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good morning. Friday’s employment report wasn’t as bad as investors feared. The US economy added 151,000 jobs in February. The unemployment rate has increased, but has now moved from 4.0% to only 4.1%. This still suggests some weaknesses. We are probably below the growth of broken employment. But for now, the economic atmosphere has mostly remained at the same atmosphere. Email: robert.armstrong@ft.com and aiden.reiter@ft.com.
Staple/Discretionary Ratio
Stock market leadership has changed significantly this year as it overtakes US stocks and overtakes less volatile stocks. One of the most attention-grabbing flip-flops is consumer staples stocks that overtake discretionary stocks of consumers. This is a classic signal that the market has become defensive and economic weaknesses.
This is the ratio to staple defenses over the past five years. Plotted against the performance of the S&P 500.
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What happened in 2022 shows why the recent staple/discretionary ratio spikes are shaking people. The rise in ratios that year coincided with the disastrous run of stocks (and bonds) as inflation proved sticky and the Federal Reserve increased its policy rate. Equity rally recommendations were made only if the ratio was reversed.
Don’t read the ratios too much. This is not a major indicator. When people are nervous, they tend to buy staple foods, and when people are worried, the market also tends to fall. This ratio is simply an indicator of investors’ sentiment.
And because of the incredible run of the epic 7, it may be incomplete for now. Amazon is currently at almost 40% of its discretionary index, while Tesla is at an additional 15%. These two stocks have fallen 12% and 36%, respectively, since January 6, when the staple/discretionary ratio began to rise. The remaining shares in the discretionary index have lost only 1% of their value over that period.
This observation encourages two conclusions. First, the most important change in market leadership is the major technological disruption. This change doesn’t fit the dominant market narrative of slowing the economy and tariff policy, and therefore receives less attention than it deserves. Second, investor sentiment signals from the staple/discretionary ratio are not as strong as they look.
But that’s still a signal. Since early January, the 10 largest positive contributors of the Staples Index have been sorted by changes in market capitalization. They are all absolutely classic safe plays, from cigarettes to soap to soda. Almost all of them are rising in double digits in percentage terms.
Investors are nervous, and defensive stocks are at work. Fear is not just a big picture, but one of the factors of what’s going on in the market.
Oil prices are in your hands, Mr. President
Last week it was a confusing thing. So many headlines on tariffs, or lack thereof – if you missed crude oil prices hit their three-year low on Wednesday, you’ll be forgiven:
After months of delays and discussion, OPEC+ finally promised to raise the production cap in April. At the same time, the market is worried about what appears to slow us down and drive global growth. Together, they could mean that more supply will collide with the market just as global demand will recede. A global oil overload may come.
There was a bit of a rebound on Friday after a Russian minister suggested that OPEC+ could boost production to protect prices, after US new energy secretary Chris Wright pledged to buy $20 billion in oil to fill US strategic preparations. But it was just a momentary reprieve. Balanced, we seem to be set to cheaper oils. Brent Futures plummeted last week and is now below spot prices (“setback”), suggesting a collapse in demand in the future.
OPEC+ is in the path to boost production. They may bring things back, but they take so long to schedule changes and that it came with so many internal inconsistencies suggests that the cartels are slow to pivot again. Some analysts also believe that demand for oil from China, a swing buyer in the global market, has finally reached its peak. China’s crude oil imports fell 5% in the first two months of the year. It leaves tariffs as a potential determinant.
The Trump administration definitely wants cheap oil – Trump and his advisors have said repeatedly. Before taking office, non-editors and many other commentators pointed out that this was at odds with the administration’s desire to increase oil production. If oil falls below $65 per barrel, the industry will set back at the average US intrusion price. By raising concerns about stagflation, it seems likely that they will favor cheaper oils right now rather than higher production.
But getting there during the tariff regime is not simple. Recent movements in the market suggest that higher tariffs will lower oil prices by weakening global demand, but in reality it could jump to prices in the short term. Canadian oil accounts for 23% of US oil consumption. If Trump places tariffs on Canada, it will take longer for US-based refineries to move away from Canada’s heavier crude oil, increasing demand for lighter performance. Whether or not the rise in the short term depends on how quickly the oil market can adjust, and how fast the broader tariffs are.
There is also complexity in the flow-through of oil prices to US growth. Cheaper oils are a boon for the industry, but are now a massive US export, so it’s surprisingly not good for US growth. To make things even more complicated, oil and the dollar have been correlated in recent years, suppressing the historical inverse relationship.
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When oil prices and the dollar go hand in hand, US exports become more attractive to foreign buyers with stronger currencies. Therefore, boosting the export of goods from cheaper dollars will result in less oil exports from cheaper oil, which could lead to lower energy prices, leading to net profits for US growth. But that too depends on how serious the tariffs are and how quickly the market adjusts. And the cheaper dollars are not a panacea in the Trump world. He repeatedly says he wants to see a strong greenback.
If Trump really wants cheap oil, high tariffs can help us get him there by slowing down and spurring global growth. However, the fear of stagflation attachment and the complex interaction of oil, dollars and growth can undermine trade-offs.
(writer)
One good read
Joseph Nysoft Power Guy.
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