Signs on the Horizon

Signs on the Horizon

A Strange World

All around us we see the same thing: weirdness.

According to a client of mine, a McDonald’s on Interstate 81 posted a sign in the window:  

Apply Inside … Work Today!

So anyone with a pulse can walk in off the street and get a job at McDonald’s. No resume? No references? Surely an interview.

Doesn’t that paint a picture of a white-hot economy?

The housing market seems on fire. Another client reported to me that a house in her neighborhood had a bidding war with nine contracts written on the property. The winning bidder paid $52,000 over list price.

And just look around you: in formerly deserted shopping malls, consumers seem to be spending like crazy. Again, a white-hot economy?

But dark clouds are forming on the horizon.

In a CNN interview[1] Ken Rogoff, Professor of Economics and Public Policy at Harvard, said he had met with some top professional forecasters who identified some frightening signs of an “extremely difficult global situation.” According to Prof. Rogoff, with “the lockdowns in China . . . , , war in Europe, and galloping inflation, you have the makings of a perfect storm of a global recession.”

Perhaps to give viewers some hopium, he said, “It’s a pretty scary risk, but not a certainty.”

So what are the signs that have Prof. Rogoff and many other top financial analysts on the edge of their seats? We’ve singled out four economic indicators to watch.

Sign One: The Stock Market

The year began with the markets in nose-bleed territory. January posted record highs for the Dow and the S&P. “As of early 2022, the Dow’s all-time high at market close stands at 36,799.65 points—reached on Jan. 4, 2022.”[2] On the same day, the S&P reached an intraday all-time high of 4,818.62.[3]

But (there’s always a “But”) the bloom came off the rose at the end of January:

The Nasdaq Composite ended the trading day Monday down 9.49% from where it started at the beginning of January, marking its worst month since March 2020—the start of the spread of the COVID-19 pandemic in the U.S.[4]

Since that ominous day in January, the bottom seems to have fallen out of the market:

After hitting record highs in early January, the stock market has lost nearly a fifth of its value — plunging stocks near bear-market territory. The Nasdaq (COMP) is already deep into a bear market. More than $7 trillion has evaporated from the stock market this year.[5]

The bad news from Wall Street has certainly impacted Main Street. Even though a minority of Americans invest in the stock market, when they see red ticker symbols at the bottom of their TV screens, their moods shift significantly. In May, consumer sentiment dropped to its lowest level in 11 years.[6]

When consumers get frightened, they stop spending. Not good for the U.S. economy, two-thirds of which comes from consumer spending.

Sign Two: Inflation and the Fed

And when consumers spend these days, they find that their hard-earned dollar doesn’t buy nearly as much as it did last year. At the gas pump, the one gallon that $3.04 bought a year ago now hits your credit card with a charge of $4.47.[7] Californians must pony up more than $5.96.[8]

To buy the same thing, a consumer who spent $100 in April 2021 will now have to spend $108.26.[9] That 8%+ inflation rate has finally freaked the Fed.

Inflation was indeed a huge problem in 2021, but the Fed sat on its hands and failed to fight the growing inflation forces. The big 8.5% number in March thus prompted Chairman Jerome Powell and his committee to raise interest rates by a half percentage point—the largest jump in 22 years.[10]

[And Powell] said this month the central bank would continue to raise rates by half a percentage point at the conclusion of each meeting until it’s satisfied inflation is getting under control — and then the Fed would continue to raise rates by a quarter-point for a while.[11]

Deutsche Bank recently sounded the recession alarm in a letter to its clients. As reported by CNN Business:

“We regard it…as highly likely that the Fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel,” Deutsche Bank economists wrote in its report with the ominous title, “Why the coming recession will be worse than expected.”[12]

A gospel truth among stock market forecasters: The markets don’t like interest rate hikes.

Sign Three: Bonds

In the past, many investors fleeing the stock market used the proceeds to buy bonds. But that might not happen this time.

Cash is king, for bond owners are selling, too. As they sell, prices of bonds fall. As bond prices sink, interest rates rise (there is an inverse relationship between bond prices and interest rates). And this time, there’s another big bond owner selling bonds: the Fed itself. When COVID hit in early 2020, the Fed began to increase the money supply by buying bonds on the open market. But now, to hike interest rates, it’s selling off its huge bond portfolio.

All of this bond activity has produced a “yield curve inversion”:

​As bonds sold off and investors grew more fearful of an economic downturn, the gap between short-term and long-term bond yields has been shrinking. Yields on the two-year Treasury note briefly rose above those on the benchmark 10-year note in March for the first time since September 2019.[13]

This is a yield-curve inversion, which has preceded every recession since 1955 (producing just one false sign).[14]


Sign Four: Global Chaos

Again, weirdness. All around the world. Russia continues its war-crime adventures in Ukraine, choking off a major source of food to Europe and Africa. With NATO countries and the U.S. stopping purchases of Russian oil, energy prices have soared, contributing to the galloping inflation in the U.S. China has recently been imposing severe lockdown restrictions in its fight against the COVID virus. Bizarre videos circulating on the Internet (and not verified by us) have shown thousands of Shanghai residents screaming from their balconies.[15]

​While there has been no official announcement, residents in at least four of Shanghai’s 16 districts received notices at the weekend saying they wouldn’t be allowed to leave their homes or receive deliveries, prompting a scramble to stock up on food.[16]

Just as the world became deathly ill in the winter of 2020, when the COVID virus flew on thousands of airplanes taking off from Wuhan China, the world’s economy is about to catch another dose of doldrums as the world’s second largest economy slows to crawl in its battle with the same virus.

What Now?

What will it all mean? And where do we go from here? And what should you do now?

We’ll send a follow-up email later this week with a consensus of the experts.

As always, we encourage you to pass this article along to family and friends. We would welcome the opportunity to help them preserve their hard-earned assets.

Market Commentary May 9, 2022

Market Commentary May 9, 2022

Weekly Financial Market Commentary

May 9, 2022

Our Mission Is To Create And Preserve Client Wealth

There is a lot of uncertainty in financial markets – and markets hate uncertainty.

In recent weeks, economic and financial market data have been telling different stories – and that makes it tough for investors to know where the United States economy is headed. Since stock markets move up and down based on what investors think will happen in the future, markets have been volatile. Here are some of the issues that have contributed to recent uncertainty.

 

  • Is economic growth slowing? At the end of April, the advance estimate for gross domestic product (GDP), which is a measure of economic growth, showed the U.S. economy contracted (-1.4 percent, annualized) during the first quarter of 2022. It was a puzzling piece of information because consumer spending, which accounts for more than two-thirds of economic activity rose by 2.7 percent during the period – after being adjusted for inflation – which suggests the economy is strong. A discrepancy between imports (up) and exports (down) appeared to be the driver behind the decline in GDP. A contraction can be a sign that the economy is weakening.

 

  • Is economic growth continuing? Right now, workers are in demand, which can be a sign of economic growth. Last week’s unemployment report showed stronger-than-expected jobs growth in April. The unemployment rate was 3.6 percent, and average hourly earnings rose by 5.5 percent, annualized. However, the labor force participation rate – the percentage of people who are working or actively looking for work – ticked lower. This could be due to the latest wave of COVID-19, reported Patti Domm of CNBC.

 

  • Will the Federal Reserve make a mistake? The U.S. economy recovered from the pandemic quicker than expected. One consequence was that high demand and limited supply pushed prices higher. Then inflation was exacerbated by the Russia-Ukraine war and China’s COVID-19-related lockdowns, reported Jack Denton and Jacob Sonenshine of Barron’s.

 

Last week, the Fed continued its fight against inflation by raising the fed-funds target rate by 0.50 percent. On Wednesday, investors welcomed the move and U.S. stock indices moved higher. On Thursday, they changed their minds and markets dropped lower. “US stocks appear to be on a permanent rollercoaster ride as investors debate continued signs of a strong economy alongside rising rates,” stated a source cited by Barron’s.

 

Bond yields have risen along with interest rates. At the end of last week, the 2-year U.S. Treasury note yielded 2.72 percent and the benchmark 10-year U.S. Treasury yielded more than 3 percent. Higher bond yields are likely to affect stock markets, too, as investors can now find opportunities to invest for income with less risk.

 

Last week, major U.S. stocks indices moved lower. The Nasdaq Composite Index is in bear market territory (down 20 percent or more), and the Standard & Poor’s 500 Index is down 14 percent year-to-date with almost half of the stocks in the Index down 20 percent or more, reported Ben Levisohn of Barron’s.

ARE YOU LIVING THE AMERICAN DREAM? In a late March survey, conducted by an accounting technology firm, small business owners were asked if they were living the American Dream. Two-out-of-three small business owners said they were, although they thought the “American Dream” was changing. Small business owners said their American dream includes:

  • Being self-made,
  • Owning a business,
  • Being financially comfortable, and
  • Providing for their families.

They also want to:

  • Provide for the future,
  • Pay off a mortgage,
  • Push for good causes,
  • Give employees health and retirement benefits, and
  • Pay employees higher wages.

According to the IRS Small Business and Self-Employed Division, there are 57 million small business owners and self-employed taxpayers that have businesses with less than $10 million in assets.9 Over the past 25 years, small businesses have accounted for two of every three jobs created in the United States, reported the Small Business Administration.

If you’re a small business owner and you would like some help with spending, saving, tax, or retirement strategies, let us know. We’re happy to help.

Weekly Focus – Think About It
“There are no forms in nature. Nature is a vast, chaotic collection of shapes. You as an artist create configurations out of chaos. You make a formal statement where there was none to begin with. All art is a combination of an external event and an internal event…I make a photograph to give you the equivalent of what I felt. Equivalent is still the best word.”
―Ansel Adams, photographer

How Are Your Investments Doing Lately?  Receive A Free, No-Obligation 2nd Opinion On Your Investment Portfolio >

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Investment advice offered through Research Financial Strategies, a registered investment advisor.
* This newsletter and commentary expressed should not be construed as investment advice.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
* Asset allocation does not ensure a profit or protect against a loss.
* Consult your financial professional before making any investment decision.
* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject.

 

Investment advice offered through Research Financial Strategies, a registered investment advisor.

Sources:
https://www.bea.gov/sites/default/files/2022-04/gdp1q22_adv.pdf
https://www.bls.gov/news.release/empsit.nr0.htm
https://www.cnbc.com/2022/05/06/job-growth-and-wages-were-strong-in-april-but-some-workers-just-disappeared.html
https://www.barrons.com/articles/stock-market-today-51651825141?mod=Searchresults (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2022/05-09-22_Barrons_The%20Dow%20Dropped%20Again%2c%20Jobs%20Growth%20Was%20Strong_4.pdf)
https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202205
https://www.barrons.com/market-data?mod=BOL_TOPNAV (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2022/05-09-22_Barrons_Overview_6.pdf)
https://www.barrons.com/articles/bear-stock-market-fed-china-51651870728?mod=read_next (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2022/05-09-22_Barrons_This%20Stock%20Market%20Feels%20Like%20a%20Bear_7.pdf)
https://www.goodnewsnetwork.org/2-in-3-us-business-owners-are-currently-living-american-dream/
https://www.xero.com/content/dam/xero/pilot-images/campaign/us-smb-survey/small-business-%20week_Infographic-new-american-dream.jpg
https://www.irs.gov/newsroom/irs-selects-new-leadership-for-small-business-and-self-employed-division
https://cdn.advocacy.sba.gov/wp-content/uploads/2022/04/22141927/Small-Business-Job-Creation-Fact-Sheet-Apr2022.pdf
https://www.goodreads.com/author/quotes/12115.Ansel_Adams

Signs on the Horizon

Important Market Update

Dear friends and clients,

You’ve heard about it on the news, you’ve felt it at the grocery store and at the gas pump, you’re having to deal with it every day. 

It is inflation.

We didn’t hear much about it in the news or feel its impact until very recently.  With a 1.4% increase just in the month of March, the US Producer Price Index (PPI) recorded the highest ever year-over-year increase in history. The famous US Consumer Price Index (CPI) saw its highest year-over-year increase in 40 years. Together, these two price indexes highlight the serious threat rising prices have on your purchasing power and your investment portfolios.  In other words, inflation does not limit its impact to your grocery purchases, it is also weighing on your life savings, and for many, their daily choices.

Inflation’s impact on the financial markets has been strong and immediate.

Familiar stock market Indexes

·         S&P 500 Index (SPX)  -13.31% (NEGATIVE)

·         NASDAQ Composite Index (COMPQX)  -21.16% (NEGATIVE)

·         Dow Jones Industrial (DJ-30) Index  -9.25% (NEGATIVE)

·         Barclays Aggregate Bond Index (AGG)  -9.83 (NEGATIVE)

Yes, you read that correctly.  All major indexes are languishing in negative territory.

·         S&P 500 is in correction territory (10% loss)

·         Tech-heavy NASDAQ is in bear market territory (20% loss)

·         Dow Jones is just ¾ of 1% shy of being technically designated as being in correction

Add to that the beating taken by bonds this year.  If you have traditional bonds or bond funds, you’ve likely seen your bonds values fall and accordingly the AGG is just 17 basis points shy of being in an official correction.  For bonds, that is serious because many have been led to believe they are a “safe haven” for retirees desiring a less risky investment. 

If you recall our presentation from September 2020 entitled “Dangerous Times”, you’ll remember we illustrated and warned of a perfect storm forming due to 40 years of falling/low interest rates and low inflation that led to all-time low interest rates and all-time high stock market values.  The perfect storm is now on our shores.  Rising interest rates and inflation are sending markets tumbling and bond values crashing.

In this storm, it seems like there is no good place to hide and wait it out.  Historically, when inflation grips our economy, cash loses purchasing power and commodity prices rise as a hedge against falling market indexes.

What is a commodity? 
A commodity is a basic good used in commerce that is interchangeable with other like-commodities. Traditional examples of commodities include grains, gold, beef, oil, and natural gas. The basket of commodities is varied and wide ranging; so, not all commodities will be a worthwhile inflation fighter.

Here are a few Exchange Traded Funds (ETFs) that represent various commodities and their results.  The percent return is for 2022 year-to-date through 4/29/2022.

Agriculture / Food

·         WEAT (Wheat) ETF 41.00%

·         CORN (Corn) ETF 39.18%

·         SOYB (Soybeans) ETF 25.63%

·         TAGS (Agriculture) ETF 27.69%

·         CANE (Sugar Cane) ETF 4.13%

·         JO (Coffee) ETF  -1.65% (NEGATIVE)

Energy / Oil / Alternatives

·         UNG (US Natural Gas) ETF 100.16%

·         USO (US Oil Fund) ETF 41.94%

·         XOP (Oil & Gas Exploration & Production) ETF 37.49%

·         TAN (Solar) ETF  -16.55% (NEGATIVE)

Natural Resources / Metals / Mining

·         JJN (Nickel) ETF 52.54%

·         SLX (Steel) ETF 17.07%

·         GLD (Gold) ETF 3.48%

·         URA (Uranium) ETF 1.62%

·         WOOD (Timber/Forestry) ETF  -2.07 (NEGATIVE)

·         SLV (Silver) ETF  -2.19 (NEGATIVE)

·         LIT (Lithium) ETF  -22.8% (NEGATIVE)

While many commodities can be good inflation fighters, they can also be volatile.  As a result, you may have seen or will see RFS purchase an ETF and sell it rather quickly.  Our buying and selling rules are in place to prevent catastrophic losses while attempting to capture as much upside as possible.  This requires trends and indicators take root…which usually means we need to allow the ETF to solidify its direction over several days.  Once the direction seems solid, we act accordingly.

Nearly all of the above commodity ETFs are constrained by low daily volume and/or tax reporting complications.  As a result, Research Financial Strategies is limited to investing in diversified commodity ETFs such as energy and agriculture.

·         IXC (Global Energy) ETF 28.97% YTD

       o   Purchased 2/3/2022 is up 8.27%

·         PDBC (Commodity ETF 32.65% YTD

       o   First lot purchased on 3/22/2022 is up 4.19%

       o   Second lot purchased on 4/27/2022 is up 0.17%

These returns may sound small; however, when you compare them to what is happening to the markets overall, then you’ll find they are going in the opposite direction which is the right direction.

Do you have bonds? 
If so, then you may have noticed we sold many ETFs and mutual funds a while ago and purchased TBT.  TBT is an ETF that benefits from the 20-year treasury decreasing in value.  As mentioned above, rising interest rates negatively impacts bond values.  With the expectation that the Federal Reserve will continue to raise rates several times over the remainder of this year, it looks like bond values will continue to fall.  As bad as that sounds, your bond portfolio will benefit.  Since TBT was placed in our bond model portfolio it has earned 9.04% through 4/29/2022.

You may have noticed our equity and bond models both have large cash positions.  This is done on purpose.  Cash is a good loss-avoiding hiding place and better than bonds currently.  Inflation may erode some of your purchasing power while in cash but at least it won’t be exacerbated by bond losses.

How are we fairing?
2022-YTD as of 04/29/2022: 

·         RFS Bond Model  -1.35% (NEGATIVE) vs AGG Index  -9.83% (NEGATIVE)

·         RFS Equity Model  -13.56% (NEGATIVE) vs S&P 500  -13.31 NEGATIVE)

·         RFS Equity Model  -13.56% (NEGATIVE) vs NASDAQ  -21.16% (NEGATIVE)

RFS is beating the AGG and NASDAQ handsomely and keeping pace with the S&P 500.  Going forward we imagine a favorable rest of the year.

Bottom line, you, as an RFS client, are poised to potentially benefit as bond values fall and commodity prices rise.  No matter how long this turmoil lasts, we’ll be there fighting for you.

Questions? Please call us. 301-294-7500

 

 

Sources:
ETF and Index returns calculated using TC2000
Spotlight: Come On, Commodities by Direxion Funds
Commodities on Investopedia.com 
https://www.investopedia.com/terms/c/commodity.asp

 

Signs on the Horizon

Q1 2022 Update

Ehhh,  What’s up Doc?

Just two years ago, media had zero coverage of inflation as a topic of interest. Now, multiple stories appear every day about how inflation is affecting the global economy, consumers, and business.

In many ways, the economy is like a three-legged stool. For a strong economy we rely on strength in three sectors, consumer discretionary, financials and technology. Inflation is affecting all three of these sectors.

Consumer Price Inflation was reported last week at 8.5%1 with many forecasters expecting that it is the peak. Then the Producer Price Index reported inflation at 11.2%. Those higher prices that manufacturers are paying have not, yet,  been passed on to retail outlets. The CPI, even if it peaks at 8.5% isn’t going to ease quickly.

Whether at the gas station, grocery store or general shopping, higher prices have caught our attention. Household and business budgets are being reprioritized by reducing discretionary expenses which will eventually impact the economy.

Housing is a major cause of inflation2 as the country deals with a limited number of houses for sale and a growing demand due to Millennial household formation. Housing data is added to the CPI on a lag. Rising home sales will be adding to the inflation data well into next year even if sales begin to slow.

Except for Baby Boomers, most investors have never seen inflation at today’s levels. Even most Boomers weren’t big investors in the ’70s when inflation was even higher than today. Gasoline rationing and grocery shortages were not supposed to happen in America.

In 1979, Fed Chairman Paul Volker changed monetary policy3 and aggressively raised interest rates to 13%. Home mortgage rates rose to as much as 21%!  The economy responded to expensive money and prices began to fall. ​The rate hike was hard and much like giving a child cod liver oil.  It was unpleasant but “what the doctor ordered.”  Collective thinking by the public and all levels of government changed from this experience.

Forty years of declining interest rates4 benefited job creation, wages, purchasing power and the country’s standard of living.  The stock and bond markets began long-term appreciation trends. “Buy the dip” and “the market always goes up” became common beliefs.

Today’s Fed Chairman, Jerome Powell, has a task similar, but different, than the Fed confronted in the ‘70s.  In the post-Covid economy business conditions are much different than at the beginning of our technology explosion.

Raising rates aggressively could cause a recession5 boosting unemployment and aggravating existing shortages.  Higher interest rates would push 30-year mortgage rates above the current 5% slowing home sales. Lower home sales results in lower employment and broadly impacting related industries.

A broad base of stocks has been declining for several years6, but the falling prices have been masked by Wall Street propping up favored technology and growth stocks.  Now, with the Fed announcing higher interest rates those same favorite stocks that dominate major indexes are being repriced to lower levels.

For investors whose major experience in the markets has been post-2008, it is time to examine basic assumptions.  Interest rates are rising which means the safe haven of bond investing is gone7.

Bonds benefit from falling interest rates and lose value with rising rates. Bond values and interest rates are connected to each other as on a teeter-totter. The majority of investors have significant bond allocations as the primary means of protecting their portfolios. It is essential to reconsider this assumption. As of mid-April, Barclay’s Aggregate Bond Index (AGG) is negative 9.11% year-to-date. That isn’t the safety asset that investors expect.

Investor’s favorite FANG stocks (Facebook, Amazon, Apple, Netflix, and Google) are negative 18.66%. The NASDAQ is negative 14.63% while the S&P is negative 7.71% at this writing. This year is different than we are used to. It is changing and as the Federal Reserve attempts to conquer the inflation it created, more changes in the markets lie ahead.

Higher interest rates make rising dividends more valuable8 in the near term than investing in a company with an unproven product or concept. That includes many growth and technology firms.

Shortages have revived a focus in commodities9 which most portfolios have ignored for a few decades. New industry leadership will surface from recent knee-jerk volatility. We will adapt.

Questions? Call us. We are here for you!  301-294-7500

 

 

 

 

1 https://www.nytimes.com/live/2022/04/12/business/cpi-inflation-report

2 https://www.washingtonpost.com/business/2022/01/31/if-policymakers-are-serious-about-tackling-inflation-they-need-address-soaring-housing-costs/

3 https://www.thebalance.com/who-is-paul-volcker-3306157

4 https://www.ocregister.com/2021/10/19/40-years-of-falling-interest-rates-who-got-rich/

5 https://www.bankrate.com/banking/federal-reserve/will-the-fed-cause-a-recession/

6 https://www.cnbc.com/2022/02/16/stock-market-futures-open-to-close-news.html

7 https://am.jpmorgan.com/br/en/asset-management/adv/insights/ltcma/rethinking-safe-haven-assets/

8 https://www.investopedia.com/articles/investing/072115/do-interest-rate-changes-affect-dividend-payers.asp

9 https://www.bnnbloomberg.ca/commodities-soar-as-anxiety-over-supply-shortages-increases-1.1732299

SPECIAL EDITION MARKET UPDATE

SPECIAL EDITION MARKET UPDATE

Weekly Financial Market Commentary

April 12, 2022

Our Mission Is To Create And Preserve Client Wealth

Some Scary Grains of Truth

The Pain …

Perhaps we need to brace ourselves.

A slew of reputable sources are painting bleak pictures. Not just of the U.S. economy. But of the global economy. Pain peeks just over the horizon.

Bloomberg pulls no punches:

Global food prices are surging at the fastest pace ever as the war in Ukraine chokes crop supplies, piling more inflationary pain on consumers and worsening a global hunger crisis.[1]

In Ukraine, there’s the Black Sea Breadbasket Region. “Ukraine exports over 50 million metric tons of corn and wheat to the world, and Ukrainian farmers would normally be planting crops right now. With Putin’s invasion, that is unlikely to happen.”[2]

A photo in The Times of Israel shows what’s at stake.

“Farmers harvest with their combines in a wheat field near the village Tbilisskaya, Russia, July 21, 2021. (AP Photo/Vitaly Timkiv, File).”[3]

As Russian troops invaded Ukraine, breadbasket farmers were forced to neglect their bountiful fields; they had to fight or flee. The Ukrainian government announced that men 18 and older had to remain and take up arms. So farmers had to put get off their tractors and put down their scythes and sickles.

The war has thus upended “global trade flows and [has] fuel[ed] panic about shortages of key staples such as wheat and cooking oils. That’s sent food prices— which were already surging before the conflict started—to a record, with a United Nations’ index of world costs soaring another 13% last month.”[4]

And it’s not just food prices that are soaring. The inflation report of April 12 should put a pit in all our stomachs.

Inflation rose at the fastest pace in 40 years  in March as consumer prices jumped 8.5%

The consumer price index leaped 8.5% annually, the fastest pace since December 1981, the Labor Department said on Tuesday, likely cementing Federal Reserve plans for an unusually large half-point interest rate hike early next month. That increase is up from 7.9% in February and inflation now has notched new 40-year highs for five straight months.

Prices rose 1.2% from their February level, the sharpest monthly increase since September 2005. [5]

It goes without saying: The stock market does not like huge inflation numbers.

… Of No Gains

There’s pain ahead.

Russia has blockaded the Black Sea, so the strain on the global economy goes beyond food shortages.

Putin’s blockade in the Black Sea is an act of economic warfare against the world. Any shipping restrictions in the Black Sea will not only slow trade but will also make it more expensive. Countries in the Middle East and Africa rely on the Black Sea trade for critical supplies such as wheat. Even the U.S. relies on Black Sea trade to export more than $130 million of poultry products to Central Asia and other countries in the region.[6]

… Stays Mainly

Sunflowers also suffer. Who cares about sunflowers?

Sunflower oil is a key ingredient in all sorts of foods. Ukraine provides nearly half the world’s supply of sunflower oil. Russia’s invasion has set the sunflower oil industry in turmoil.

Thousands of items, also including ready meals and even wrapping paper, use sunflower oil. Prices are surging and the ingredient will only become more scarce from the summer as Ukrainian farmers may struggle to grow and export the crop. [7]

Companies like Martin’s Snacks that rely on sunflower oil will be particularly vulnerable. Ukraine is the largest exporter of sunflower oil in the world, responsible for up to 46% of sunflower-seed and safflower oil production, according to the Observatory of Economic Complexity. The second largest producer is Russia, which exports about 23% of the world’s supply.

Sunflower oil is now $1.28 per pound, versus the $0.60 it cost in September 2020. [8]

…In the Grain

But grain remains the key. Wheat and corn. The staples of the world.

According to Bloomberg;

Russia’s invasion has caused a humanitarian disaster in Ukraine and disrupted trade in foods across the world, sending wheat and corn prices to the highest in a decade. Ukraine is a key supplier of grains to countries in the Middle East. Meat prices are also under pressure as the cost of the feed used for cattle and pigs rises. 

The two countries are key players in certain major global industries, like computer chips, sunflower oil, grains, petroleum, and wood. Together, they account for more than a quarter of global wheat exports. Ukraine produces somewhere around 70-90% of the world’s neon gas, which is a vital component of the microchips used to manufacture smartphone and computer screens. Russia is responsible for 13% of the world’s crude petroleum exports, which means anything that requires transportation at any stage of production—almost everything—will be impacted. Penfield predicts inflation may hit 11% by the end of the year.9

The Pain of No Gains Stays Mainly in the Grain

Investors, brace yourselves. Don’t expect assets to show any gains in 2022. The real challenges lie not in seeking gains but in avoiding gargantuan losses. We can’t expect the disaster unfolding in Ukraine to cause just a blip in world stock markets. We might just see lots of red in charts with arrows pointing only in one direction: down.

Avoiding the Pain of Losses

Here at Research Financial Strategies we will turn all our analysis and energies toward preserving the capital of our clients.

The RFS strategy of concentrating in three themes in energy, oil and natural gas; commodities, food, groceries, wheat, corn, sunflower seeds, etc.; and metals and mining, aluminum, steel, copper, lithium, platinum, palladium, uranium, etc., have all paid off recently.

No gains certainly cause pain. But that’s nothing like the pain of losses.

As always, we encourage you to pass this email along to family and friends. We would welcome the opportunity to help them preserve their hard-earned assets.

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* This newsletter and commentary expressed should not be construed as investment advice.
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