From what we have seen stock and bond markets doing for the last 20+ months through the end of 2021, the U.S. economy grew faster last year than at any time since 1984. Faster than what created the Tech Bubble and faster than what created the 2006/07 housing bubble. In the 4th Quarter of 2021 alone, the U.S. economy grew at a whopping 6.9%! Remember that number. It is BIG but it is also now history.
Now, January seems to show that the U.S. economy has turned on a dime. WHY is this occurring? It is the connection of three very critical events coming together at seemingly the least beneficial of times.
Look at this graphic below, it tells a host of stories coming together. We, the U.S., has a very consumer buying driven economy. Suddenly it seems that the U.S. consumer is not buying like they have been.
1) The COVID announcement shocked the U.S. consumers and they stopped buying almost instantly. See #1 in the graph where the drop began.
2) To try to keep the consumer buying, the U.S. Treasury started sending out stimulus checks to everyone basically. See #2. Buyers bought! (Everyone at the Treasury must have thought... "We are really smart; this is working great!").
3) Just before #3, buyers slow their buying which makes the Treasury send out more stimulus checks. (Hey, it worked before, let's do it again!). Notice that at the point of 3# the U.S, consumer buying is now back up to the ---- line of historical projection that the U.S. has been on for a decade!
4) It sort of worked but then it stalls again, and the Treasury does stimulus checks again, #4.
5) Buying starts to stumble and is now headed back toward normal (the ---- line). The Atlanta FED says we will grow at .01% in the first quartter. GDPNow gauge
6) At this exact time, with inflation having peaked and with just having finished a 6.9% growth quarter--
Now the Treasury is stepping back from sending stimulus checks; Remember, the economy is already slowing.
The Federal Reserve is telling everyone they will raise interest rates (home mortgage rates are rising) which makes borrowing more expensive which slows the already slowing economy even more.
Inflation is going to start going away in measurable ways but the Federal Reserve thinks they have to now finally start to take action to slow it down...
This chart/graph shows what drives the biggest part of the U.S. economy-
Consumer Spending
To further show that the Atlanta FED is on target with their view of a slowing economy in a dramatic way, see this Baltic Dry Index report below! Since October 2021, the shipping of goods all across the globe has dropped by 75%!! Please REMEMBER, this is against the backdrop in 2021 of too many ships with too many goods sitting and waiting offshore to get their goods offloaded!
AS OF LATE
So how has all this above impacted the markets here in the U.S.? Volatility has abounded in the month of January, but it's certainly nothing at all compared to back in March of 2020 and we give you a comparison below as an example and some perspective on those two months and on January 2022 for sure.
We do see below that the smooth ride that investors enjoyed during 2021 (and some investors may have dozed off due to that smooth ride we had) has quickly taken a break and stock prices, as well as bond prices, have headed to the downside in January.
Major Stock Indices for January 2022 - The new year and a different feel to markets.
Stocks as shown by the S&P 500 during March of 2020 - Covid began....
Bonds-While closing out January 2022 down about 4%, still have little to no long-term direction--yet.
Covid started in March of 2020 and while stocks plummeted -30%, bonds rose 7%.
This has not been true of bonds with the start of 2022.
Not to worry too much though, it's not all falling down in a straight line but the outlook we currently have would say that on a broad basis for stocks particularly, there will be more downside coming in the future. (Seriously, how many investment advisory firms openly tell investors that stocks overall will weaken and are taking actions in light of this information?) As you can see from the cover of Barron's magazine which comes out today, they too are making note of the January volatility in markets.
As you can see in the first graph of this section, AS OF LATE, stocks fell for the month of January 2022 but additionally really over the last 90 days (see below), stocks have pulled back for this longer timeframe, quite noticeably with the NASDAQ and the Russell 2000, hitting -20% at one point! This seems to be contrary to conventional thinking by many investors but the numbers clearly show these declines.
Broad market indices for the last 90 days +/-. The strength of stocks has seemingly been fading for this most period.
Bonds
As we have stated before, bonds have been having a very undetermined direction to them really for the last many months. They will move up a little bit and they will move down a little bit. The lack of directional move for bonds is very uncharacteristic of them. It's not that they always move big in either direction, but they do tend to have direction to them, and we just have not been seeing that too much as of late. They have moved a few percentage points up and a few percentage points down, but there's just not real direction to them overall.
We began commenting on the lack of direction in bond prices in the August newsletter and still today, bonds have not shown their hand and moved in any direction definitively. The real problem here is that the Federal Reserve Bank has been threatening in its regular writings that it's going to have to start raising interest rates to cool off the economy. The problem with an economy that needs cooling off is that the Federal Reserve is the very one that created an economy that needs to cool off. So, the FED created the problem by throwing too much money at the economy with big splashes of cash. Now the FED realizes they created a problem which they believe they can solve.
This current and growing problem is of the Fed's own doing. It is worse here in the U.S. because more of our economy is built on consumers buying lots of "stuff" and the rest of the world is not as hooked on "stuff" as the U.S. is.
We remain watchful!
Ken Graves, Chief Investment Officer
Capital Research Advisors, LLC
CaptialResearchAdvisors.com
Capital Research Advisors, LLC,
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Suwanee, GA 30024
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