Trade The Journey

Trade The Journey

Short Post IV

Top of the Morning! Another week of declining market value across the indices. Market participants are coming to grips with a falling market that shows no signs of returning to its once bullish trend. All of the factors that the market once shrugged off like inflation and supply chains are becoming more challenging to overcome.

Companies in their latest reports have cited the increasing cost of labor, transportation & freight, and supply as their top concerns moving forward. Rising labor and supply chain costs are also biting into companies’ bottom line evidenced by the cost-conscious retail giant Walmart. Walmart shares fell more than 11%. Walmart increased its inventory levels in an attempt to navigate the supply chain challenges and meet demand. This resulted in products having to be sold at discount to try and alleviate the high inventory levels.

As the Ukraine and Russia conflict wages on, food prices continue to rise. Russia is a major exporter of fertilizer, and with its invasion, countries have shunned its exports causing a fertilizer crunch around the world. Natural gas is a key ingredient of nitrogen fertilizer. Farmers are now either skimping on ingredients for their crops or considering leaving the farming industry altogether.

Some of the less wealthy countries are facing food shortages along with higher prices to stock food on the shelves. Some analysts foresee monthly grocery bills rising to over $1,000 a month in the United States.

China is also adding to the supply chain concerns due to its Zero Covid policy which resulted in a shutdown of a major port city. China has refused to change its strategy towards Covid which is affecting its growth and the citizens’ sentiment toward the government. Slowly, China is allowing some businesses to reopen but not nearly fast enough as suppliers would like. To combat the slowing growth and housing market fall, China has cut its borrowing rate again.

There are also reports that China is joining India in purchasing cheap oil from Russia as countries attempt to isolate Russia from the world economy.

With inflation raging on and growth slowing, the echoes of a possible recession hitting the US economy towards the end of the year and maybe into the next year are growing louder. The FED has pledged to fight inflation by raising rates until inflation subsides. The challenge facing the FED is raising rates enough without severely damaging the economy.

The labor market remains strong and that has given the Fed confidence in the economy’s strength and its ability to handle rising borrowing costs. Initial claims did come in a bit higher than forecasted but are still at their lowest level in many years. Continuing claims decreased for the week.

Retail sales grew at a slower pace than the previous month, coming in at 0.9%. Since last year, retail sales have increased by 8.2%. Looking at the trend, retail sales have steadily decreased from January. It’s important to remember that retail sales are not adjusted for inflation, so it’s hard to tell if the increase is due to higher prices or higher spending. Building materials fell to -0.1% from 0.7% the previous month. Autos/parts increased 2.2% from the previous month. Gasoline station sales also fell 2.7% from the previous month.

Consumers are tapping into their credit accounts, as their savings and stimulus money continues to dwindle due to the increasing cost of living. From the retail sales report, it’s clear to see that consumers are feeling the effects of inflation as it wears on their purchasing power.

Industrial production increased 1.1% from the previous month. Capacity utilization also rose from the previous month. The utility index rose the highest of the index group, coming in at a 2.1% increase from the previous month. Mining also increased. Both durable goods and nondurable goods manufacturing rose for the month. The capacity utilization rate is still below its long-run average indicating there is still room for growth. It’s also indicative of an economy not yet at the risk of overheating.

Housing is a different story, with builders growing hesitant to construct new single-family units due to the high cost of materials and labor. With interest rates of 5.37% for the average 30-year fixed-rate mortgage, potential homebuyers are now pulling back from the mortgage markets. Mortgage applications decreased 8.3% from the previous week, the refinance and purchase index also declined for the week.

Although buyers are turning more towards adjustable-rate mortgages, there’s still no activity to spur homebuilders to continue building at the quickening pace earlier in the year. Building permits, an indicator of future homebuilding, fell 3.2% from the previous month. Total housing starts fell 0.2% from the previous month. While units under construction did increase for the month, the future still looks dim for the housing market.

Interestingly enough, home depot according to a report on CNBC is seeing continued success as customers opt to remodel their homes instead of purchasing new ones. Most of its customers as the report stated have mortgages with fixed rates. The same report by CNBC also cited a similar story for Lowes.

Market Review

Are the markets overreacting? or is there a risk that we are heading into a recession?

Market participants have been buying bonds across maturities, specifically long-term bonds. Investors seem to be rushing to safety, shunning risky assets like stocks and cryptocurrency. Energy, healthcare, and utilities are the few sectors not spiraling toward their lows.

Depending on your level of tolerance this might be a good time to begin scanning the market for great companies selling at a discount. Buying stocks when the market is falling is no easy feat but the shrewdest investors do it without concern. Possibly the greatest investor of all time, Warren Buffett, is putting his cash to use by stocks in companies like HP, Apple, and Chevron.

Market Volatility is here to stay for the foreseeable future, so participants should brace themselves for the times ahead.

I added a new aspect to my reference levels chart to see how well I did in selecting the appropriate levels that the indices test.


Past Weeks cash flow review:

This past week, I earned a bit more and spent a bit more but I also contributed to my investment accounts. In the week ahead, I plan to cut back on my discretionary purchases to continue building up my savings account and paying down debt.

Grade: C

Reason: Maintenance

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