By David Nelson, CFA CMT
On the heels of another cyber-attack this weekend, Cyber Monday takes on a whole new meaning. Colonial Pipeline Company with a 5500-mile network of infrastructure extending from Linden, NJ to Houston was hit by a ransomware attack. With 45% of gasoline and diesel for the east coast transported by Colonial it shows how vulnerable we are in the digital age. Early indications are that the attack did not hit the operational systems but as a precaution Colonial opted to shut down.
Of more concern is the possibility this was a state sponsored attack pointing to one of our many geo-political adversaries including China, Russia, North Korea, and Iran. Experts believe if the disruption were to last more than 5 days it could start to impact key terminals and in turn transportation.
Back to work?
Friday’s non-farm payrolls coming in at 266K relative to a 1.1 million consensus estimate was a significant miss catching most economists and traders by surprise. Ultimately, I believe the slowdown in job growth and creation is a hiccup and we’ll get back on trend relatively quickly. The details surrounding the miss are more complex and nuanced than the media would suggest. In addition to some companies are finding it difficult to get employees to return to work. Shortages in semi-conductors and other key manufacturing components have forced some firms to slow down or put in place temporary shutdowns.
Having said that, government cannot continue to throw money at workers paying them to stay home when there are jobs available. Here in CT, casinos like Mohegan Sun are offering $2000 signing bonuses to attract workers.
The growth trade is the most comfortable for investors. Many can’t remember any other market than the one created by the Federal Reserve post the 2008 financial crisis. The idea that value or something boring like commodities could be an investment theme in a digital age is tough to fathom, yet copper is at 20 years highs.
I think the trend that has played out all year will continue to be the dominant theme at least through summer. We’ve seen a few head fakes along the way but with the economy growing at a 6% clip it’s hard to ignore. If we get to the end of the year and find the FAANG trade was the best place to be, the economy likely failed.
Biggest risks for the market
Rates will be a key indicator in the weeks and months ahead. Each stair step higher in yields will challenge the bull thesis. I think 10-year yields can climb another 100 basis points before they become competitive.
China – remains a threat in every sense of the word. Xi will test the administration on several levels. Certainly economically, foreign policy and now with recent incursions into Taiwan’s Air Defense Zone even militarily.
Inflation – The inflation threat is real and at some point, the Fed will have to defend this part of their increasing set of mandates. Even in Friday’s weak report average hourly earnings surged and increased across all categories. Jay says it’s transitory. I don’t think so.