AlphaBetaStock’s Report (Premium Edition) 05-2-2022

KEY DRIVERS 5-2-22

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
  • Wednesday, May 4 – FOMC Interest Rate Decision
  • Friday, May 6 – Unemployment Rate (April)

This week we are waiting on two big events: 1st, The Fed rate decision (this could be the biggest for the month), and 2nd. Unemployment Rate. Both of these events will likely swing the market around. Expect high volatility after the decision and the Fed to try to talk the markets out of chaos

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: Fed’s Soft Landing or Recession

Two topics had dominated the financial sector last week before last Thursday: 1) China’s slowdown and lockdowns slowly affecting the United States, and 2) the expectations that the Federal Reserve would become more aggressive in tackling inflation. 

However, last Thursday morning was shocking to almost everyone: The U.S. The annualized GDP (gross domestic product) fell 1.4% in the first quarter of 2022. One reason is that the economy contracted due to weak exports and a wider trade deficit. Biden calls these “technical elements” today. Another is that consumers are spending less and inventory slowdown.

One-quarter of contraction doesn’t make it a recession. However, this -1.4% growth can be adjusted, as preliminary GDP numbers are always. Surprisingly, however, we have heard from the Fed and the Biden Administration non-stop about how strong and healthy the U.S. economic system is. 

Trevor Noah said it best at the White House Correspondents’ Association Dinner to Biden: “Things Are Really Looking Up. Gas Is Up. Rent Is Up. Food Is Up. Everything.” Not exactly what the Democrats want to be up coming into an election, but it is actually worse.

For Q1, GDP expectations were +1%, and economists are foolish because they missed 2.4% of their downside expectations. The Q2 GDP numbers should rebound, but they might look weaker than expected given the continued downgrades of the year and further trouble ahead.

Here are some investment bank outlooks that you can take a quick look at:

  • Deutsche Bank first says that inflation must be addressed with the most aggressive fiscal and monetary policy since 1980. Is this a Volcker Redux, with interest rates close to 20%
  • Bridgewater’sBridgewater’s Rebecca Patterson stated this week that to reduce inflation; interest rates must rise above the Fed’sFed’s neutral rate (2-4%).
  • Credit Suisse predicts that inflation will be higher and growth will be weaker. That is a recipe for stagflation. Credit Suisse analysts believe that we will have a hard landing in 2023’s2023’s second half — but not a “hard landing.”
  • Analysts at Barclays don’t see the Fed moving beyond neutral. This means that higher inflation is here for the long term.
  • Lastly, ING predicts that the dollar will continue to rise in 2022. This could lead to a bust for the dollar in 2023. The dollar has strengthened against other currencies in the last year, while it has declined against domestic goods and real assets.

Credit Suisse’sSuisse’s research found that Google-based clients are now more concerned about stagflation than they were in 2008. This suggests that global communities are increasingly worried about falling growth and rising inflation. 

According to market analysts, the Federal Funds Rate will rise to 3.5-4% in Q4, and the yield curve will invert in the second half of 2023. This will result in a “soft landing” in the second half of 2023. The most significant risk of stagflation, according to the group, is “if wage growth doesn’t respond to rising unemployment.” Credit Suisse says that there is no chance for a repeat of the 1970s.

Jay Powell stated that controlling inflation was “necessary” and that an aggressive rate hike of 50bps is “on the table.” He also said that his goal is to bring supply and demand closer together, which would mean crushing demand because he cannot increase supply. He reiterated a note from last Wednesday – I mention it because it is worrying – that we won’t have the same economy as before COVID and that he is ”unsure” of the new economy”. This could indicate an implicit threat of persistent inflation that the Fed cannot bring down.

This year, we won’t be in recession if there isn’t a Black Swan. I believe the Fed will continue to hike rates. However, the Fed is eager to move the needle; they will likely “break something” along the way. 

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 3.92%, and the yield curve was inverted. We fully expect bond yields to continue to increase this year unless the Fed changes it plan.

CRYPTO

Cryptocurrencies have been hurt by the decline of the market with Bitcoin unable to recover above $40k. The gloomy macroeconomic environment is dragging crypto sphere players along, with little to no inherently positive catalysts for reviving the crypto-asset markets. There is a strong possibility that they could jump up on some positive news and may have found some support.

OIL

Oil appears to be in a ranging trend around $100 dipping below $97 but jumping to $106. When demand is not meeting supply (like now), oil production, specifically Russian oil, is being watched closely. It is likely to continue to trend UP, but may consolidate around the $103 range. Summer is likely to increase

PRECIOUS METALS

Precious metals continue to suffer despite rising inflation. Specifically Gold has underperformed and it is now at risk of breaking its bullish trend. Historically, Gold was the winner of all asset classes in the 1970s rising inflation by going up over 2000%. Other metals have followed in trend with Silver being down -by 2%, Palladium -1.73, and Copper -2.5%.

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