Weekly Economic Update: March 21st, 2022

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Newsletter - 21 - 03 - 22

 

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March 21st, 2022

 

The wild ride that 2022 has provided in equities markets continued last week, but this time the move was to the upside. China discussed easing restrictions on tech firms and presidents Biden and Xi held a call where both expressed a commitment to de-escalating the situation in Ukraine. There was a growing fear that China might assist Russia in avoiding sanctions or provide military assistance to the invasion of Ukraine. The news appears to have sparked a four-day 43% rally in the Golden Dragon China Index, which consists of US-listed Chinese tech companies. The index had been down as much as 75% from its peak in February 2021.

The gains were not limited to just Chinese equities. The S&P 500 rose 6% on the week and gained more than 1% for four consecutive days. Since 1928, it’s only happened 16 times and only four times in the last 50 years (see table below). Historically, these strong multi-day rallies occurred following steep declines and often during recessions. Those instances that occurred outside of recessions were followed by strong returns over the following year.

Last week, the Fed raised interest rates for the first time since 2018. Fed Chair Powell indicated that the Fed was expecting to raise rates six more times this year to combat the worst inflation since the early 1980’s. However, he also emphasized the need for their policies to be nimble, thus leaving room for them to adjust policy if incoming data changes materially.

The bond market is not convinced that inflation is going to be a long-term problem. The yield on the 10-year treasury bond is just 2.2% while the latest inflation reading was 7.9% (see graph below). The last time inflation was above 8% was January 1982 and the 10-year treasury yielded more than 14%. Unfortunately, with the surge in gas prices and other commodities due to the conflict in Ukraine, it seems likely that we will continue to see higher inflation over the coming months.

 

Short-term interest rates have moved up meaningfully over the past year, but longer-term rates have been slower to rise. Below is the yield curve as of Friday (black line) compared to a year ago (grey line). The two-year yield has risen from 0.16% to nearly 2%, but the 30-year yield is effectively unchanged. When the spread between short-term and long-term rates becomes this narrow, this is often an indicator of a forthcoming recession. Historically, when short-term rates exceed long-term rates (known as an inverted yield curve), a recession typically occurs within 18-24 months.

 

While we believe the above the slope of this yield curve warrants some attention, it does not represent a near-term risk. Instead, the markets are keenly focused on the conflict in Ukraine and the possibility of escalating or de-escalating of tensions. Given the volatility of the situation in Ukraine, we expect investors will continue to see heightened volatility across financial markets.

 



T I P   O F   T H E   W E E K

 

 

Use your phone or camera to take a video of your home and your belongings. Keep it in a safe place. It may come in handy someday.

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THE WEEK AHEAD: KEY ECONOMIC DATA

Wednesday: New Home Sales.

Thursday: Jobless Claims. Durable Goods Orders. Purchasing Managers’ Index (PMI) Composite Flash.

Friday: Consumer Sentiment.

Source: Econoday, March 18, 2022

The Econoday economic calendar lists upcoming U.S. economic data releases (including key economic indicators), Federal Reserve policy meetings, and speaking engagements of Federal Reserve officials. The content is developed from sources believed to be providing accurate information. The forecasts or forward-looking statements are based on assumptions and may not materialize. The forecasts also are subject to revision.

 

THE WEEK AHEAD: COMPANIES REPORTING EARNINGS

Monday: Nike, Inc. (NKE).

Tuesday: Adobe, Inc. (ADBE).

Wednesday: General Mills, Inc. (GIS).

Source: Zacks, March 18, 2022

Companies mentioned are for informational purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. Companies may reschedule when they report earnings without notice.

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Q U O T E   O F   T H E   W E E K

 

“Everything must be taken into account. If the fact will not fit the theory — let the theory go.”

AGATHA CHRISTIE

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T H E   W E E K L Y   R I D D L E

Two lawyers sit at opposite ends of a large conference table. Nothing is in between them but the table, yet they don’t see each other. How is this possible?

LAST WEEK’S RIDDLE: You are at sea, it is mid-July, and your ship has reached a unique spot on earth. If you sail north, it will be summer; if you sail south, it will be winter. If you sail east, it will be Friday, but if you sail west, it will be Saturday. Precisely where in the world are you? (Hint: your ship is in the Pacific Ocean, near the island nation of Kiribati.)

ANSWER: You are at the intersection of the International Date Line and the Equator.

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SteelPeak Wealth –

Institute of Portfolio Management

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The forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.
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CITATIONS:
  1. The Wall Street Journal, March 18, 2022
  2. The Wall Street Journal, March 18, 2022
  3. The Wall Street Journal, March 18, 2022
  4. CNBC, March 18, 2022
  5. The Wall Street Journal, March 16, 2022
  6. The Wall Street Journal, March 16, 2022
 

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