This week, Europe will see the release of the January inflation figures and the final PMI readings. The European Central Bank and Bank of England will announce their 2022 monetary policy decisions on Thursday, and the United States will focus on Friday’s January employment figures.
- Rising Inflation & Recession Fears
- Fed Hikes & Fed Talk
- Monday, January 31 – Chicago PMI
- Tuesday, February 1 – JOLTs Job Openings
- Friday, February 4 – Unemployment Rate
Inflation and recession fears will likely grow in the coming months. The Buffet Indicator is signally a bubble bust (chart included below). We continue to recommend more conservative investments such as our inflation stock picks, minimize leverage, and have cash.
Financial advisors and 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.
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.
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.
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.
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.
For the past week, markets have been in turmoil: Rate hikes and slowdowns in expected growth. Traders don’t know where to go because there is so much contradictory information.
There is a possibility of a rate increase in March due to tensions in Ukraine and inflation. Also, there has been a shift towards value stocks in the sector. Is this the end for growth stocks? It is not difficult to see why traders anticipate a slowdown and may start rebuying growth stocks.
Supreme Court Justice Breyer announced his retirement last Thursday by hand-delivering a letter to President. It will allow the Democrat-controlled Senate to confirm his replacement before the November midterm elections.
Democrats are concerned that if they fail to confirm Breyer’s replacement by then, another Supreme Court seat may remain until 2024. Although the administration has not released a final list, it reiterated that Breyer’s replacement would come from a progressive African American woman.
Small Caps Turn Bearish
The Russell 2000 index (which is often a step ahead) has entered a bearish market (i.e., It has fallen by more than 20% from its 52-week peak.) The US market, which drives the rest of the global market, is only as strong as its behemoths. All three market giants, including Microsoft and Apple, have published impressive figures.
Buffet Indicator – Bubble Bust Ahead?
The Buffet Indicator (named after Warren Buffet) is a simple market valuation the measures the total US stock market value to GDP.According to the Buffet Indicator, stocks are “elevated,” meaning they are in a bubble. Higher interest rates translate into lower earnings and stock prices for most equities. You can see the impact of the Fed’s zero-interest-rate, loose-money policies on the stock market, as you have already seen. These policies have created massive bubbles in America’s economy.
The best way to determine asset valuations is to use the Buffet Indicator (above), which measures total market capitalization and gross domestic product (GDP). The latest Fed data shows that the Buffet Indicator ratio fell to 200% after the market selloff, and this ratio is still significantly higher than before the 2000 and 2008 bubbles.
The correction that began at the start of the year and was intensified last week has continued. After a Fed 2022 meeting that had an interesting result of dropping and then raising the markets. Technology stocks are back in the middle of the storm.
Even though the US central bank’s statement was close to the market’s expectations, Jerome Powell, the chairman of the Fed 2022, was much more aggressive than expected during the subsequent press conference.
Investors saw this sign as a signal that the Fed may be becoming more aggressive to eliminate inflation. This meeting was not the rescue plan many were looking for.
Last week, Jay Powell, Chairman of the Federal Reserve, issued a clear warning about inflation. “There is a chance that the current high levels of inflation will continue,” Powell stated that there is a possibility that inflation will rise even more. Powell noted that lower inflation via higher interest rates would take time after the Fed announced that it would not raise interest rates this month. We want this process to be predictable and orderly.
Powell gave a partial outlook and maintained that the Fed would meet again in March to discuss a slight increase to interest rates. Investors expect an increase of at most 0.25%, and the majority anticipate a second rate rise during the Fed meeting in May.
Powell did, however, note that the Fed will reduce its monthly asset purchases by $30 billion next month. A planned stoppage in March is also planned. Some investors and financial pundits speculate that too much of the Fed’s asset purchases will cause market collapse and increase interest rates too high.
The Fed’s balance act continues, with one side pressed by the Biden administration for higher interest rates to combat inflation and the other maintaining stability in the bond and equity markets. Powell referred to this again last week, stating that asset valuations were “somewhat elevated” – the same thing he said in 2018. This is an indirect warning to investors.
Jeff Gundlach, CEO of DoubleLine, previously stated that the Fed’s policies had fueled most of the economic growth over the past decade. This is not an organic economic expansion.
Investors need to think about the following questions:
- How long can the Fed keep raising interest rates before it leads to an economic slowdown and tightening?
- Which paradigm will the Biden Administration accept or likely be able to promote? Is there runaway inflation or an economic recession sometime between the 2024 elections and the midterms? This does not support Democrats going into either of the election cycles.
To control inflation, raising interest rates may take several months or even quarters to achieve an effect. This assumes that increasing interest rates will work!
The Fed still has a lot of work to do to bring 7% inflation down below their stated goal of 2-3%, regardless of what they do. Fed officials maintain that inflation will likely remain higher than previously expected. If the Fed fails to reduce inflation, they’re probably diminishing their credibility, which can be exploited and abused by rival central banks like the People’s Bank of China.
Bond yields are rising, but not too much: 1.84% for a 10-year T-Bond and 0.022% for a Bund of the same maturity. 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%.
Crypto-investors on the bitcoin side are still waiting for a jump up. The price of digital currency could plunge further. The price of Bitcoin is now around$36,000, despite a 50% drop in the last two months. My perspective is that this is new support, and the price is likely to climb after some time.
Even though the announcements of integration of blockchain NFTs solutions to well-known services like Facebook, Instagram, and Twitter have been a highlight of the last few days, it is evident that they have not had the expected impact on cryptocurrency’s price.
The oil markets are in Olympic shape. Brent crude oil prices have risen for six weeks in a row and now have the luxury to cross the USD 90 per barrel mark. WTI, the US benchmark oil, is also rising and is now close to the USD88 mark. Given the current supply issues and growing geopolitical friction in Europe, the environment is favorable to the energy sector.
OPEC+’s failure to fulfill its production commitments also contributes to buying pressure. The International Energy Agency (IEA) data shows that the expanded alliance increased its supply by 250,000 barrels/day in December against a target of 400,000 barrels/day.
Precious metals suffered this week due to the Federal Reserve’s announcement, which weakened the greenback and bond yields. This was much to the dismay and surprise for gold. However, a bear signal is trading below USD 1,800 an ounce for a significant time. This sharp decline also impacts silver and platinum to a lesser degree.
Palladium was able to maintain its position this week because of Russia’s substantial weight in producing this precious metal. This country accounts for almost one-third of global supply. The rise of the greenback is usually a relief for industrial metals. Aluminum prices are relatively stable, while the rest of the metals have declined. This is where the Russian threat is once again causing concern. However, European smelters still have to deal with high energy costs, weighing down their production. Aluminum prices are now above USD 3100 per ton.
Soybean oil prices have risen in agricultural commodities due to solid demand in the US for soybeans over the last five days. Chicago soybean oil is now trading at 65c per pound, an increase of almost 15% since January 1. Lumber prices are also in decline this week. The trend was impacted by flurry job cancellations, which drove prices down to USD 1,000 per 1000 board feet. According to the last cattle auction in Okeechobee, beef prices are going up.
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