Inflation, Fed and Recession Fears Drive Markets Down

10YR 1-24

We are heading into another crazy week with huge volatility. The PMI indicators for January’s preliminary versions will be available on today. These indicators are closely monitored as they measure the pulse of purchasing managers in every major economy. The German Ifo business confidence index will be available on Tuesday, and the Fed’s rate decision and preliminary Q4 GDP will be on Thursday, and Friday, respectively.

  • Rising Inflation & Recession Fears
  • Earnings
  • Tuesday, January 25 – CB Consumer Confidence (January)
  • Thursday, January 27 – GDP (QoQ) (Q4)

Inflation and recession fears will likely grow in the coming months. We continue to recommend more conservative investments such as our inflation stock picks, minimize leverage, and have cash.

Investors should watch the US 10YR yield over 1.84% 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.

Consumer staples, commodities, real estate, and gold have 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.

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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.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 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.

The macroeconomic news last week has been dominated by China, apart of course, from the permanent backdrop of the promise of a US rate hike this year. In the “Middle Kingdom,” fourth-quarter GDP rose by 4%, taking growth in 2021 to 8.1%. A respectable performance, slightly higher than expected, reassured investors.

At the same time, the PBOC, the Chinese central bank, successively lowered four of its key rates to encourage banks to irrigate the economy. This signal was positively perceived by the market, which sees it as the basis for a pro-recovery policy when Western economies are engaged in the opposite movement. A re-acceleration of China could be a bullish catalyst for financial markets in need of positive signals. Watch closely.

Friday’s market chaos has possibly turned the equities trend bearish. Nasdaq is currently experiencing its worst year-to-year start in at least 30+ years, and it is slightly worse than 2008 and the longest losing streak for a weekly since Sept 2020.

stock news

Notably, the S&P 500 recently broke below its 200DMA and critical support! The bears are definitely in charge.

Although it’s not the message you want to hear on Fridays, imagine this: An adrenaline junkie bungee jumping off Victoria Falls finds halfway through the fall that there is no cord attached to their hip. Stocks are heading for a similar fate, warns legendary investor Jeremy Grantham.

According to Grantham, the S&P 500 is on track for a plunge by 50% that will bring it down to 2500. Grantham’s research is fascinating and straightforward. Stocks are trapped in a superbubble, and this is a three-standard deviation movement away from the trend. This would be equivalent to a nasty shock that occurs less than one in 100 times during a jump for our bungee-jumping adventurer.

Many traders believe that there is a market selloff underway. Due to an increase in Treasury yields, the S&P 500 has fallen 4% over this past week, and rising yields can indicate a weak future performance of equities. Sven Heinrich, also known as Northman Trader, said this week that a market correction before the Federal Reserve starts to lower interest rates in March could cause the Fed delay rate increases. He wrote that if there is a correction of 15-20% before any rate increases, there won’t be any rate rises in 2022.

Delaying interest rate increases would likely support higher inflation and could cause a recession by implementing a more hawkish monetary strategy. Jay Powell, Fed Chair, stated last week that if high levels of inflation become entrenched in the economy and people’s minds, then we will have to implement a tighter monetary policy. This could result in a recession.

The Fed is trying to balance market conditions, inflation, and interest rates. One thing to consider is long-term impacts on the dollar. We believe that the dollar will continue to decline as other currencies, like China’s Renminbi, continue to erode dollar dominance. I am still waiting for updated data regarding the dollar’s foreign exchange reserves. It was last measured at 59% in 2000, and this is a decrease of 71% from 2000.

The pilot program for a digital Yuan is still ongoing, and it has deployed the rough equivalent of 14 billion dollars. As the central bank’s digital currency expands, the People’s Bank of China will be able to increase its financial and monetary power.

Bonds & Currency

Investors seem to have been overwhelmed this week and last week by the Fed’s policy changes. The rotation of financial flows in favor of “inflation-compatible” assets continued. The yield on US 10 YR has increased to 1.8%. However, it is still below the psychological 2% mark. Over the past ten years, real rates have fallen to -0.5%. After a brief recovery to bullish territory, the German Bund is now at -0.05%.

Last week the US Dollar gained some ground against major currencies, trading at USD 1.13356 – 1 EUR, but did not move higher. This is also due to its role as a preferred safe-haven currency when risk aversion resumes.

Crypto

The cryptocurrency market continues to fall in the wake of Wall Street. It is moving closer to its historic highs each day. We will soon be able to halves the record of $3 trillion total market capitalization, which was set just two months ago. The market is “only” 1800 billion at the time of writing. Bitcoin fell almost -10% in a week which causes more fear among crypto-investors. The digital currency bull trend that began more than two months ago is now moving in scary bear territory. We expect to see a huge amount of movement in the coming weeks due to the Fed talks, legislation and digital Fed.

Oil

After reaching levels not seen since 2014, oil stabilized this week. Due to global supply bottlenecks, Brent crude oil has been hovering around the USD 90 per bar line. Recent events included the explosion of a pipeline in Turkey’s southeastern region, which transports 450,000 barrels of crude oil per day from Iraq to E

urope. The freeze in Texas, which is a key US producer basin, raised concerns about US output. Traders also kept in mind that similar conditions had affected oil and gas production in the area. The increase in US inventory has dampened traders’ spirits. Although this increase is modest (+0.5million barrels), it ends seven weeks of decline. Brent crude oil now trades at USD 86.7, compared to WTI’s 83.8.

Precious Metals

China is helping industrial metals to maintain their bullish trend despite being at odds with Europe and the United States. It has been boosting its economy through monetary stimulus, a move that is not in line with Europe or the United States.

Nickel prices are particularly affected by this buying pressure and as end-users face low inventories, which has pushed prices up to USD 24,000. Copper is at USD 9900, aluminum is at USD 3100, and copper is at USD 9900. Tin is at USD 44,000 per metric tonne. The rise in bond yields didn’t affect gold, which rose to USD 1,834, and silver recovered to USD 24.4.

AG

Chicago grain prices increased despite the USDA’s latest monthly report concerning agricultural products, which raised its stock estimates for wheat and corn. Florida’s temperature took a huge dip that has increased citrus prices. There continues to be a draught for most of the country which will affect prices.

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