JJ's narrative and chaos in DC sends stocks reeling, moves amplified at year end

•  And the chop continues – lower….

• 10- yr kisses 4.59%.

• Oil down, gold down, commodities down.

• Gov’t on the verge of a shutdown? Both sides screaming!

• Many participants are out - Moves are amplified.

• Try the Italian Wedding Soup for Christmas Day.

So we had another choppy session, but nothing like the hysteria we saw yesterday created by the FED drama after JJ dialed back 2025 and 2026 expectations…..…. While stocks attempted to rally out of the gate after the Wednesday drubbing – that is not how it ended – stocks struggled for most of the day only to end the day mixed to a bit lower. The Dow added 15 pts, the S&P lost 6 pts, the Nasdaq gave back 20 pts, the Russell lost 10 pts, the Transports lost 90 pts, while the Equal Weighted S&P gave back 25 pts.

Bond yields continue to go up…. The 10-yr yield, gaining 4 bps to end the day 4.56% but not before it kissed 4.59%...The 2 yr is now yielding 4.30% and what these rising rates are doing is putting pressure on investors to pay attention. The FED is cutting, yet the bond market is saying ‘Hold on, Big Boy’…. not so fast.

While JJ and the Inflation Orchestra – may think they need to cut rates to bring us closer to ‘neutral’ the bond market is not so sure. JJ – said it himself…he is concerned about inflation….and that is clear – because if you live in this country – then you are concerned about inflation as well. Now, remember how he told us that the reason for that aggressive 50 bps rate cut in September was not because of inflation but rather a weakening labor market…Yeah, how’s that working out?

Yesterday’s Initial Jobless Claims was DOWN – coming in at 220k vs. the expected 230k and down from 242k…. Continuing claims came in better as well. 1.87 mil vs. 1.89 mil. Hardly a reason for concern and this after a rising JOLTS report, a strong NFP report, a weaker Challenger Job Cuts report and an unemployment rate that is not sounding any alarms…..So, tell me again why we needed an aggressive rate cut just weeks ahead of an election?

Yesterday’s Core PCE q/q came in a bit hotter than the expectation at +2.2% - not good and today we will get Core PCE m/m and y/y and guess what sports fans? Both y/y results are expected to tick HIGHER…while the m/m results are expected to come in unchanged. Now given that JJ made it clear that ‘inflation’ is now the focus – we can expect investors to be sitting on the edge of their seats for today’s PCE report, remember – this is the FED’s favored inflation gauge…. So, pay attention.

We are also getting Personal Income at +0.4% down from +0.6% while Personal Spending is ticking higher at +0.5% vs. +0.4%. So what that says is income is in decline, spending is up and inflation is up…. that is a recipe for disaster….

The VIX – fear index – retreated just a bit…. falling 12% to end the day at 24.10 – still well above all 3 trendlines and still very much in the ‘nervous’ zone. I suspect it will remain in the ‘nervous zone’ for a bit longer…. a new administration, new policies, a gov’t on the verge of a shutdown because they just don’t want to stop - each side blaming the other – what else is new? All while we have a bond market that is screaming ‘caution – slippery when wet’!

This morning the VIX is higher by 6% - trading at 25.64 – Wednesday’s high was 28.32 – this is the level to watch…. A breach of that level will send the VIX spiking even higher and that will send stocks lower still. The headlines over the approaching gov’t shutdown, that is now only hours away, is top of mind this morning…..The scaled down version, the one that eliminated all the ‘pork’ that the Dems wanted – failed in the vote last night – 35 Republicans voted against it, 2 Democrats voted for it - leaving fewer options on the table….Tensions are running high…….Who will cave first? Each side taking a swing at the other…. What else is new? In the end – a shutdown would shake the branches but would not be the end of the world…. We’ve been here before, stop the histrionics.

Oil plunges…. falling 1.1% yesterday and is down another 1% this morning…. trading at $68.64 – taking us below the last trendline support at $69.18. This now puts us back into testing the October, November, and early December lows at $66.70 ish…. It is the same story…. supposed soft demand fundamentals – and an oversupply - created by many of the non-OPEC producers - that is expected to continue well into 2025. Look the Saudi’s want prices to go UP and their recent decision to delay production increases corroborates that view and suggest that they are more interested in keeping prices up rather than taking market share. Let’s see how this works out.

In addition - The recent ‘hawkish’ commentary by Fed Chair JJ on rates has only sent the dollar higher – it is now up 1.5% since Wednesday – trading at 108.25 - and that only puts pressure on the whole commodity sector…. Both Brent crude and WTI are down ~3% this week.

Gold – like oil is down on the week – falling 5% coming into this morning. Think the stronger dollar and the inverse relationship between the dollar and all commodities. Gold – trading at $2615 has now broken 2 trendline supports – leaving it back in the $2530/$2645 trading range. You can point to JJ’s hawkish interest rate commentary as the culprit…. higher rates, strengthens the dollar and hurts gold – which some see as a negative and is if you own gold. But – let’s be honest – it also puts pressure on the whole commodity sector – which in the end just might help tame inflation.

The BCOM (Bloomberg Commodity Index) is down 5.1% since October when the dollar started its latest surge…..and that includes a range of commodities – specifically FOOD – lean hogs – 5.5% this week, wheat -16% since October, cattle -3.6% since Monday, soybeans -16% since October, coffee, sugar, etc and ENERGY. Lower commodity prices caused by a stronger dollar is good for the US consumer as it should help to lower commodity inflation….

US futures are getting slammed again as I write this…Dow futures are down 166 pts, S&P’s down 50, the Nasdaq down 285 while the Russell is off 30 pts. Look, that’s not pretty, but it is Friday, and we are going into the weekend -when so much can happen. It has been a week rocked by a new narrative, but not a narrative that should be so surprising to investors. We’ve been discussing this – valuations had gotten stretched, inflation remained sticky, the excitement created by the election caused many asset managers, traders, algo’s and retail investors to overreact and go all in – ignoring the signs…. – the momentum only creating even more anxiety for ‘fear of missing out’ - which only confirms what I keep telling you – Stop the insanity - You are NOT missing out….

European markets are under pressure. Germany in the lead – down 1.4% with Spain only down 0.7%. Media making a big deal of the recent tariff threat by Trump on the EU – if they don’t reduce the trade deficit and buy more oil and gas from the US. Ok – you go with that…but the EU can and will buy more so my money says – the threat is nothing more than a negotiating tool. Even the EU Commission President Ursula von der Leyen said last month that LNG imports from the US (which is cheaper) could replace the consumption of Russian LNG (more expensive). So, in the end – cheaper LNG is good for the EU, no?

In addition – NOVO Nordisk is getting crushed…down 22% after a disappointing late-stage trial result for a new experimental weight loss drug – CagriSema – get this – patients only lost 22.7% vs. the expectation of 25%! Do you think this is a bit of an overreaction? This morning NVO (US ADR) is quoted down $20 at $86.20 – taking it back to prices last seen in August 2023…when btw – they created a gap up – thing Wegovy - (Aug 7th – Aug 8th) - so this moves almost ‘fills that gap’…which to me cries ‘UNCLE”!

S&P ended the day down 5 pts to end the day at 5867. We are on the verge of filling that gap created on November 6th…. which means we need to trade down to 5760….to actually fill it. Today’s PCE report is top of mind….My sense is that it will come in a bit hotter on both m/m and y/y…and if that happens, then the VIX will surge and stocks will continue to fall – shaking the branches a bit more….

Do not discount the drama in DC as well. Now is the time to see who is in it and who is not. Remember – when stocks go up, everyone is thrilled, but the minute the markets attempts to correct – the weak hands run for the door – putting even more downside pressure on stocks. Remember my theory – when Bloomies puts dresses on sale you go running in to buy 3 of everything…when good stocks go on sale – many panics and hit the sell button. And while I understand it is hard to watch, if you are a long-term investor and have a solid, well diversified portfolio, with big mega cap names whose story has not changed, why are you hitting the sell button?

The S&P is down a whopping 3.8% off the high….that’s not even a blip on the screen….we could go down another 6% and still be in what is considered a normal trading pattern and that means the S&P could trade to 5520 and still be ‘ok’. 5520 btw, is the 200 dma – the long term trendline support…and while I am not saying that is going to happen, it would not be a deal breaker if it did.

Remember – we are now officially in the holiday travel season…. asset managers, investors etc. are away from their desks and that will allow for more amplified / exaggerated moves. Which is why you should not overreact.

Again, at this point keep new money in your gov’t mm fund earning 4.25% while we wait for the new year – and see how this plays out. In the end – patience is a virtue.

Italian wedding soup – 1st course for Christmas Day

Start with the basic chicken soup -

For this you need 1 whole chicken, 1 beef shank, onions, carrots, celery, water, s&p.

Rinse the chicken and remove the innards from the cavity, place it in the pot and fill it with water. Now add the chopped veggies. Season with s&p and bring to a boil. Once it boils - turn the heat to med low and let it simmer for about 1 1/2 hrs. Turn heat off - remove the meat and allow it to cool.

When cool - remove the skin and debone the chicken. – shred some of the chicken and add back – (while making chicken salad of the rest) Now - place the pot in the fridge and allow it to cool overnight - the fat from the chicken will rise to the top and form a 'skin'.

Remove from the fridge and take the fat off and discard. Re-heat

Now make the meatballs for the soup -

For the meatballs - you need:

1 lb. ground veal (or you can use ground beef), minced garlic (2 cloves), chopped fresh parsley leaves, freshly grated Parmesan, milk, 1 extra-large egg, lightly beaten, s&p.

Place the meat, garlic, parsley, Parmesan, milk, egg, s&p in a bowl and combine. Using a teaspoon, make small balls and set aside. Once completed – fry the meatballs and then add to the soup. Right before you serve the soup – add a bag of spinach and allow it to wilt.

Ladle into soup bowls and sprinkle each serving with extra grated Parmesan. A nice piece of garlic bread on the bottom of the bowl is always a favorite.