Market momentum is yellow. We will likely start charging downward as our Bear rally came to a screeching halt on Thursday.
Yesterday, JPMorgan took an ax to the bull case for shipping stocks. The investment bank said it anticipates a slowdown in freight traffic due to global economic weakness. The announcement comes after the World Bank slashed its global growth forecast in 2022 to 2.9%, and the Atlanta Fed said that Q2 GDP for the United States would fall under 1%.
A slowdown is imminent. But JPMorgan’s statement about shipping says more about the economy than at first glance. Remember, shipping stocks had a tremendous run thanks to a flurry of concern about supply chain constraints and commodity shortages. But now. The tide has shifted.
Major Pressures for Shipping Stocks
Earlier this week, the Baltic Exchanges’ main sea freight index fell to a one-month low as shipping rates continue to drop around the globe. The dry bulk sector has experienced much longer wait times due to port congestion. Meanwhile, the Russian blockade of shipments from Ukrainian ports has hit Black Sea traffic. Turkey attempted to reach a deal with the Kremlin that would allow a pathway to deliver grains.
It failed, and raises significant challenges ahead for an industry that delivers a bounty of food, metals, and other commodities like coal and iron ore around the globe.
Then there’s China, where zero-COVID lockdowns have made it very difficult for ship owners. The nation accounts for 35% of global cargo demand, and its economy continues to weaken.
The bigger impact is problems around global growth and rising inflation – a dual condition known as Stagflation. Just two weeks ago, we learned that major retailers – some of the largest cargo shipping customers in the world – had badly mismanaged their inventory over the last six months.
Thanks to inflation and concerns about rising rates, they invested heavily in buying and storing inventory when there were product shortages looming. However, once their inventory levels surged, consumer buying slowed down due to rising costs and tighter budgets.
Some analysts project that retailers will dramatically cool off their shipments for at least two quarters as they attempt to clear inventory from their warehouses. This can also have a significant impact on shipping rates, and drive these stocks lower.
While this had been one of the hottest sectors, it has quickly cooled off. Shipping container giant ZIM Integrated (ZIM) was the hardest hit. Shares have plunged from roughly $68.50 to $52.75 in just two days after downgrades across the sector.
Today was a really ugly day for the markets, but another lesson that we’re still facing a slew of challenges heading into next week. Tomorrow, we have the Consumer Price Index (CPI). The White House has already warned that inflation will be elevated in this report.
The White House Press secretary rambled something about rising airline tickets and the price of jet fuel. That’s not an excuse, as aviation represents just 5% of the economy, and couldn’t be responsible solely for rising prices.
Meanwhile, the Federal Reserve meets next Tuesday and Wednesday. In this environment, the Fed is likely to raise rates by 50 basis points next week, and signal on its rate hikes for the following meeting in July. The central bank will also give us an update on its Quantitative Tightening, a process in which the Fed will start to sell Treasury bonds and mortgage-backed securities from its $9 trillion balance sheet.
Historically, the process of tightening is bearish because it drains the bond market of liquidity. In December 2018, when the Fed’s tightening cycle completed, the S&P 500 crashed by 19.8% in a month.
Finally, next Friday is Quad Witching, historically one of the more volatile days in the market. This Third Friday event happens four times a year and consists of the simultaneous expiration of stock index futures, stock index options, stock options, and single stock futures.
With momentum turning yellow this afternoon, and selling accelerating, I plan to be very cautious as a trader in the next few days. I’m taking a lot of risk off the table, cutting losses, and looking to go short into next week.