Quote of the Week
“Any transition is easier if you believe in yourself and your talent.” – Priyanka Chopra
Tech Corner
Last week the markets put in a slight gain of between -0.03 for the Dow and +1.10 for the Nasdaq. If it weren’t for the huge rally on Thursday and Friday the markets would have had a terrible week. What is interesting about the rally last week is that the trading volume was pretty low which is not a good sign that the rally has any legs. That was proven out on Monday and especially Tuesday of this week with a big selloff. The markets are rallying today (Wednesday) but again the volume is low.
We are still in Quad IV and getting deeper with the trend declining. Because of the strength of the downward trend, it looks like this trend should continue for a few more months. Of course, trends could change but the math doesn’t see that happening any time soon.
Today Chairman Powell testified before Congress and confirmed that Fed is committed to raising rates at the March 16th meeting. Add to that, growth is now projected to decline to just above zero for the first quarter of this year, this is the same mistake that the Fed made in the fourth quarter of 2018 when the stock market crashed. Raising interest rates into a declining economy never works out well for the stock market.
In the business of investment research and risk management, interesting times are typically beneficial. Using research and mathematics, interesting times often gives us investment opportunities. But like most things in life, interesting times are best served in moderation. A global pandemic followed by a major military conflict involving one of the world’s superpowers might be pushing things a bit too much.
There is no doubt this shall pass, but there is also no doubt there is some serious upheaval that is happening and it looks like it will continue to happen. Consider some of these recent asset class moves:
– Russia raised interest rates from 9.5% to 20%
– Oil is up close to 40% year to date to $110 per barrel
– The Russian Ruble is off 30% year to date which is an all-time low
– Volatility in the stock market is up +108% year to date
– European natural gas is +45% in the last month
The list could go on, but the point really is that risk is trending. That is what happens in Quad IV. Volatility spikes are no longer episodic and non trending. Bad news has a tendency to build on itself.
We certainly didn’t come into the year expecting Russia to invade Ukraine, but we did expect U.S. economic growth to slow. This has played out in spades. A significant recent driver in GDP (Gross Domestic Product) growth is Real Disposable Income. It has fallen by almost -10% year over year. This brings GDP growth down to almost zero for the first quarter of this year.
This deceleration will get sharper as we head into Q2. The key reason for this is highlighted in the non-trending chart below. The stimulus of last year obviously drove up household income in Q1 of 2021 and then subsequent consumer spending into Q2 and Q3. Consumer spending is approximately 70% of U.S. GDP.
Coming into the year the model was suggesting that we would start to see some rate of change slowdown in inflation. While there is some evidence of this happening, it hasn’t occurred to the extent we originally expected. The key reason for that is related to Russia and Ukraine. Not only has the conflict driven up oil prices, but other commodities are also on the rise. You may not know this, but Ukraine is responsible for roughly 16% of the world’s corn exports and 12% of the Global wheat exports. Add to that, Russia is the world’s largest exporter of both wheat and fertilizer.
As of this morning, 26 of the 31 commodities we track are up this year. To the extent inflation continues to accelerate, that will obviously put a dent in consumer spending. Thus, this leads to slower growth in the U.S. economy. So, our forecast for slower growth will accelerate.
In an attempt to stay ahead of the coming events, we are positioned primarily in U.S. Government bonds with small positions in Gold, Energy, and Consumer Staples.
