Euclid Investment Advisory Blog

Review & Analysis at Close February 7, 2022

Comments

Many if not most investors and institutional managers believe that the Fed will raise interest rates in March and at least a quarter-point at each Fed meeting through 2022 and into 2023 and so on - in order to tame rampant inflation. A recession has followed eleven of the past twelve Fed rate hiking policies. Timing will be key. Supply chain bottlenecks, one of the sources of the current inflation spike - unlike customary falling demand - are being worked out slowly. If they result in inventory buildup just as the economy begins to slow, a recession is possible. As inventories approach capacity, orders and production will be cut. Consumer spending is being crimped by increasing prices. Higher prices for food and fuel necessities are causing the consumer to cut discretionary spending. Once rate hikes hit a slowing economy, a recession is possible. If that happens, bonds should increase in price as the Fed reverses course.

Also, mid-term elections are coming in November. The administration has to be concerned. We expect one rate hike in March as resolution of the supply issue begins to cool inflation.

Equities

Another week of volatility. Large Cap Growth indices dragged down with the sharp 26% Facebook drop last Thursday, and since has dropped additional 5.4%.

  • Equity Style Tech Score Ranking: Large Cap Growth stocks reversed to leadership again in one-week ranking; Large, Mid- and Small cap Growth now laggards.

  • Sector Tech Score Ranking: Energy, Financials and Staples lead in one-week ranking; Industrials, Materials and Communication Services lagging.

Bonds
The 30yr US Treasury yield Long Term trend and 10-year US Treasury yield Long Term trend continues. Both surged higher last Thursday but now show negative divergences.

The 2-year Treasury yield surged to 1.30 from 1.18 last week. The Yield Curve's flattening slowed since last week. The spread widened slightly to 0.62 from 0.61 last week.

 

Currencies
Currencies vs. US Dollar: The Euro appears to have bottomed and turned up on the February 3 European Central Bank's announcement to raise rates.

US Dollar vs. basket of major currencies: The Dollar pulled back February 3; the US dollar rise appears to be topping out.

Gold ETF "GLD" rose slightly and remains in long-term trading zone of 164 to 173.

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