The broad markets continued their expected declines last week into oversold territory, it’s still too early to get bullish, for now, optimism should suffice. The caution is simple, the short term technicals are showing an increasingly oversold market, but the overall technical condition has been damaged this year and will require more than just a pause in momentum, or a poor earnings season. I think it’s still up to the Federal Reserve’s expected increase of financial interest rates, and the ongoing conflicts in the world, led by the war in Ukraine. Once those uncertainties become clearer, the markets will have a steep climb to reach a level from which a more convincing rally lies ahead.
Another challenge that we’ve discussed here has been the unevenness of the economic condition. Higher interest rates to battle inflation are never to be taken lightly, and as the narrative speculated about coming recessions, that’s to be expected too. Last week Housing came in as expected, neither slower nor faster, but that number could seem some definite head winds as mortgage rates rise in sync with the current rise in US 10yr and 30yr Treasuries, to 2.9%, 3.0%, respectively to levels not seen since 2018. All on the back of recent inflation data showing the Consumer Price Index (CPI) and the Producer Price Index, (PPI) rose 1.2% and 1.4% in March and annually 8.5% and 11.2% respectively. Personally, although unlikely, I would like to see the Federal Reserve aggressively increase rates 1.0%, but no lower than .50%. The week ended with a slightly lower than expected Retail Sales number of .05% vs .06%. Today, Industrial Production increased a strong .09%. All this strengthening activity on the back of Real GDP coming in at 5.5 in 2021. However, in the two years ending with the 4th quarter of 2021 the annual rate was 1.6%, which is closer to the 1.5% which is actively being tracked by the economist community. Uneven has been a natural occurrence because of the pandemic, in my opinion, a more even growth rate appears to be happening, and with the Fed set to raise rates more than 2% this year, 1.5% to 2.5% shouldn’t slow the economy too much. While some of the impact of inflation may have slowed consumption during the traditionally active Easter holiday, in my opinion, activity should increase as the weather warms up. At that time, traveling domestically and internationally should warm up as well. Overall, my early expectation, is more consumption this year will eventually slow down next year, much more like a pending rainstorm, rather than a hurricane.
The Federal Reserve knows that inflation is too high to ignore. I still see more external events affecting inflation, such as continued supply chain disruptions and the recent lockdown in China adding the breadth of the disruption by impacting its commanding lead in export of consumer electronics, data processing technologies, clothing, textiles and medical devices. War in Ukraine is still mostly affecting fossil fuels, all factual events with a wide range of unintended consequences keeping the uncertainty real. As long as that condition prevails, cash on hand, with an eye on increasing exposure in consumer staples and services, healthcare biotech and services and select technology companies. Particularly those that have suffered this year because of short selling speculators, including Hedgefiends and Pindudes. This is because those companies still have products and services in demand, admirable balance sheets, and a clear vision with a strategy to take a huge bite out of the future.