KEY DRIVERS 4-25-22

TIP – This is a brief bullet-point summary. It is a tool that gives investors and financial advisors a fast and simple list of what to watch for and talking points for the week.

• Ukraine Conflict
• Rising Inflation & Recession Fears
• Company Earnings
• Tuesday, April 26 – New Home Sales
• Tuesday, April 26 – CB Consumer Confidence (
• Thursday, April 28 – First Preliminary GDP for Q1
• Friday, April 29 – (PCE) Personal Consumption Expenditure for March

Three critical dates in the US are coming up next week: The March durable goods orders (Tuesday), Q1 GDP’s first estimate (Thursday), and March PCE inflation (Friday). The euro zone’s April inflation estimates and Germany’s Ifo business Index for April will also come out.

STOCK & ETF LISTS

Tip: Use this section to find stocks and ETFs to add value to your portfolio by increasing the alpha (return) and decreasing the 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.ts.

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 increases 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. 

MACRO 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.

S&P 500 SECTOR TRENDS

Tip: Use this section to know the performance of various sectors, weight portfolios, or look for trades. Modern portfolio theory stresses the importance of diversification, but recently several sectors like technology have outperformed others like utilities. This is also a way to narrow the sectors to find investment opportunities.

WEEKLY REPORT: Housing Bust, Rising Rates, Recession

Last week Wall Street was hit hard by M. Powell’s confirmation that a Fed double-rate hike was in the offing. Positives include mostly positive Q1 results and optimistic outlooks from companies. The volatility should not decrease, and earnings reports from corporations should accelerate.

The week did not produce a lot of macroeconomic indicators but saw a slowing of the economy. Fed officials prepared investors for a higher interest rate environment. Jerome Powell, Fed Chairman, blew away all hopes of slow-motion monetary tightening. His statements raised the probability that a half-point rate increase on May 4 to 100 percent or close to it.

Markets fear rate hike fears. Fed fears Recession

As it becomes apparent that traders are shifting away from growth stocks, a 50 basis points hike is planned for next month and possibly other similar orders to keep prices under control. No one knows the effects of this tightening of the monetary system, which fuels volatility, will be. The reality is that money won’t continue to flow so freely for investors. Investors will closely monitor this week’s flurry of corporate results to gain more insight into the economic state.

Bullard: Fed must act fast

James Bullard, President of the St. Louis Fed, stated Monday that inflation expectations could get out of control if the Fed does not act fast enough. He said that the Fed should “get [rates] higher than neutral” in order to combat inflation as soon as possible. Bullard believes that the housing market could cool down. Bullard also suggested that the Fed’s balance could be reduced faster if interest rate increases fail to work. 

Bullard last week called on the Fed to implement policies to slow down economic activity to stabilize rising prices.  In keeping with Bullard’s sentiments, Neal Kaskhari, Minneapolis Fed Bank President, stated this week that the Fed must be more aggressive if China’s supply chain disruptions cause further damage. This is exactly what they should do. 

Many Fed bank presidents are warning against getting more aggressive. This could indicate that inflation expectations will worsen if they don’t take greater action. 

Evans: Fed must monitor possible wage-price spiral

Charles Evans, the Chicago Fed Bank President, stated this week that the Fed must monitor for a possible wage-price spiral. Evans believes that rates will need to rise beyond 2.5% neutral. This indicates that the Fed could continue raising rates in the future, as well as the seven increases Evans sees for the rest of the year. Mary Daly, the San Francisco Fed President, stated this week that she expects inflation to return to 2% within the next five years.

This suggests that inflation could be more difficult than the Fed is admitting. Daly stated that the U.S. will experience a short and shallow recession. This is the first time I’ve ever heard a Fed President describe the risk of a recession as something other than unimprovable. We previously discussed the possibility of a wage-price rise spiral and it is encouraging to see the Fed acknowledge this risk. (a bit late to the party)

FED Bottomline

 In the past, the Fed has always had to raise interest rates higher than the inflation rate during periods of high inflation. The Fed has to choose between runaway inflation (which I believe we are already experiencing) or aggressively hiking interest rates – so that there is an abrupt recession. 

Housing Boom-Bust?

Mortgage rates have risen at an unprecedented rate since 1994 when they were at their highest level. Rates are now at an average rate of 6% after starting the year at an average of 3.1%. The average interest rate today of over 6% is more than twice the amount that was paid on a 30-year fixed-rate mortgage. This compares to rates of 2.65% one year ago. According to the New York Feds survey, consumers anticipate that average mortgage interest rates will rise to 6.7% in the next year and then continue to rise to 8.2% over three years. It should be noted that JPMorgan expects that demand will be impacted by rising interest rates in the short term.

Is there a housing boom? Yes. I believe there is a housing bubble in many markets. Investors are flooded with cash, and low-rate borrowers have pushed up housing prices beyond their fair value. 

Fitch Ratings reported recently that 73% of homes in the country are overvalued. 46% of these homes are at least 10% higher than their fair value. Is there a crash coming? At the very least, I believe we have reached a temporary top in home prices. Some people believe that the steep hike cycle will reduce demand and cause a crash in the housing market.

However, this really depends on how cash buyers react to the situation. Strong demand for rental properties would result in a 3-bed/2-bath “starter house” with rental potential experiencing less pullback than larger homes, which are more difficult to rent due to higher rental prices. If the Fed starts a rate-cutting cycle in 2023, and inflation picks up, then home prices could continue to rise after a brief breather.

G20 DRAMA

Treasury Secretary Yellen, Federal Reserve Chair Jerome Powell, and Canadian Deputy PM Chrystia Freeland walked out of a G20 Meeting when Anton Siluanov (Russian Finance Minister) began speaking. While the Russian representative was speaking, several foreign representatives and bank officers joined virtually turned off their cameras. 

The U.S. Treasury Department immediately released information about its latest round of sanctions against Russia. It targeted a Russian bank that offered services to China and the Middle East and more than 40 individuals, entities, and organizations involved in sanctions evasion. The annual meeting of the 20 largest economies in the world, G20, discusses the state of the global economy. In the aftermath of Russia’s invasion of Ukraine, the walkout is an attempt to isolate Russia from the international community. As the war in Ukraine drags on, more economic sanctions can be expected against Russia, Russian interests, or individuals.

BONDS

With the Fed’s determination quickly to raise rates, the yield on US debt rose. At the week’s end, the 10-year maturity was at 3.95%, and the yield curve was inverted. The 5-year yield was just above 3%. The German Bund was at 0.94%, while the French OAT was at 1.39%. The Swiss debt was at 0.84%.

CRYPTO

Cryptocurrencies Bitcoin has not been able to move out of the $40,000 area in which it has been ranging for over ten days. It has currently dipped below $38, but we think it will come back up. The crypto-investors will be put to the test by lateralization in the price of digital currency. The gloomy macroeconomic environment is dragging crypto sphere players along, with little to no inherently positive catalysts for reviving the crypto-asset markets.

OIL

The weekly bearish sequence is for oil markets, which continue to change according to developments in Ukraine. When demand is not meeting supply (like now), oil production, specifically Russian oil, is being watched closely. This is why prices have slowed this week due to concerns about tightening oil demand. Brent crude oil is currently trading at below $100, but we think it should pop back up.

PRECIOUS METALS

Precious metals have suffered this week due to Fed’s shift in tone. This has hurt the greenback and bond yields, much to the dismay of gold. As a sign that gold is losing ground to the USD 2,000 mark, it is dropping fast. This sharp decline also impacts silver (which trades at USD 24.3) and platinum (USD 930). This week’s palladium outperformance is due to Russia’s significant role in its production, which accounts for almost a third of the global supply. The rise in the greenback means that industrial metals can generally breathe. Nickel prices (USD 33775) were the only thing that remained stable, and copper prices fluctuated and are currently trading at USD 10,300 on LME.