The S&P 500 was down when it closed on Friday, sitting at a price of 4,328. That gives us a new short-term resistance level of 4,370 and a new support level of 4,290. It’s also important to keep in mind that the 50-day moving day average has dropped down to a price of 4,529. We still have hope that some of the fundamental topics such as jobs, might correlate with these technical terms and test the support lines.
The employment number came out strong this past Friday. The non-farm payroll numbers of the jobs report beat expectations when the unemployment rate fell to 3.8% and the labor force participation rate is the highest it has been since COVID started. Average hourly earnings saw no wage inflation and while you may think that’s not great since less money is being made according to this report, but this is a good thing when it comes to the Fed. This gives them little ammunition to maybe not over hike when it comes to interest rates if they see a lack of inflation. For the first time, we’re starting to see some job growth since pre-COVID in some areas. Trade, Transporting, Utilities, Information, Financials and Business Services, are all growing now which is good.
Over the weekend, we saw oil spike in the news. The US is looking to ban the import of Russian oil and energy products. While Russia only accounts for 3% of American imports, it’s no secret that the price of oil has skyrocketed the last week. As you can see in the chart shown in this episode, it now stands at roughly 60% above its 200-day moving average. This is the most stretched it’s been since 1990 when we saw Iraq invade Kuwait. During that period, the price of oil more than doubled in three months and stayed elevated for almost six months. During the 1990 oil shock, you can see in the chart shown in this episode, the S&P 500 corrected 20% and the US entered a recession. While this year, the S&P 500 is down roughly 11.9% from its January 3rd peak, there could be further volatility and is something we’re watching carefully. In 1990, looking back in history, the Fed Funds Rate was 8% and they eventually embarked on the easing cycle. The Fed was cutting rates then but today the Fed is in the beginning of a hiking cycle. There is a lot to analyze between the positives of strong corporate earnings, the positives of a great jobs, and what history says about oil spikes.
The Yield Curve
Something we’re looking at closely and we’re hearing in the financial press is the yield curve. What is the yield curve? It is the difference between where rates are at different lengths of time. You want to see higher rates the longer you go out because you want investors to be rewarded for taking on the risk of long term. What we’re getting concerned about with this Russia and Ukraine situation, is we’re seeing the yield curve flatten. This means that the interest rates on 10-year treasury bonds are coming down. We’re seeing interest rates come down as people are flooding to low-risk assets. On the two-year treasury, we’re seeing yields go up because the Fed is pushing rates higher on the short end due to them raising short term rates. Right now, the difference between the 10-year treasury yield for money being invested for 10 years and in the two-year treasury yield is only 0.25%, which is very tight. Traditionally when we see this go negative, which means you get more money for investing short term than long term, that’s an indication that the economy is shifting into recession. We’re not there yet even though it may look like we’re close, but we’re really not that close yet. This is an indicator that the Fed may need to be less aggressive because they don’t want to push us into that inverted yield curve scenario as the global economy kind of gets a little scared. We’re seeing the dollar strengthen and we’re seeing flows into US assets. We’re seeing long term rates fall that may limit the ability of the Fed to be too aggressive, which in the intermediate term is likely good for financial assets and something we’re watching very closely.
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
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