KEY DRIVERS 4-18-22

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
• Tuesday, April 19 – Building Permits (March)
• Wednesday, April 20 – Existing Home Sales (March)

This week’s macroeconomic agenda is heavy with Chinese growth (Monday), Building Permits (Tuesday), Home Sales (Wednesday), the German Ifo index (Wednesday), and the preliminary PMI activity indicators for April (Friday). Central bankers will also give speeches, which will likely move the markets more than data.

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: RECESSION 2023?

Ukraine War continues… For the moment, Russian troops are concentrated around the Donbas. Last week it looked like there was a possibility of peace, now we don’t see it happening.

We are seeing signs that the U.S. market is experiencing an economic slowdown. Freight Waves CEO Craig Fuller said a “freight recession” is imminent. Other industries have confirmed that the U.S. economy and global economies are slowing. Gary Friedman, Restoration Hardware CEO, stated, “I don’t think anyone really understands what’s coming from an inflation point of view… and I don’t think anybody really knows how high prices will go everywhere.”

Friedman believes that there will be slowdowns in all sectors. Taiwan Semiconductor Manufacturing Co. Chairman Mark Liu said he also sees a slowdown in sales, particularly in China, which is the largest consumer market.

Inflation might be the leading cause of the U.S. slowdown, but the high cost of inventories may also be a factor. Both manufacturing and non-manufacturing have seen a decline in ISM surveys, which would indicate an economic downturn.

Even though US inflation is at its highest in 40 years which suggests imminent monetary tightening from the Fed, the ECB seems to reassure markets at the end of the week. It doesn’t seem to be in a rush to raise rates. Over the past sessions, major indexes have moved in scattered ways. As the situation in Ukraine continues to be tense, caution is advised. The earnings season will also be closely monitored.

In March, consumer spending increased 0.5% a month-over-month, compared with a 0.3% increase in February. Although consumer spending may have increased, inflation-adjusted numbers likely show that retail spending has been slowing. Consumers are worried about a recession, and inflation is on the rise. We’ll likely see a decrease in consumer spending, which could lead to a recession. Due to low consumer demand and high inventories, there should be good sales and discounts for this year.

These trends will be confirmed with a full schedule over the next few weeks. Many traders are turning to assets that are less sensitive to inflation, or that can benefit from this confusing environment. Companies that have the ability to price effectively and maintain margins under a possible stagflation scenario (an increasingly central scenario) will do well.

Bonds, Rates & Recession?

The primary driver of the economy and markets is the central banks. On one hand, everyone knows the Fed needs to increase rates, while on the other, the Fed’s rate hikes are still making the stock market a little worried.

This week, they found some relief with the release of slightly lower US inflation. As US inflation continues to rise, it’s all relative. The increase in prices that exclude food and energy was somewhat less than anticipated between February and March, which helped to calm the bond yields during the middle of this week.

The easing didn’t last for long. On Thursday, the US 10-year rose by 2.8%. In the weeks ahead, central banks will be responsible for ensuring a smooth landing and preventing inflation from slipping.

This week, James Bullard, President of St. Louis Federal Reserve Bank, stated that it is “fantasy” to believe the Fed can combat inflation with interest rate increases. He thinks the Fed must do more to drive down consumer demand. “This [inflation] Report just underscores how urgent the Fed needs to get moving… If households and markets get the impression that the Fed is not going to do right and keep inflation under control, then they have to be able to trust you by doing things that demonstrate that you are serious.”

Bullard’s bottom line is that he is advocating for people being laid off. This is the same as Bill Dudley, former New York Fed President. He said last week that the Fed must deflate stock markets to disrupt consumer psychology. It seems to me that the Fed admits that inflation is a bigger problem than it is being acknowledged. This also shows how destructive the Fed could become.

CRYPTO

This week, Nasdaq is still dragging the crypto-currency markets along. It is now clear that there is no correlation between bitcoin and the US technology stock Index. The crypto-currency is continuing its decline that started at the beginning and is now hovering around $40,000 when this article was written. This scenario is enough to test investors’ nerves.

OIL

Vladimir Putin stated that peace talks had ended in a deadlock, which placed pressure on oil markets. Operators fear that the European Union will impose severe sanctions on Russian oil, which could lead to a tightening of the market. The Chinese authorities have also begun to loosen restrictions on the coronavirus. This has boosted oil demand and fueled optimism this week. OPEC also reduced its monthly forecast due to lower demand. The cartel believes that global economic growth will be slightly slower than anticipated because of the economic effects of the conflict in Ukraine. Brent crude oil is currently trading at USD 106 per barrel versus USD 104 for WTI.

PRECIOUS METALS

Gold has also seen a rise in demand and is now approaching USD 2,000 despite the rising yields on the major bond markets. Prices for base metals have fallen overall because of the improving situation in China, and authorities are working to eliminate bottlenecks at ports terminals and logistics sites. Copper trades at USD 10,290, while aluminum trades at USD 3,200 per ton. Zinc has, however, reached a new high on the LME at USD 4500 per ton.