura over a bottle of champagne that his arms were bigger than Ventura's. Ventura lost the bet because Arnold made the wardrobe department lie to Ventura about the size of his arms.
Here's what we've seen so far this week...
Got Time To Duck? Just when we thought the rate cut discussion was mostly settled, in comes the Fed to play perennial word games. It reminds me of the scene in "Predator" when Poncho and Blain are trying to get a rebel out of a stronghold and Poncho notices that Blain is bleeding, to which Blain responds, "I ain't got time to bleed." Poncho says, "Oh...okay." He then proceeds to fire multiple grenade rounds at the cliff above them and asks Blain before the ridge explodes, "You got time to duck?"
On Wednesday of this week, Fed Chairman Powell reiterated during a speech that "3 rate cuts are our intention" this year. Markets have been speculating as to the timing and number of rate cuts since the beginning of the year. However, on Thursday, markets went haywire as Minnesota Fed President Kashkari stated that the Fed might not cut rates at all in 2024 if inflation is "sticky." The S&P 500 Index sold off more than 1% after Kashkari's comments. Markets settled down just a little when Chicago Fed President Goolsbee stated on Thursday, "If we stay restrictive too long, we will likely see employment begin to deteriorate." And yet, after all of that back-and-forth, the futures on the June rate decision have not moved - hovering around 57% probability of a 25 basis point cut for the last month. Leave it to the Fed to come out firing.
Meanwhile, other data suggests that inflation may remain steady in the near term. The latest report from the ISM Services PMI shows that prices paid continues to ease, meaning that the Fed would have ample room to cut rates, at least once or twice this year. The outlier remains oil prices, which have spiked recently with the turmoil in the Middle East. As of yesterday, Israel's ties with several gulf countries have become strained with the struggle between Hamas and Israel. Meanwhile, embassies in Iran and Israel have been put on high alert in the wake of Israel's attach on the Iranian embassy in Damascus. The price of Brent Crude Oil has increased 17% since the beginning of February.
When we look at the seasonality of markets, we shouldn't be surprised by some weakness in equities, especially after a sustained, low volatility rally. History shows that since 1985, the S&P 500 Index experiences some weakness around Tax Day (April 15th) as investors take some profits to pay off Uncle Sam. However, if history turns out to be somewhat accurate this time around, returns tend to head higher post-Tax Day. We'll see.
We Hit Nothing! For the time being, the market's resiliency is puzzling to those who would love to see this rally come to an end. After Arnold's group of special forces realizes there's something in the jungle after them, they trap the Predator for a brief moment and unload most of their ammunition into the jungle trying to hit what it is that is unknown. After surveying the damage to the trees, Poncho returns to Arnold's character, Dutch, and says, "Not a thing. Not a @$#& trace. No blood, no bodies...we hit nothing!"
The reality is that the economy is on solid footing and the market rally is justified. The jobs report showed that more than 300,000 jobs were filled last month, much higher than the 212,000 expected. In fact, in periods prior to previous recessions, COVID notwithstanding, we have seen major weakness in the monthly jobs report. In 2007, the first negative jobs number came out 5 months prior to the start of the recession. The situation is similar prior to the 2000, 1989, and 1981 recessions. A jobs number north of 300,000, like March, is far from recessionary.
In addition, wages continue to out-strip inflation. While Wages came in as expected, there was a drop from +4.3% in February to +4.1% in March. The Unemployment number also declined in March from 3.9% in February to 3.8% in March. The Redbook Sales number on a year-over-year basis showed a 5.2% increase, meaning the consumer is still spending. Lastly, the JOLTs number was still north of 8 million available jobs, an elevated level compared to historical data.
If anything, the current market environment looks more and more like 1995. The Fed has turned largely dovish. The labor market is marked by strong wages and high productivity. For the most part, the outsized inflation that resulted from COVID-related policies, has normalized. In 1995, the largest drawdown for the market was 2.53%. So far this year, the largest drawdown we've had is -1.71 back in January. While I don't expect those kind of numbers to continue, we may experience a year where the maximum drawdown is less than the typical year of at least -8%. All-in-all, so far, the permabears have hit nothing!
You got time to duck...
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