The Economy’s Continued Struggles

This latter part of January was a disaster, recently the norm for both the president and vice president. As markets struggled, anything else that could have gone wrong did go wrong. The 10-year Treasury rate rose to 1.87 percent, inflation is at a 40-year high, and crude oil is at a 7-year high. Partially due to the Keystone Pipeline closure, we have gone from being oil and gas independent to dependent. Thousands of illegals who haven’t been tested for COVID-19 are roaming across the U.S. There is a growing sense that Washington has lost control, with no leadership at the top. 

The president’s statements are so confusing that his staff routinely must clarify what he really meant to say. Most Americans are concerned about grocery store and gas station prices as well as the direction of this country. Recent news conferences included unwarranted sarcasm and insults, with President Biden referring to one reporter as “a stupid SOB.” Even though much of the economy remains in fairly good shape, the president and his vice president are very unpopular.

Stocks capped their worst week in nearly two years with another round of choppy trading to wrap up the third week of January, sending the S&P 500 tumbling below its 200-day moving average, a level of support that had held up since May 2020. Both the S&P and Dow closed out their third straight week of losses, down 5.7 percent and 4.6 percent respectively, while the Nasdaq Composite plunged 2.7 percent on that Friday and 7.6 percent for the week—its worst weekly decline since March 2020. Major losses in growth stocks have pushed the Nasdaq further into correction territory, down more than 14 percent since its November high. Rising interest rates pressure stocks by making any lofty valuations look less attractive. 

We have just passed the two-year anniversary of China’s COVID pandemic, but many things could not be worse. Fortunately, Americans try to remain optimistic. Almost anyone who wants a job now can get one, and wages have risen at the fastest pace in the past 20 years. The unemployment rate has fallen as the U.S. work force shrinks, and many workers have decided to retire (or live off welfare), while many working mothers still need to stay home because schools will not stay open.

Stock market investment themes come and go, but in the end, you simply cannot ignore fundamentals. We are now in the midst of a renaissance era for powerful growth stocks, which are increasingly emerging as market leaders announce better quarterly results than the overall market. The current inflationary environment is causing a major stock market rotation into quality stocks characterized by strong sales and earnings momentum.

Much of the market’s daily performance is tied to the current narrative—be it bullish, bearish, or a mixture of both, depending on the dominant tone of headlines that move markets and influence investor sentiment. Recent weeks showed just how much the current investor mindset is focused on inflation and rising bond yields. It’s amazing how much a 40-basis point rise in the 10-year Treasury apparently spooked stocks.

The question now is whether the bond market has adjusted enough to take a wait-and-see approach to further economic and earnings data. The one-year technical chart of the 10-year Treasury suggests that a short-term top of 1.80 percent in the 10-year bond yield will define the near-term. If not, then a move to 2.0 percent (by the 10-year) is almost assured.

By late 2022, the stock market will become increasingly distracted by the mid-term elections, after which the leadership in Congress is expected to change. If the Biden administration would cooperate with the new Congress, as Bill Clinton did 30 years ago, that could save this president’s legacy. But Wall Street usually loves gridloc. The political environment could become much more favorable for growth stocks.

Investors need to be in tune with “what the market wants to own now” and rebalance their portfolios accordingly. Inflation will remain elevated for some time longer than originally anticipated, and interest rates are reflecting not just higher inflation but expectations of eventually stronger GDP growth. Identifying sectors of the market seeing high-volume accumulation, then acquiring those stocks and ETFs on pullbacks, should be beneficial. We believe there is always a bull market somewhere.