For the first time since March 2020, the S&P 500 is down 10% from the recent highs, which technically means the market is in correction. Although, this isn’t comfortable, investors need to remember that there’s usually one 10% correction on the average year. After going nearly four years without a 10% correction, it’s not out of the ordinary for us to be having a period of volatility, especially with the combination of what’s happening in Ukraine, but also with the Federal Reserve and them most likely raising interest rates in a few weeks. On a chart shown in the video for this episode, you will see that the good news is, looking at all of the 10 to 15% corrections since 1980, the future returns were quite strong. As always, no guarantees, but returns were higher more than 90% of the time, and up more than 21% on average. One reason for the great performance of corrections, is that the new money from opportunistic investors was invested in the market when there was a pullback. We’re watching things carefully, as always, and there’s no doubt about it, the next few weeks will not be dull and we will continue to keep you updated.
Oil prices skyrocketed to the top of the news page and peaked everyone’s interest because it is the most real time inflation gauge that the average consumer can see every day as they are driving around and filling up at the pump. What consumers are feeling is definitely accurate. So far this year, the price of oil has averaged $86.40 a barrel and that’s the highest since the third quarter of 2014. There’s an old adage that the cure for high energy prices is high energy prices. Typically, that’s because at a certain price level, energy companies are making enough money where they will then invest in producing more energy and that by itself, producing more energy and increasing supply, brings prices down. The greed of the energy companies typically causes their own downfall because they often over produce and you’ll see a huge collapse in energy prices like we saw in 2014, which was the last time we saw prices this high. What’s unique about this scenario is that capital expenditures, which is the amount of money that energy companies are spending on increasing production, is actually at lows not seen since the mid-2000s. We’re not seeing that spike up. The capital expenditures is something we’re going to have to watch closely because the increase in capital expenditure will have to proceed the increase in production which will then proceed a decrease in price. This is something we’re watching closely as geopolitical events occur and as prices remain high. We will likely start to see these energy companies take some of those profits and reinvest in growing their production.
The Labor Market
The labor market is tight and has shrunk considerably. We will get the big jobs report this Friday, but the information we got last week on initial claims for unemployment insurance were down. There were 232,000 new initial claims for unemployment insurance, which was below the expectations of 235,000. Continuing claims of unemployment insurance are at their lowest level in 50 years. That’s an improvement.
Emotions led to a lot of volatility last week in the markets, especially on Thursday and Friday. Friday, the S&P 500 closed at a price of 4,384 which gives us a new short-term resistance level of 4,435 and a new support level of 4,335. These numbers along with the intermediate and long-term technical analysis that we went over last week, are all things that we are going to keep an eye on. The year-to-date moving day average of the S&P 500 is at a price of 4,510. That price is still trending above the market but that’s something we’re really going to want to keep an eye on going forward as well.
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