At a Glance

• In the news, Putin is pouncing, the super bowl is set, frozen iguanas are falling from the trees. 
• Equity markets sold off in January and bond markets are flashing warning signs.
• The energy sector is booming, employment is low, labor force participation is low, and retail sales are slowing.

In The News

Russia is flirting with war in its attempt to take back Ukraine.  Ukraine has had its own infighting in recent years and Putin feels like it’s a perfect time to pounce.  Governments around the world are threatening Russia with sanctions and military action. 

The Bengals and Rams are headed to the super bowl in the end of two outstanding weeks of football.  The Rams have gone "all in" trading away three years of their future draft picks to pick up all star players.  So far, their plan has worked out.  I will be rooting for the Bengals as I consider them to be the under dog and my Broncos aren’t in the fight.  As an aside, the Bengals have never won the super bowl.

Storms are knocking power out again.  President Biden will replace Stephen Breyer in the justice system.  Frozen iguanas are falling from trees in Florida, but don’t worry they’re not dead.  Copious splatters of politics splash on the news; its amazing we can see any other colors beside red and blue.

Markets

The stock market experienced its most dreadful month since March of 2020.  In the span of four weeks we have had 10 negative daily Dow reversals.  A negative reversal day is defined as a positive market day swinging negative relative to the previous days close.  Six of those days were a negative drop of 1% or more.  Volatility runs in both directions; we definitely experience that in January.

Now that the feds have signaled they will raise rates volatility has come back to the fore.   The fed is playing with fire given how flat the yield curve is at 46 basis points between the 5 and 30 year treasuries. 100% of the time in the past since 1956 when short term rates go above long term rates we experience a recession.  The two year treasury and ten year treasuries have historically been the two rates to watch.  As of 1-28-2022 they currently sit at 1.15 and 1.78 percent.  If the feds raise rates 4 to 7 times this year like everyone is expecting, I expect we will invert the yield curve and head into a recession.

Economy

Energy Markets are booming as the price of oil just went over 90 dollars a barrel.  Some of this has to do with the Ukraine situation.  I’d argue its because over a year and a half ago the price of oil was a negative dollar.  It goes to Bob Farrell’s rule #2 that excesses in one direction will lead to an opposite excess in the other direction.  It seems like to me that the Saudis and Russians like to push oil to the highs and squeeze the life out of economies before the end of a cycle.  Pay attention to 1970, 1980, 1990, 2000, 2008, 2021.  It’s the sinister analyst in me please forgive me pointing fingers.    

Employment fell below 4% despite a low jobs number of 199,000 jobs in December.  The White House is bracing for a lackluster jobs report for January.  Economists expect January numbers to be around 178,000.  What nobody is talking about is the labor force participation rate.  Pre-pandemic it was sitting at 63.4% and today we are at 61.9%.  With our labor force estimated to be 161 million people this equates to 2.4 million people not working who were working 2 years ago.  Lots of those took early retirement, some of them will come back to the workforce and I’d say some of those are trading meme stocks in their apartment or mom and dad’s basement.  The bottom line is we may have a low unemployment rate but it doesn’t include the 2.4 million people not participating in the labor force. 

Retail sales for December were disappointing as they declined 1.9%.  However, a lot of the sales were done in October as people were expecting shortages.  We could expect January numbers to be down as well due to the omicron variant and as people move back to spending money on events instead of things. 

The Road Ahead

This is a highly unusual economic and market cycle.  The bull market of 2009 to 2020 was long and sustained.  In contrast, the 2020 to 2022 market has moved much faster aided by a massive government policy-induced surge in economic activity and asset prices.  With the feds set to raise rates in March they are determined to put a lid on inflation.  The only question is: at what cost?  Time will tell, but I believe the fed is about to make a big mistake and the economy, markets and unemployed are going to pay for it. 

Your situation is unique, please call me with any of your specific investment, retirement or tax planning needs.

Written By Sean West, CFP®

Disclosure

This blog reflects the personal opinions, viewpoints and analyses of the White Cloud Wealth Management employees providing such comments, and should not be regarded as a description of advisory services provided by White Cloud Wealth Management. The views reflected in the blog are subject to change at any time without notice. Nothing in this material constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security.