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January and February were down months.  March had the final two weeks of positive returns but more downside/drop in markets lies ahead.  Be wary and aware.

 

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AS OF LATE
 

    

If we simply look at the data, we see that the first quarter not only was a had loses in terms of the total return for the last 90 days, but was also the worst quarter out of the last eight. That previously poor quarter in 2020 was triggered by the announcement of COVID. Be that as it may, there is really a lot more behind the first losing quarter out of the last eight.

 

What all is behind the losing quarter? A lot. The Federal Reserve and its posture. The Federal Reserve and future posture. Inflation. Rising interest rates. Supply chain issues. Rising wages issues. Worker shortage issues. China and it’s shipping issues. China and Taiwan. Growth expectations for stocks. Growth expectations for US corporate earnings. Other geopolitical issues. This crazy thing called COVID.

 

Realize ALL of these were in place before 2022 even arrived. Also, recall that the U.S. stock market fell a great deal more in the first six weeks of 2022 than in the second six weeks of 2022.

 

As we look over this graph below of the first 90 days of 2022, while certainly the first quarter was negative from the very first day, it seems understanding some of the things which impacted the negative performance of the first quarter is helpful. The items which could continue to confront the market in negative ways, I believe is truly important.

 
This is the 1st Quarter 2022 showing the SP500 index and the NASDAQ Index.  Though both are negative in the 1Q, they did rally the last 2 weeks of the first 90 days.

 

If you will notice, there is one distinct thing which was not mentioned in our list of problems we perceive as facing the market(s).............. the war in Ukraine. It has been exactly five weeks (as of the end of March) since the war began. Though we hate what is happening in the Ukraine, the stock market side of investing in the U.S. has actually risen during those last 5 weeks. Crazy, but it is true. (Note chart above). 

It appears that the war has had nothing to do with the downturn in the market and nothing to do with the short term rise in the market since the war began.  It is purely coincidental timing.   Should Russia move and actively start using chemical weapons (as opposed to creating chemical issues through what they bomb and destroy) or start to use nuclear weapons, then it is the view here that those actions would become impactors upon the markets, globally and U.S. both.




INTEREST RATES
 

One thing which does seem to be quickly impacting markets is the rise in interest rates which has directly impacted the number of mortgages people are obtaining. The biggest impact in the mortgage finance industry has actually been on the refinance side of things. Refinances have dropped like a rock off a cliff.   Capital Research has talked for a long time and in our right hand side panel of each newsletter in the upper corner.  We have noted repeatedly, about interest rates and if you need to refinance. We were encouraging readers more than a year ago to please get the refinancing done. If you haven't refinanced yet, a big estimate on our part would be, do not be dismayed. The rates have definitely jumped as of late, and in some cases actually doubled from about a year ago, but we also think they're going to have to come back down in a big way to help keep the economy moving forward. They will not come down today or tomorrow, but they will after a time to get the economy going again. They may not get down all the way to as low as they were, but they will begin to drift south not too far into the future.

Remember, in the graph below, the price of a bond and the interest rate move in OPPOSITE directions, just like a seesaw on a playground.  If interest rates go up, the value of the bond goes down.  Below we are showing the strong deterioration in bond prices since January 1 as interest rates have gone up.  Capital Research, for the most part, moved to ultra-short term bonds in January to not have to suffer price deteriorations which have continued into February and March as you can see below.  A 5.5%-8.5% drop in bonds within 90 days is certainly a large drop for buy and hold bond investors.

 
This shows the value/price (drop) of 20 year U.S. Government Bonds and Tax Free bonds during the first 90 days of 2022.

 

 

IS THE MARKET GOING INTO LABOR?
(It is not but the labor market is delivering a lot of pain to the economy)

 

In business, the most common theme in terms of the cost of any product or service has always been and likely always will be, labor. It simply is the biggest slice of the pie in terms of what it is going to cost to produce goods and services.

 

One of the constants which has been going on for about 20 months has been the labor issue. We all know, due to covid, multiple of millions of people were sent home and were out of work. Then as the workforce began to return slowly to their respective industries even though many employees did not return, this created a worker shortage. 

 

Now to try to compensate for that worker shortage and to get them to return, some employers began to raise wages to attract people to come back to work for them. In some cases successfully, in other cases not so much. What we see happening now is shown in the graphs below. 



 

Now we have the domino effect occurring. Workers are now receiving more money on an hourly basis than they were before (a year or more ago) and that is potentially beneficial to the economy. More money per hour might  domino and mean more money to spend, at least in the near term. But that also will begin to domino and have a chilling effect for employers. If they are paying people more money and therefore making the cost of producing their goods and services rise, that makes them domino into them having to raise the costs of their products to the consumer. This pushes inflation higher, which none of us are really excited about. As people begin to spend the extra money they are making, with prices rising due to inflation, the domino falls again and that person actually cannot buy more than before since the price went up. The list of what they can buy starts to domino down and drop at some point due to inflation that is rising. Now employers, who are paying their employees more money per hour but have fewer goods and services purchased, begin to domino down and they cut those hours back and that means a reduction in total pay going into the pockets of employees and into the front door at home. 

As was mentioned in the outset of this newsletter, many issues are confronting markets right now and the labor issue is just one - but a very large issue and it is not one to be able to be managed away quickly.  Some of the others could rise or fall in terms of their importance on markets in possibly shorter time frames but the labor issues will likely linger for a long time.



We remain watchful!





Ken Graves, Chief Investment Officer

Capital Research Advisors, LLC
 
 

 

CaptialResearchAdvisors.com 

Capital Research Advisors, LLC, 
4185 B Silver Peak Parkway, 
Suwanee, GA 30024 
770-925-1000 
800 -767- 5364 
All rights reserved

 

Mortgages (click here)  

 

   Rates to many people have seemingly gone mad.  They have spiked in big ways for sure but in historical context, they are not terrible.  Impactful but not terrible. 

The impact is this.  The average home in the U.S. is $351,000.  A year ago that house (it was likely less a year ago) would have had a 30 year payment of $1481.72 for principal and interest @ 3.01%.  Today, that same $351,000 house, has a 30 year payment of 1782.64.  Almost exactly $301/month higher.

But, with housing up 19.8% in cost during the last 12 months, the house of $351,000 today would have sold at about $280,000 a year ago and at 3.01% back then, the payment would have been $1182.00, almost exactly $600/month higher!  Interest rates and inflation can price people out of the housing market for sure. 


 


The Falling Factor
 

Last month, I wrote here about The Jump Factor.  It basically focused on two elements of the way we as people are motivated to jump as jumping relates to investing.  Those two elements, fear and greed.  People want to jump into markets (greed motivated) and out of markets (fear motivated).  I have very readily seen both of these two motivations come about in the last 2 months.  As markets were pointed down 30ish or so days back, the few clients I spoke with seemed relieved that we had been raising our defensive holdings and our cash holdings.  Then, as shown in the first graph in the center column, as stocks seemed to rally up from the low in mid-March, I had a conversation with someone asking me if they should buy into the rally.  I urged them as best I could, "Do not chase this brief rally, it will be over before you know it." They wanted to jump into what they were thinking was a "buy the dip" opportunity.  They seem to have a motivation of greed but were willing to listen to a possible counter point, which I delivered. 

So, that brings this conversation to The Falling Factor.  The falling is occurring in several areas. The first we will look at the number of mortgages being applied for.  The chart below shows a slow tilt lower of the number of mortgages being taken out over the last 12 months.

The big jump higher last July is somewhat expected since the summer is a key time for people to move with the school year just having closed and families wanting to take advantage of the break so that classes can start anew once they move. This one spike in July does not really carry the day as we see the average, shown by the
red trend line, is steadily dropping.  When mortgages slow down, The Fed gets worried but The Fed should have also taken actions long before now to help head off this Falling Factor. (I have beat the drum about The Fed before, time and again).

 

This shows the number of mortgages is falling on a year over year, month over month and on a week over week basis.  


 

Think for a second, about the implications of this change in 2022 versus last year.  So, in March of 2021 the average home sold was just over 20% less than in March of 2022, average of $280K vs $351K today. Also the average number of homes being financed is down about 5% from the same time a year ago.  This means from last year to this year there is a -$330,645,000.00 difference in the amount of money flowing in the mortgage industry simply due to the fall in the number of mortgages taken out by home buyers vs last year to this. 

Here is how the mortgage bankers see it.  Decrease means "falling".

 


 

Another way to see the falling factor is in the costs of goods used in the basics of many activities going on.  Really for the last 20 months, we have seen the cost of lumber going higher and higher still.  

Now we see that in the month of March, lumber prices fell by 30%!  Lumber had actually risen to a price actually 400% higher than it started 2 years ago, pre-pandemic.  Now, it is falling.  It actually fell 6% during the day as this was being written!  I guess my only comment on this falling of the price of lumber is, "TIMBER!"

 


 

Viewing The Falling Factor in reference to the labor issue written about in our main sleeve, we see below what is happening in demand for employees by employers.  As shown in the center graph on labor in the main sleeve, U.S. Average Weekly Hours is slowly falling.  And that is impacting the need for employees so the Hiring Plans Announcements has fallen and flattened out to a full on stall posture.



The rise in interest rates dominos into falling numbers of mortgages leads to a fall in lumber prices and with housing slowing this will lead to a slowing in goods and services needed which again dominos into fewer hours being worked by employees and finally fewer employers needing workers so hiring plans slow.   

This will eventually lead to The Fed needing LOWER interest rates (to get the soon to be slowing economy going again) at the very time when The Fed has just started raising rates. The Fed, always chasing the problem too late only to run past it when the problem stalls and falls. 

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This report/summary is to be considered general in nature, reflects our opinions and is based on our best judgment at the time of writing. All information is deemed to be from reliable sources but we cannot guarantee its accuracy. No warranties are given or implied as to their promise of occurrence in the future or their accuracy. It is the readers’ responsibility to decide if any of our opinions are suitable for their own individual situation, and in what manner to use the information. No specific decisions should be made based on this report. These opinions should not be construed as a solicitation for any service. Past performance does not guarantee future results. The opinions expressed in this piece are those of the author and do not necessarily reflect the opinions of Ceros Financial Services, Inc.

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IMPORTANT DISCLOSURES

All the information in our newsletter is believed to be reliable and much of it is based on the proprietary research of Capital Research Advisors, LLC itself. However, because of the volume of information we review and the frequency with which it changes the information can only be provided as is on a best efforts basis. The information is not intended to be actionable investment research and therefore should not be used as such. Sources for this information include, but are not limited to, CBS MarketWatch, Big Charts, Bloomberg, Streetscape, Money/CNN, Futuresource, Stock Chart, Yahoo Finance, AmiBroker and http://www.newyorkfed.org/

CaptialResearchAdvisors.com

Capital Research Advisors, LLC,
4185 B Silver Peak Parkway,
Suwanee, GA 30024
770-925-1000
800 -767- 5364
All rights reserved







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