This week’s macroeconomic agenda will be calm, with Thursday being the publication of the January inflation estimate in the United States at 0.5%. This is the same as December. Will the annual decline begin after December’s price rise of 7%? Inflation and recession fears will likely grow in the coming months.
- Rising Inflation & Recession Fears
- Fed Hikes & Fed Talk
- Tuesday, February 8 – Trade Balance (December)
- Thursday, February 10 – Core CPI (MoM)
Financial advisors and investors should watch the US 10YR yield over 1.91% as it is the average S&P 500 dividend. Bonds are getting crushed, but we think investors will start moving out of equities into higher-paying conservative investments such as CDs.
We are bullish that Gold and Bitcoin. Due to higher inflation, they should be doing better, but both face different pressures. Bitcoin prices seem to be consolidating and seem to be oversold. Gold hasn’t made the jump up which I think is due to the US Dollar increasing value. Consumer staples, commodities, and real estate performed better in past high inflation environments.
More aggressive investors may want to buy at the dip or sell longer puts on growth tech stocks such as Netflix that have rocketed up due to Covid.
Table of Contents
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.
Weekly Report – 3 Reasons The Markets Are Slowing
The most anticipated statistic for the week was the US employment figures in January. It delivered a verdict that is hard to understand: while job creation was more substantial than expected, but the unemployment rate slightly rose. Hourly wages continued to increase by 0.7% in the last month and by 5.7% in the past year.
Trying to cut through the unemployment numbers was exhausting due to the massive revisions and can only conclude that either the 2021 numbers were completely made up.
More importantly, the markets saw this as confirmation that Fed would need to raise rates aggressively.
The S&P 500 is down 6.17% YTD, and equity markets as a whole this year have been a bit of a slump for three reasons. I see a slowing economy and possibly a recession.
The first reason is the Fed raising interest rates. Investors shifting funds away from growth stocks/sectors such as tech. We have seen many prominent investors and institutions talk about this for a least six months, and retail investors are starting to realize it.
The second reason is that earnings are showing a slowing economy. As of writing this report, we have seen over 70% of the earnings reported for 4Q 2021. Roughly 76% vs. 83% beat estimates and 34% vs. 42% growth is strong. We are seeing some growth, but overall everything is cooling down.
The third one is inflation. Inflation is at an all-time high that has not been seen since the 1980s. Our supply-chain woes are not ending, and supermarket shelves remain empty. Many say that covid is at the heart of everything. However, I think the root of the problem existed way before Covid.
You are asking what the problem is? The problem is Fed and government spending. I don’t want to get political, but both parties have increased the budget deficit and national debt.
This week the national debt passed $30 TRILLION and was already projected to be over $50 Trillion by 2025, according to US Debt Clock!
This is what investors need to look at.
Covid spending was like throwing jet fuel on a fire. The chart above shows the M1 Money Supply from the Federal Reserve.
It shows that a tremendous amount of money in supply was created in 2020!
We are going to face inflation TSUNAMI in the coming years.
Many market commentators say tech stocks and the market overall are in a “correction.” BUT I think they are wrong, and we are about to be plunged into another recession.
The wealthiest man alive, Elon Musk sold a considerable chunk of Tesla stock. Then a month later said on Twitter” that the next recession may be “around spring or summer 2022, but not later than 2023”. In an earlier tweet, he wrote, “If history’s any guide, many [unicorns] may not make it past the next recession.”
You might wonder if it is time to sell your stocks.
The short answer to your question is No!
An investor must never forget that there are almost always opportunities in the markets, which is still true today.
One sector we are bullish on might surprise you. These are the old, plain consumer staples stocks. We gave paid subscribers our list of inflation stocks last July!
The prominent players in the investment industry are moving away from growth-oriented, more risky areas of the market, and they are turning to more boring areas, such as consumer staples. This sector contains Procter & Gamble (PG), General Mills (GIS), Pepsi (PEP), and others.
Let’s face it, who is excited about investing in soap and toilet paper, soda, or cereal?
However, investors can rely on the cash-flow stability and predictable sales of many consumer staples businesses as a safety net during a storm. The Power Gauge also sees this. The following chart shows the Consumer Staples Select Sector SPDR Fund (XLP).
Readers should check out our inflation stock picks for ideas on how to hedge against inflation.
The 10-year US government bond yields 1.91%, compared to 1.84% last week! This is HUGE and a sign bond traders think the Fed is going to raise rates soon. Meanwhile, Bund is at 0.20% (compared to -0.02% a few weeks ago). In the meantime, the French OAT has jumped 26 points to -0.65%.
The crypto-currency industry is still struggling to recover from the three-month-old slump. Bitcoin has not recovered from the slump that began almost three months ago. It is currently at equilibrium for more than a week, with a price of $37,000 at the time. Although historically, the digital currency was relatively uncorrelated to equity markets, it has shown that it is losing its ability to withstand drops in the Nasdaq or S&P 500. Bitcoin even has a positive correlation with Wall Street at an all-time high. This is a temporary trend or a long-term dynamic. In the following weeks, Revelation will be revealed.
The oil markets have seen a seventh consecutive week of increases and are up more than 15% since January 1, 2020. This upward pressure is not being eased by anything, so speculators are now looking to take long positions on futures contracts at USD 100 delivery prices or USD 125 by December 2022. Many investors expect oil to rise above USD 100 per barrel in the coming year. The OPEC+ meeting was the primary catalyst for the week, but investors were not offered any relief. The expanded organization increased March’s production by 400,000 barrels per hour, but traders are hesitant to credit this effort because of OPEC+’s inability to meet its commitments. Brent crude oil is currently trading at USD 92.1, compared to USD 91.4 in the US benchmark, WTI.
The price of gold rose slightly this week to USD 1,810. However, it failed to ignite a rally despite increasing volatility in equity markets. This could have caused investors to seek safety in safe-haven assets. The weekly increase was more due to the greenback’s fall, which made the ounce gold more appealing to “international” investors. Silver was flat at USD 22.25 per ounce. Industrial metals were quiet this week due to the lack of Chinese traders leaving the market for the Lunar New Year. Trading volumes and variations were therefore limited. We note that aluminum prices have slowed down above USD 3,000.
Chicago saw a decline in wheat and corn prices to 619 and 775 cents per bushel, respectively. On the other side, Cocoa continued to rise to USD 2,634 a ton. This is due to strong demand, while supply remains constrained because of the possibility of a modest harvest in the Ivory Coast, which will be affected by arid weather.
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