Nasdaq Enters Correction Territory, Off More Than 10% from Recent Highs… All three major stock indices are lower for the year.
What it means— The Fed still weighs heavily on the markets, as investors try to figure out how to position for shrinking money supply. Risk assets, including crypto currencies, have been punished, as people moved away from the biggest growth names of the past two years and sold bonds to make way for higher rates. Dividend-paying stocks have held up well. But with the 10-year Treasury bond yielding less than 2% and inflation at 7%, investors still have few choices to earn a positive yield.
At the present time, buyers are quarantining themselves from the market. Stop loss orders, often placed at 8% and 10%, are activating adding to a downward bias. Some securities attract Buy-The-Dippers (BTD) who do not understand that market technicals are indicating an intermediate term correction. In our view, there is a tidal change in market conditions from BTD to “sell the rally.”
BTD strategy worked well for years with financial media never saying “sell.” It might not work this time.
We’re coming out of an extraordinary economic period where government largesse fueled trillions of dollars’ worth of spending. Central bankers flooded the global financial markets with cash. Inflation has moved to a forty-year high which will not support current Price/Earnings ratios.
The Fed is betting that the primary cause of inflation is consumer expectations. If it can convince us that inflation is ending, we will expect lower prices, and inflation will die of its own accord. Quoting Pogo: “…the problem is us.” HUH?
If the Fed raises interest rates aggressively to stop inflation now, recession and high unemployment follow. There are three big stumbling blocks for the Fed:
- The Fed’s raising rates will be in addition to tightening that has been occurring for months by global central bankers. The Fed may quit hikes due to pressure from the capital markets and deflationary pressures from a slowing global economy.
- The cost of oil is a global headwind slowing economic expansion which will be exacerbated by Putin’s probable military action.
- Work-From-Home spending is waning resulting in weaker corporate earnings. Inflation has reduced consumer buying power slowing demand.
As we get back to some semblance of normal, stock prices will likely trend lower as excess money drains out of the economy and financial markets. Expect a very volatile year for stocks.
Housing Starts Up 1% in December… Home builders broke ground on new homes last month at an annualized pace of 1.7 million units, led by a huge push in the Northeast where starts increased 112%.
What it means— Housing starts rose a mere 2.5% over December 2020. Granted, the measure is volatile, so we can’t read too much into one month, but the industry started construction on 1.6 million units during all of 2020.
That’s impressive because prices are so high. The state of the market shows that builders have plenty of willing buyers, as Millennials try to get a foothold in a market that has been undersupplied for more than a decade.
Existing Home Sales in 2021 Totaled 6.12 Million Units, the Highest Number Since 2006… While December sales were down 4.5% from November, they were still 8.5% higher than for December 2021.
What it means— As with housing starts, the news about existing home sales points to one thing, strong demand. While sales reached the highest level in 15 years, inventory dropped to a record low, going back to when recordkeeping began in 1999.
Existing home inventory for sale fell to just 910,000 units last month. At the current sales pace, that inventory would last just 1.8 months. As you might expect, the median sale price jumped last year, from $309,200 at the end of 2020 to $358,000 at the end of 2021, a 15.8% gain. The rise in house prices and rents enters the CPI on a five-quarter lag. The Fed can’t suppress the impact of housing, and inflation isn’t just something in our heads. It is a real problem.
Bitcoin Battered by Potential Russian Ban… The price of Bitcoin and other cryptocurrencies fell, after the Russian Central Bank proposed banning the mining and use of all crypto currencies.
What it means— Russia is the third-largest location for Bitcoin mining behind the U.S. and Kazakhstan. Like the ban implemented by China last year, the proposed ban would cause temporary disruptions in Bitcoin operations. The Russian Central Bank noted that crypto currencies could be used for money laundering or to finance terrorism.
Those concerns aren’t new, and the Russian government gave cryptos legal status in 2020, although it banned their use as a means of payment. A Russian ban on crypto operations would be a temporary setback. The dramatic price drop on Friday after the news was compounded by the falling price of most risk assets as investors become more cautious. The inflation hedge argument for Bitcoin is another for the trashcan.
The Transportation Security Administration (TSA) Allows Illegal Immigrants to Use Arrest Warrants as ID for Airport Security… Flying? Your seat buddy could be a wanted fugitive or felon. In December, Rep. Lance Gooden (R-TX) asked TSA Administrator David Pekoske how illegal immigrants were allowed through airport security. Pekoske explained that TSA considers certain Department of Homeland Security (DHS) documents acceptable as alternate forms of ID, including Warrants for Arrest of Alien and Warrants of Removal/Deportation. This sounds a lot like suspects in the Old West using their own “Wanted” posters for identification, but in this case the people using the warrants for ID clearly aren’t worried about enforcement. If you misplaced your wallet and need to catch a flight, don’t bother searching for your latest arrest warrant. The TSA noted that the rule only applies to non-citizens. No discrimination here!
Feel better now?
Data supplied by HS Dent Research
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