Markets Drop On Rising Fed Rates and Inflation – Weekly Market Report

Although initially a bit skeptical about the prospect of a tighter monetary policy, equity markets were shocked to learn that the Fed could increase rates by four percent this year to combat inflation. Stock market indexes rich in technology stocks and more generally in growth stocks painfully received the message. The Fed and rising interest rates will the driving force most likely for 2022 and 2033.

According to the U.S. Bureau of Labor Statistics, the consumer price index rose 0.5% in November. This follows a 0.8% rise in November. The index’s annual rate has increased by 7.0% year-on-year, which is the fastest pace since June 1982. This follows a November reading of 6.8%.

Stocks & ETF Watch List

Tip: Use this section to find stocks and ETFs to add value to your portfolio by increasing the alpha (return) and decreasing beta (beta). Our list is updated monthly to help provide our readers with timely insights. Readers should do their own research before making any investment. In order to make our report easier to read, we are now including the stocks as lists for readers in separate posts.

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All stock/ETF picks are updated as of January 1st and are now on one page. Click here to view them.

  • Inflation Stock Picks: List of stocks that we think should perform better in a rising inflation environment. 
  • Auto Parts Stock Picks: Auto parts companies are likely to see their stocks rise as the average age of cars and light trucks increased from 11.9 years in January 2017 to 12.2 years in January 2021, according to new data from IHS Markit. Below are the top auto parts companies that investors should buy now before the profits roll in. 
  • Solid Picks: This group of stock/ETF picks is likely to experience growth and perform well into the near future. 
  • Dividend Stocks: List of stocks that have excellent dividends and business performance. 
  • Dividend Growth Stocks: List of stocks that have a history of growing dividends. 
  • Dividend ETFs Picks: This list of ETFs is selected for their ability to pay dividends
  • Dogs of the Dow: This list of DOW stocks based on H. G. Schneider’s Article in the Journal of Finance in 1951 that used the price-earnings ratio. The general idea is that blue-chip companies that pay a dividend are more likely to withstand an economic downturn. 

Market Trends

Tip: Use this as a quick guide on the short-term direction (1-2 weeks) and long-term (1.5-5 years) of key markets. It is not a signal to buy or sell, just to show the trend. This is a quick cheat sheet to know the trend and help understand what is happening with the markets in the short term. I started making this section years ago because once had a client that would call me nearly every day asking the direction of the markets.

LastCHG %CHGHIGHLOWSHORT TRENDLONG TREND
S&P 5004662.840.08%3.824665.134614.75BearNeutral
10 Year181.10%−0.38%−0.0071.8561.807BullBull
VIX21.6112.61%2.4222.0921.18Strong BullBull
US Dollar Index95.3670.12%0.11595.44395.129BearBear
Gold1815.64-0.18%-3.261822.641808.99BullBull
Bitcoin/USD41740−1.14%−4824245641470NeutralBull
Oil/Crude84.8540.68%0.57485.72184.09BullBull

Macro Takeaways & Next Week

Most of Wall Street and we don’t think equities will perform very well, and investors will most likely move toward value away from growth. More money will likely be transferred out of equity markets as bond yields increase in safer interest rate investments such as CDs and bonds.

The current S&P 500 dividend yield is 1.27%, significantly lower than the long-term average of 1.86%. We are now in striking distance with the 10YR US.

This week will be the start of earnings, which may cause some volatility in the markets. We will also see China’s Q4 2021 GNP kick off the week. On Tuesday, a Bank of Japan decision regarding monetary policy will be made. There are several US reports this week, but none are likely to move the markets.

The Fed Plan

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The Federal Reserve could be forced to inflate at much higher levels, regardless of the political consequences. As voters enter the midterms, the Biden administration presses the Fed to lower inflation. High inflation is politically unacceptable, but the Fed could pursue a 10% annualized rate for inflation over ten years to allow the US Government to reduce its debt to a sustainable level.

Below, Fed Chairman Jerome Powell said this week that the US’s national debt situation was “unsustainable” and that it is best to address it quickly. However, this scenario would allow the US Treasury to pay off its debt quicker using inflated dollars.

ABS REPORT

Jerome Powell, Federal Reserve Chairman, assured senators that supply-chain bottlenecks would decline this year and that price pressures will fall as a result.

Powell described inflation as a “serious threat” to economic recovery and acknowledged that it “will last well into this year.” According to Kelvin Tay, UBS Global Wealth Management’s Kelvin Taylor, the Fed is “behind” the curve.

Powell stated that the United States will reduce its balance sheet much more aggressively than previous ones. Powell continued by saying that the United States debt was unsustainable and should be addressed immediately. According to US Debt Clock, the US will be facing over $52 trillion dollars of debt and nearly 200% Debt to GDP by 2026!

This is a risk because the Fed may lose control over inflation. Due to its insistent description of inflation as “transitory,” the Fed’s credibility has been strained in the last year. However, the Fed has a long record of policy mistakes. For example, during the Great Inflation, the Fed had difficulty controlling inflation for 10 years. Paul Volcker was the Fed’s final administrator. The Fed raised interest rates to 18-20% at the end of the 1970s and the beginning of the 1980s. This not only reduced inflation but also created a double-dip recession.

The Fed can only raise interest rates today by a maximum amount. Higher interest rates mean more debt and slower economic activity that could lead to recession. It will be difficult for the Fed to balance higher interest rates and slower economic activity.

International investors may lose confidence in the Fed’s ability to stabilize the dollar’s price, and this could lead to a hyperinflationary spiral.

Gundlach Recession Sign

DoubleLine’s Jeff Gundlach stated in an interview that the yield curve was sending a “bona fide recessionary message.” He also said that investors should closely watch yield curves that show interest rates moving up at the short end while falling at the long end.

Gundlach stated that the majority of economists believe that inflation will fall to 2% by 2023. However, he disagrees with this statement. “I believe it is highly dependent on government policy, as with everything else. The Fed should only raise the rate four more times, and then you will start to see a lot of signs that there is a recession.

Bonds

The yield on the US 10-year T-Bond is now at 1.81% after a 30-point increase in one month! While the Bund has a negative yield at -0.09%, the French OAT is now in positive territory at 0.299%. Even Dutch debt is now in the black.

Crypto

According to the market leader in digital assets, the bitcoin price is stable at $42,000 this week. Elon Musk took to Twitter last week to promote his “dogecoin,” stating that some of his Tesla products would be available for purchase using the cryptocurrency. There are only a few items for sale. No authentic Tesla cars. Comedy stunt? Probably. The asset’s price jumped more than 10%.

Crypto.com announced Monday that it has stopped all withdrawals and deposits while it investigates “unauthorized activities” on certain accounts. This could cause a short term sell of crypto, especially if others halt withdrawals.

In a tweet, the crypto wallet provider and trading platform stated that the temporary measure was necessary to increase security. It would resume activities once the update is complete. The company stated that all funds were safe.

Oil

For the fourth week straight, oil prices have increased. Oil prices returned to their peak in 2021 at USD 85 Brent oil and USD 83 USUS benchmark. Despite the increase in the global pandemic, the environment is still favorable to black gold. Thanks to a falling dollar, supply issues, geopolitical tensions, and strict production control by OPEC+ nations, the stars are generally aligned for oil and the energy sector. US commercial inventories are at their lowest point since October 2018 and have fallen again.

Precious Metals

Goold prices appear to be slowly turning bullish due to inflation and rising interest rates. However, prices for industrial metals remain stable. China continues to be the driver of demand, as evidenced by Beijing’s latest monthly import data, which is still strong overall. Nickel was the show star as it crossed the USD 22,000 mark per metric ton mark.

This is a 10-year record. Indonesia, a significant player in the sector, continues to push prices up due to its desire to tax ferronickel exports. The goal is to process nickel ore locally. Silver and gold have gained some ground in precious metals but only modestly. The price of the barbarian relic is USD 1,820, while silver trades at USD 23.10

AG

The USDA has reduced its global soybean production estimate due to the unusually dry conditions in South America. According to the USDA, there will be an increase in US stocks due to decreased demand. Wheat prices in Chicago dropped to 746c per bushel as a result.

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