test gauges

May 15, 2022

Uncategorized

By

Let’s examine these 10 indicators in more detail and the influence they may be having on the markets today: (Not listed by priority)

  • Commodity Prices:
    Building supplies, industrial metals, raw materials and especially oil prices are spiking and at or near all-time highs.  This week the national average for oil hit the all-time high over $4.50 a gallon (much higher in parts of the US) and Diesel fuel is almost near $6.00 a gallon making the transportation industry incur significant costs which should eventually help fuel inflation higher.
  • Employment Picture:   [Bullish]: The one bright spot of the economy is so good, it is overall creating a negative in many other areas (see below) including inflation and global supply chains issues.  With approximately 4.5 million people leaving the job force last year and 11 plus job openings currently in the US. this has fueled higher wages and higher labor costs.
  • Geopolitical Risk/Turmoil [Bearish]: There are enough conflicts and world issues to write a whole page on.  The turmoil between Russia-Ukraine as well as potential threats by China, instability in the middle east and North Korea all provide a backdrop for additional risk worldwide.  These factors have driven the US Dollar to recent highs and help collapse the Chinese Juan and Japanese Yen, both currencies that have weighed negatively on the US markets.

NEW LIST

  • Global Supply Chain test 1 [Bearish]: The global supply chain has been broken for some time resulting in goods being hard to obtain (baby formula, building supplies, fertilizer for crops), while their prices are rising in price at a dramatic and punishing pace. In addition, China is still locked down in several large port cities due to COVID and it doesn’t seem that normal shipments will resume anytime soon.
  • Global Supply Chain [Bearish]: The global supply chain has been broken for some time resulting in goods being hard to obtain (baby formula, building supplies, fertilizer for crops), while their prices are rising in price at a dramatic and punishing pace. In addition, China is still locked down in several large port cities due to COVID and it doesn’t seem that normal shipments will resume anytime soon.
  • Inflation/Stagflation [Bearish]: Inflation is very high.  Much higher than expected.  After a dismal report in April showing March yearly inflation running better than 8% it was widely expected the reading would subside and we would see April’s inflation slowing.  Instead, it came out above 8% again and higher than expectations. During recent polling, 94% of Americans say that their number one concern is rising prices (inflation).  We also continue to see ongoing signs of stagflation which we have been sharing with you in these Outlooks for the past 6 months.
  • Investor Sentiment    [Neutral]: By most measures (from different sources) investor sentiment is the worst it has been in many years, perhaps going back to the financial crisis of 2008-2009.  This lack of optimism and fear that the markets could go down further has translated to a massive amount of outflows from the stock market and bond funds.  This has exacerbated the downward trajectory of the markets.   Until such time that many retail and 401k investors feel better about the markets, they are unlikely to recommit funds to stocks or bonds.  We now know that many people’s behavior during the bear market of 2008-2009 was to go to cash late and not recommit to the markets in some cases for years.  However, in the near term we call this a neutral reading as these bearish signals often lead to quick rebounds and rallies that are usually not sustainable.
  • Mish’s Modern Economic Family [Bearish]: The components that make up the Modern Economic Family are all in bearish phases.  However, they all look oversold (outside the Bollinger Bands on Real Motion) and with Friday’s rally may be in for a short-term bounce.  However, given the damage in each of the charts, it may need a long sideway period before they retain any type of bullish phase.
  • Monetary Policy  [Bearish]: To curb inflation and fight many of the aforementioned problems, the Fed has started an aggressive action of raising interest rates and forecasted that their target before year-end is to get to 2.0%.  After raising rates by 0.25% in March and then 0.50% in May, we are likely to see a continuation down this path.  This is their soft landing approach.  Will it work?  We shall see.  However, given the hot labor market and extreme inflation we are experiencing, many economists believe that three things could happen:  1) the Fed raises 0.75% at a future meeting and that may shock the markets; 2) the Fed raises more than the 1.9% targeted and have to go up to 2.5%-3.0% to get inflation well under control; 3) we have a hard landing and end up in a recession.  There is an old axiom, Don’t Fight The Fed.  That is especially true when they are lowering/accommodating (good for stocks) and when they are raising/tightening (bad for stocks).
  • Money Flows [Bearish]: We have commented the past few weeks that asset liquidations out of stock and bond funds has accelerated and we have seen billions each week moving out of investments and into either cash or being used to support lifestyles, home purchases and improvements.  This has exacerbated the downward move of the stock and bond markets and is not likely to reinvigorate the markets anytime soon.
  • Yield Curve-Interest Rates [Bearish]: The 10-year US Treasury rate is up approximately 100% since one year ago when rates were at 1.5% coming out of the Pandemic.  They now sit around 3.0% and have helped bring down stock market valuations and move bond prices much lower (making the yield higher but value of the bonds much lower).  Borrowing costs for everything from cars, to houses to corporate borrowing rates have gone up quickly. Plus, 30-year Mortgage Rates have risen from 3.25% to 5.5% on their way to 6.0%.  This will not help the housing industry.  Unless and until we go into a recession, we are not likely to see interest rates much lower.  This will continue to weigh on stocks as analysts are already repricing price-earnings ratios factoring in higher raw material costs along with higher borrowing costs for most corporations.

Summary:  [Bearish]: With one positive, one neutral and eight negative macro view indicators, the investment landscape continues to be overall negative.  However, there are areas of positive investment themes, many of which we have exploited at MarketGauge and Mish’s Premium Service.  These include energy, agriculture, mining, inverses on stocks and interest rates and special stock opportunities in large and small cap securities.