Pockets of Volatility Keep Popping Up; Is There a Liquidity Vacuum?

Feeling whipsawed? I think we all are. We try to make sense of this week's market action on this week's Jarvis Weekly Update. Hello friends, I'm your host Brian Dress, joined by our CEO down from our Miami office, Nolan Langford. Nolan, welcome to the program.

Hi Brian, always good to be here talking stocks, talking markets. Let's do it.

Best part of the week. All right, before we get started, a few announcements for you. The first is we're going to invite you to our April 2nd Zoom event. We're going to put the link to our Eventbrite page in the description below. We're going to be talking about income securities and more specifically dividend stocks. We're seeing a lot of opportunities in that sector, so we want to share some of our thoughts with you. And we also have a live Q&A, so don't miss that. We also have our Jarvis newsletter where we share our weekly thoughts on the markets. Make sure you sign up at the link in the description below so that you can get that in your email box every Saturday morning. And then finally, we have our Left Brain Investment research subscription service, 8 to 10 reports on a monthly basis from our analyst team. Uh, these are the type of reports we use to make investment decisions in-house, so make sure you check that out as well. With that, Nolan, we'll get started with our market recap. So this week we had the S&P was down around 2.5%, NASDAQ was down around 3%, and then the Russell, the small caps, actually outperformed, down just a little bit under 1%. But everything negative on the board this week. Saw a huge rally in Wednesday's session. We don't know if it was a relief rally or something else. Um, that was also, uh, some Sold pretty heavily in Thursday's session, um, as you can see in this week's chart. Quite a bit to talk about this week. The 10-year note had gone down to under 1.7% on the rate. It's all the way back to 2% this week, sort of in anticipation of the Fed. The war in Ukraine continuing to weigh on markets, as we know. Lots of volatility in commodities. Inflation, 7.9%. CPI reading was the highest in 40 years. Continues to be an issue that we're all considering. And then we had a little bit more, more earnings chatter. Finally, before I ask Nolan to get started with his thoughts, volatility remains elevated. That VIX stays above that 30 line, which is a pretty good indicator that we're in a volatile moment. Liquidity is pretty minimal out there. So Nolan, with that all as a backdrop, what are your general thoughts?

Everything that we've been mentioning here on this broadcast the last several months continues to exist. Volatility continues to stay high. The price action continues to show that maybe there's a lack of liquidity in the market. If you think about yesterday's rally, there wasn't any real news to, to drive it. And what made a little bit more suspect is it was on very light volume. And particularly when you see those huge rallies or gaps up, uh, as we know historically, you've had the biggest rallies during bear markets. And so those things are on my mind today.

Well, that's a good segue right into our first topic. So, Nolan, our first topic, topic 1: price action is not normal. We've seen a lot of outsized moves across asset classes this— over the last month. And just a couple of examples we'll put up on the board here. The first was this week in the oil markets. On Wednesday, oil fell $14 in 15 minutes. In Wednesday's session. Obviously pretty abnormal. We saw a big move in the stock Bumble, BMBL, on Wednesday. JD, which is a pretty large Chinese company, huge move down on Thursday. Plenty of others. Asana was another one with over 20% move down. So what's going on here, Nolan? Is this the type of action we should expect indefinitely? You know, because the Fed's out of the market, they're not providing liquidity, buying bonds. Is this something we should gird ourselves to expect over the next few months? And also, how should investors respond?

I'll take the last one first. How should investors respond? As cautiously, and hopefully most investors are working with an advisor. We're an advisory firm, and in full disclosure, um, you're more than welcome to call us. We do complimentary portfolio reviews. But for the individual investor, you know, I know we had that meme stock thing last year. I know a lot of individual investors have gotten used to trading crypto with the volatility, but for the average client that's trying to build their net worth, these aren't markets you want to be in and out trading. If you want looking for some fun, you're better off going to the craps table or something, because this is really serious. And when the markets get really volatile, and you know, you look at some stock that reports earnings or whatever, and stocks are moving 20%, 20, 30, 40, 50% moves are not normal. And so that tells you the market environment that we're in, that we're in, it's just not normal. The cause of the volatility, we really don't know. You know, I suspect it has a lot to do with liquidity and the lack of market makers in the market. You know, if you go back to March 2020 through April 2020, before the Fed stepped in, you know, even after the market closed and, you know, and it reopened, you're seeing these wild swings in the market. And what it came back to is, normally before Dodd-Frank, you would have market makers, and their functions were to make markets orderly, to buy when everybody was selling and to dribble shares into the market as sales when everybody was buying. And so those traditional brokerage functions don't exist anymore. And so you get these huge moves around because there just are no buyers, so prices have to gap down or gap upward. When the Fed came in, in April of 2020, to provide liquidity, you know, that provided a backstop to the market for smooth, smoother functioning. Now that the Fed is removing liquidity and raising rates, who's going to fill that gap? And so we continue to see these huge moves, particularly when the macro environment is so challenging right now. So we'll be looking for signs for this heightened volatility, you know, up 500 points one day, down 500 points the next day to settle in a more normal, uh, narrow range.

Well, and I was going to ask you this question. I think you sort of answered it. What sort of signs are we looking for for a bottom? I think the answer probably is the end to this type of wild trading. Um, so we'll be looking for that and for volatility to start tamping down below that 30 line, um, for an extended period of time before we feel more comfortable with just the general functioning of the market. And then also, Nolan, I want to talk about one of our core competencies, which is high-yield bonds. How can investors take advantage of this in high-yield bonds? How do you think about this?

Most people are familiar somewhat with bonds. Bonds are just loans. You loan somebody some money for some period of time, they pay you a contracted interest payment, they generally come twice a year, and then at the end, at maturity, you get your money back. And so you can be a borrower to multiple people, to the government, called a government bond. If you loan money to a local municipality, a city or state, it's called a municipal bond. And if you're loaning money to a corporation, it's called a corporate bond. And if it's below BBB, that means the bond has credit risks and the business has more risk than investment grade, and the credit risk is there, so they need to compensate me a higher amount. To make up for the higher risk that I'm taking. Those are called high-yield bonds. And what Brian said is interesting because high-yield bonds are— they sort of move right along with stocks. So in times of economic stress, you will get the bond prices that'll go down in value. Doesn't mean that you won't be repaid, but before maturity, the bond could be priced much lower for a lot of reasons. And some of them may not have anything to do with the company itself being less creditworthy. Some of it could just be that there's no borrow— there's no natural buyer if you want to sell that bond. So you get these gap-down in prices. Now, that gap-down in price also provides an opportunity for an investor that's looking to buy a bond that they feel good about, that they're going to get repaid on, and you're able to do it at cheaper rates.

Excellent. Let's move on to topic 2. Topic 2, Nolan, just like it's been the last few weeks, more earnings. And, uh, cybersecurity was on the menu and a few other tech names. Um, we saw positive earnings from a couple of tech names. This has been kind of going against the flow of what we've seen over the last few weeks, but MongoDB, MDB, and then CrowdStrike, a cybersecurity provider, came out just recently with some pretty solid earnings, CRWD. Are things changing in growth, Nolan? Are these two just kind of outliers? Um, and do you have any other comments on earnings, um, outside of these two?

Yeah, the comments I would make on earnings, um, we're coming to the end of earnings season. Um, the first quarter earning reports or the fourth quarter earning reports that are reported in the first quarter. I think last— this week was the last big week of earnings. They'll start dribbling in after this. And it's interesting because, um, The market, you know, is a push-pull right now between the macro headlines you see, you know, the inflation prints, uh, the Ukraine war, gas prices, uh, all of that. Um, and it's a push-pull between the headline macro and the micro, how individual businesses themselves are doing. And a lot of companies do well in spite of the overall macro economy, and that's what we got this week. So it's interesting, the push-pull there and how it all settles out. Uh, but there were some fantastic earnings reports, um, going back to the beginning of this earnings reporting season. And as you and I were talking about, Brian, some of the companies that we've seen a huge spike up because the market was excited, because fundamentally these businesses were doing better, so the prices went up. As earnings season continued, we saw a lot of those gains fade. And it'll be interesting to see these names that you mentioned that reported this week. It'll be interesting to see if they can hold those gains. But it is a good sign that businesses themselves continue to put out really good sales, really good earnings, and in some cases they exceed what they told the market that they were going to do. So it's a really good, really good sign.

Yes, and we also take note of stocks that trade well in, in bad markets. I think that's a really good tell of strength of that particular business. So we'll keep that in mind for these two and watch them in the coming weeks. And then with that in mind, we'll move to topic 3. Topic 3 is another one we've covered for the last few weeks, but it's not leaving the market headlines, and that's commodities. Commodities and materials still continue to be the leadership in this market. In a sea of red, those are the green The Greenprints and commodities and materials sit at the intersection of two of the biggest stories in the market right now, which is inflation and Ukraine. Obviously, with these Russian sanctions, it's putting a lot of pressure on the supply of a lot of commodities that come out of Russia and also from the region. We saw some really insane moves this week. Nickel, commodity nickel, which is used in steelmaking and also in electronic electric vehicles. Spiked 4 times in price. That's 4x in a week. Oil spiked nearly to $130, came back to $105. Wheat, we've seen go up quite a bit and pull back today, 10% in a day. Palladium is another one. Evidence of the story is everywhere, Noland, which makes the Fed meeting next week really interesting in that context. They're fighting some serious inflation at the same time, concern of growth slowing. So can you tie all those themes together for us, Nolan?

Yeah, I know people in that Fed meeting wish that they could tie them all together, and it's a near-impossible job, uh, and the numbers change daily, and it can't be made much easier with these wild swings in price. You know, what they seek is stability, and all we've had is a bunch of instability, uh, so it's very tough to tie them together. Here's what I will say We've been talking about this underinvestment in certain raw goods. We've been talking about this for a few years, actually. If you look back over the last 20 years, we've had these huge sort of boom-bust cycles with commodities. We've seen it obviously with oil. We've seen it with steel. We've seen it with fertilizers. We've seen it with copper. We've seen it with pipelines. And so what you're seeing now that's being reaped is what was being sown over the many years, because as these companies face these near-death experiences, it's crystal clear in their mind that they're never going to repeat the sins of the past, and that's overproducing. And when you get a lack of production and you get a demand that spikes, you're going to get a price spike. And I know what the Biden administration, everybody's wishing is that there's a quick quick fix. Oh, hurry up and drill more oil wells to bring the oil price down. Well, there is no quick fix. It takes months. Um, it takes months. And that's if you know where the oil is and the well is already there. And so there isn't going to be no quick fix. And it's across the board with most commodities. Question is, you know, with things like nickel and natural gas, what is the natural price? And is that price artificial? And is it going to come back to earth? And only time will tell, uh, but Economics 101 is it's supply and demand. So if supply is low and demand is high, you can expect prices, uh, to rise. Do either demand comes down or you get supply that comes up.

Yeah, absolutely, Nolan. No easy answer on this one. It's going to take more than a few weeks, as you said, to sort out all the all the difficulties that come along with, you know, the commodity undersupply that we see right now. So with that, we'll thank everyone for joining us once again. We'll ask you all to like the video, share and subscribe, hit the bell for notifications, drop a comment below the video. We'd love to engage with you and answer any questions you have. With that, we'll thank, thank Nolan for being with us, and thanks to everyone for, for watching the, uh, the Jarvis Update.

Have a great weekend, everybody. We look forward to talking to you next week.