Profit Taking Dips

Macro Perspectives: Fri 22 Apr 22

Stocks were in a slide from the open of trading yesterday. The decline accelerated when Jay Powell spoke at a round table interview at the IMF/World Bank meetings in Washington.

What did he say?

He said a 50 basis point rate hike was on the table for the May meeting, which is in two weeks. Is this enough to shake markets? A Fed willing to take the Fed Funds rate from 25 basis points to 75 basis points, in an economy with 8.5% inflation?

No. If anything it only highlights the tone deafness of the Fed and the policy error they continue to aggravate. And, related, nothing said was new. We heard this from Powell back in March, and the market has exactly this scenario priced in (i.e. a 50 bps hike in May).

So, what gives for stocks?

It looks like profit taking.

If we look at the biggest losers on the day in stocks, most of them have been the biggest winners on the year. The top twenty performing constituents in the S&P 500 year-to-date are up 50% on average. That group gave back almost 4% (on average) - dominated by commodities related stocks (oil and gas, steel makers, agriculture).

What did the underlying commodities do on the day? Oil was UP 1.8%, Gold was relatively unchanged, wheat and corn were each down around 2%. The Goldman Sachs Commodities Index was UP on the day and copper UP 0.7%.

Meanwhile, the copper stocks were hammered; Freeport McMoran was down 10%, Teck Resources was down 8%, BHP was down 7%.

Again, these are some of the biggest winners in the stock market in the past year, and they have been the big winners for good reason. Rising demand and scarce supply are a recipe for higher and higher copper prices, and higher and higher earnings. That continues for the foreseeable future, and the investment case for the oil stocks and agricultural stocks are similar.

Bottom line, these profit taking dips in commodities stocks are a buy.