Happy Monday.
Despite rather aggressive rate hike announcements and continued war in Ukraine the market has shown us its strength over the last two weeks with it bouncing hard, up 10% from its low on March 15th.
Many traders attribute this bounce to short-sellers having to buy back stock as market-makers squeezed them out of the bear positions – creating a buying frenzy and upward momentum. Regardless, we’re now back in a strong position for the bulls – a bit confusing for the bears. And all around a little perplexing for myself.
Jobless claims reach new lows – bolstering Fed confidence to continue raising rates. Jerome Powell – Fed Chair – is usually quite transparent with where he wants things to go. However, the Fed is likely to announce rate hikes on the fly due to the continued geopolitical turmoil and persisting volatility in the market. Goldman Sachs, Morgan Stanley, and Jefferies are all projecting back-to-back 50 basis point hikes. Something I’ve suggested we would not see this year – but war abroad seems to be changing my tune, and many others, due to the additional inflationary effects war engenders. I do still project such aggressive measure would invert the yield curve – which could result in more of a negative consequence on the overall economy, than positive. Regardless, it is hard to predict and I believe the Fed is taking all precautions into consideration – hence the unwillingness to announce rate hikes ahead of time.
I remain skeptical and cautious about the market environment. We continue to hold a generous cash position until there’s a little more certainty in the air.
Market & Economic Update below.
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Warmly,
Mark Sauer
info@AllOneWealth.com
+1(310)355-8286
Weekly Market Summary
Global Equities: Equity markets took a bit of a breather after an incredible run up the prior week. The S&P 500 gained 0.7% while the Nasdaq and the Dow Jones Industrial Average were up 0.4% and 0.2%, respectively. Developed International stocks were -0.3% lower and Emerging Markets slipped -0.9%. The Moscow stock exchange, closed since early in the invasion of Ukraine, reopened this week in a very limited capacity. Heavy buying from the Russian government sought to stabilize a select group of roughly 30 stocks which were the only securities eligible to trade. Short selling was banned, and foreign investors remained locked out from selling their remaining shares.
Fixed Income: 10-Year Treasury yields have run up dramatically both in advance of and following last week’s FOMC meeting. The 10-year pushed up to just under 2.5% on Friday, a significant level that hasn’t been reached since March of 2019. Corporate bonds struggled amidst uncertainty and double headwinds of rising rates and increasing default risks. Investment grade corporate bonds, measured by the iShares Corporate Bond ETF (LQD) were down –0.5% while high yield bonds (iShares High Yield ETF, HYG) were down –0.8%. Investment grade bonds saw slight inflows of $209 million while high yield funds reported nearly $2.7 billion in outflows.
Commodities: Oil prices popped back above $100, reaching $115/barrel before settling around $112 Friday afternoon. A missile attack on a Saudi state-run oil facility pushed prices a bit higher, but all eyes remain on the Iran deal which may unleash additional supply. Liquefied natural gas (LNG) prices hovered around all-time highs, while the US and European Union reached an agreement to increase US exports of LNG to reduce European dependence on Russia. The Baker Hughes US rig count jumped by 7 after last week’s decline, although US drillers are still holding off from drilling due to the risk of oversupply if Iran oil comes into play or if OPEC increases production. In the meantime, US drillers are enjoying record profits as oil remains over $100 per barrel.
Weekly Economic Summary
Jobless Claims: New weekly jobless claims were reported at the lowest level since 1969, with just 187,000 people filing for unemployment. Theoretically, the tight labor market is indicative of a strong economy and gives the Fed carte blanche to raise interest rates aggressively, although the Fed has shown some hesitation to get too aggressive, electing to hike by just 25 bps initially. Investors should expect 50 basis point rate hikes for the next two Fed meetings.
Rate Hike Trajectory is Transitory: The Federal Reserve suggested six more rate hikes in 2022, which would bring the benchmark interest rate to 1.75-2.0%. Given the persistence of high inflation, which is being exacerbated by the Russian war in Ukraine, the Fed may end up being even more aggressive. Goldman Sachs, Morgan Stanley, and Jefferies are all projecting back-to-back 50 basis point hikes as the Fed’s next move. Citigroup is even more aggressive, suggesting four consecutive 50 basis point hikes which would put the benchmark rate well above 2% before the end of summer. Given the uncertainty and the geopolitical turmoil, the Fed will likely decide on the fly, which creates additional risk compared to Jerome Powell’s typically transparent approach.
Mortgage Rates Surge: The cost of a 30-year fixed rate mortgage has risen 1.3% in the past 3 months, the biggest 12-week jump since 1994. The 30-year mortgage is now averaging just under 4.5%, pushing the median monthly payment up 25.6% compared to just a year ago. The housing market has remained red hot, as supply fails to keep up with demand, but the rising cost of borrowing could throw cold water on home-buying.
Market Data Supplied By Halon Investment Management.
