April Stock Market Newsletter

Dear Clients and Friends,

Here is my April market review for you. Markets are not happy recently with some earnings and supply chain concerns, although the summary forecast for earnings for the S&P500 Index as a whole is very steady. And Russia’s ‘talk’ of nuclear options and the Russian foreign minister making a mention of the war spreading beyond Ukraine has merely added to the market’s current anxiety about interest rate hikes. https://www.cnn.com/europe/live-news/russia-ukraine-war-news-04-26-22/h_fff5cf2e97e7f11d5481508f6a2957da

SUMMARY VIEW

?Here are 8 questions about the stock and bond markets and related, and my own professional opinions for answers with some backing from other professional analysts. I was going to do 10, but 8 made this long enough. Lol

?I had a lot of good feedback that people liked the summary version to read first and then went back to read details later. So, in that same mode, here are relative questions and my super short opinions for the answers. The longer versions follow afterwards.

1. ?Will the very hot housing market crash and pull down the economy??No
2. Will rising interest rates cause a US recession because so many people have variable rate mortgages that will climb? No
3. What key consumer commodities are at risk (besides natural gas for Europe) and are being affected by the Russian/Ukraine war? Wheat and sunflower oil.
4. The news says that Russia has defaulted on its bond payments, so will that affect the stock markets? No
5. Are there a lot of sanctions placed on people or companies in Russia? Yes
6. Are we going into a recession? Not for a while
7. You always say that earnings and economics are the parents in the room to support markets, so how are they doing? Just fine, for now.
8. As a follow up to #7, why have the stock and bond markets been going down and what might change that direction back up? No more cheap money.

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?Here are the more detailed answers to the above questions.

1. ?Will the very hot housing market crash and pull down the economy??No

The US average price of a new home sold was $511k, up 25.4% versus last year. First Trust Data Watch, 3/23/22. However, US existing home sales month’s supply has been dropping consistently since 2010, and right now is 50% less than just 2 years ago, and just 1/3rd of what it was in 2014.?Liz Ann Saunders, Schwab, 28 Feb 2022 and Bloomberg.

?Translation: demand is strong, but there isn’t enough housing available for people in most income categories and hasn’t been for a long time. Will the house price war subside? I believe so, but probably next year, as interest rates continue to climb from the Federal Reserve raising rates to try and catch up with inflation, (CPI) which is currently running at 8.5 percent. As both housing prices and interest rates rise, what happens is a point of demand destruction, and then prices might start to drop. The questions is when and by how much, of course.

1. ?Will rising interest rates cause a US recession because so many people have variable rate mortgages that will climb? No

In 2005, 2 out of 5 mortgages (40%) had adjustable-rate loans, but only 1 out of 100 (1%) in 2021. FHFA, National Mortgage Database (NMDB)

?Translation: it’s not an issue.

1. ?What key consumer commodities are at risk (besides natural gas for Europe) and are being affected by the Russian/Ukraine war? Wheat and sunflower oil.

Russia and Ukraine jointly account for 57% of global sunflower oil exports, while Russia and Belarus are respectively the 1st and 6th largest global exporters of fertilizers, representing 20% of world supply. www.bruegel.org/2022/03/the-impact-of-the-war-in-ukraine-on-food-security

?Translation: we’ll probably see wheat and oil-based products going up in price. And by the way, we get very little regular oil from Russia.

1. ?The news says that Russia has defaulted on its bond payments, so will that affect the stock markets? No

“The Russian government attempted to pay a coupon payment and a maturity payment totaling some $650 Million on two Russian USD sovereign Eurobonds.” Meaning: it was supposed to be in dollars, but they tried to pay it in rubles. Mohammed Elmi in London from Federated Hermes, 4/21/22.

?“Russia made a payment on external debt in rubles on April 4th. S&P already declared that this constituted a technical selective default. Simply not enough to matter beyond the losses that any bondholders already have”. Zack Winer and the Natixis strategist team. 4/21/22

?Translation: no big deal because it’s not a total Russian government default, just on a minor amount of money, so far.

1. ?Are there a lot of sanctions placed on people or companies in Russia? Yes

Yes, as of March 28, 2022 there are sanctions by countries all over the world on Russian oil, industrial metals, key government and business people, banks, agriculture, the Nord Stream 2 pipeline was halted, a phase out of Russian gas imports; a full ban on Russian ships from US, the UK and Canada, but not the EU, yet; 35% tariff on tires from Russia, the list goes on addressing people, financial institutions, imports, exports and travel.?S&P Global Commodity Insights and Peterson Institute for International Economics https://www.piie.com/blogs/realtime-economic-issues-watch/russias-war-ukraine-sanctions-timeline

1. ?Are we going into a recession? Not for a while, perhaps in 2023, IMO.

For quite a while, the financial news media was awash in its own hyperbole that it believed the US economy was going into a recession. It was so loud about it that I often looked out the window waiting for the asteroid heading this way with a neon sign on it flashing the word Recession. Or maybe it was the K-Mart blue light special of Recession Cookies on sale in aisle 4, I can’t remember.

?Very simply, the media went nuts on the idea because of technical reasons, so here goes. Short maturity US Treasury bonds such as 2-year bonds have less yield on them than say, a 10-year bond would offer. That makes sense, as you should get paid less for giving up your money to buy one for a shorter period of time than a longer maturity bond with higher yields.

BUT, when shorter maturity bonds pay more than longer maturity ones, then the yield ‘curve’ is labeled as being inverted. AND, most times in the past when that’s happened, the US went into a recession some time afterwards. But the media made it sound like it was imminent. Nope, it was caused, to be brief, by rising short term interest rates being pushed up because of the Federal Reserve’s actions, not by normal bond market and economic forces. And the kicker is that the average time it takes to go into a recession after an inverted yield curve is… drumroll, please, about 22 months. “Going back to 1900, the lag between a yield curve inversion and the start of a recession has averaged about 22 months” Dan Burrows, Kiplinger, 3-30-22, and https://www.reuters.com/world/us/us-recession-not-imminent-despite-yield-curve-inversion-blackrock-executive-says-2022-04-08/

Translation: hurry and wait, it might be sometime next year or afterwards. But not soon.

1. ?You always say that earnings and economics are the parents in the room to support markets, so how are they doing? Just fine, for now.

Most economic indicators reviewed over a multi-year period still show results that are the same or higher than we were pre-Covid. That includes Durable Goods Orders Ex Transportation, Redbook (same store sales of stores open 12 months or more), US Non-Defense Capital Goods Orders Ex Aircraft, and the US ISM Manufacturing New Orders (dipped a little lately, but still higher than pre-Covid. www.tradingeconomics.com Yes, there might be a sense of a slowdown beginning, but consumers are still spending strongly, and unemployment claims are still falling, too.

?As for earnings, the forecast for Q1 and Q2 2022 S&P500 Index earnings are basically the same now, with just over 130 companies reported for Q1 so far, as they were forecasted to be by this time back in December! And that’s before the market woke up to inflation (which was already here but ignored) and rising interest rates.

? Translation: The parents are still holding up well so far.

1. ?As a follow up to #7, why have the stock and bond markets been going down and what might change that direction back up? No more cheap money.

When the stock and bond markets started to wake up at the very start of this year to the (already known) fact that inflation was high it through a fit. It was if someone turned on the light in your bedroom at 4 a.m. while banging on a frying pan. I was talking about it last year, but no one listened, and when the calendar flipped the year, the revelation that it slept through its alarm hit hard.

?Briefly, growth stocks will take out loans to pay for capital equipment that it invests in itself to grow, grow, grow even more. BUT, when that loan costs more because of rising interest rates or the fear that rising rates will eat into profits, it becomes a stock market environment of sell your growth stocks before it gets worse. And since you raise interest rates to control the out-of-control inflation rate, the full circle of the issue is seen. This week is about earnings anxiety, as some, but not all of which aren’t great. But reread my earnings statement above.

?IMO, the next big date to watch is May 4th, when Chairman Powell states how much he’ll raise rates in May, again in June and into next year. If the market doesn’t like the size of the hikes or number of increases or what he says about it, more selling could occur. That’s where the market is now.?But, after that dust settles, (maybe early June?) and because earnings and economics are still (so far) overall steady, the market may settle down to a smoother and hopefully more upward path thereafter. Same for bond markets, IMO. We’ll see.

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?WHAT to do about all of this? Wait. Stay lighter in stocks for now, out of most bonds for now, and wait for the turnaround and some rationale (after May 4th?) to prove it’s legit to possibly be buying even more at a cheap price.

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?As always, I’d enjoy sharing and chatting with you to explain further, plus what I like and don’t like in more detail.

?Have a good, safe, rest of your week.