US equities jittery, it’s not just interest rates

  • Is an Omicron slowdown spreading through the US economy?
  • Hiring and spending were weak in November and December.
  • Interest rates and inflation are significantly higher in the new year.

Stock traders are worried. All three major US stock averages are down significantly this year and the Nasdaq has corrected from its November high.

Concerns are mounting. Economic growth is threatened. Supply chains are creaking, consumers are unhappy, interest rates, oil and consumer prices are rising, and a Russian invasion of Ukraine and subsequent sanctions could tip the global economy into the recession.

The Dow is down 5.86% this year and 6.89% since its January 4 high. The S&P 500 has lost 8.35% since the start of the year and 8.69% since its all-time high on January 3. The NASDAQ is down 12.53% in the new year and 14.25% from its high of November 19.

Treasury yields retreated from their two-year, Federal Reserve-inspired highs mid-week, but 2-, 10-, and 30-year Treasuries jumped 28, 26, and 18 basis points, respectively, over the course of the week. of the new year. Even Bitcoin (BTC), that child of utopia and speculation, comes to a banal conclusion from its bubble excess.

NASDAQ

CNBC

U.S. Treasury yields hit a two-year high this week, with the 10-year hitting 1.902% on Wednesday, but closed at 1.827%, then fell to 1.771% on Friday, down 13 basis points in two days. The 2-year traded at 1.059% on Tuesday to close at 1.038% and by Friday’s close at 1.016% was down just over four points. The yield on the long (30-year) bond peaked at 2.19% on Tuesday and ended the week at 2.085%, a loss of 10.5 basis points.

Bitcoin (BTC) has been falling since its close high of 67,529.05 on November 8. Since then, it has fallen 45.64% overall and 20.54% in the three weeks of January trading, including a loss of 9.83% on Friday.

BTC

US economic conditions

According to a Reuters poll of analysts, the U.S. economy grew at an annualized rate of 5.6% in the fourth quarter of 2021, more than double the 2.3% pace of the previous three months. The Atlanta Fed’s GDPNow model predicts the expansion was 5.1%. The Bureau of Labor Statistics’ first fourth quarter gross domestic product (GDP) estimate will be released on Thursday, January 27.

The question for traders and investors is not about growth in the last quarter or all of 2021, but the direction of the economy in the first half of 2022.

How the pervasive pandemic, inflation, labor and manufacturing component shortages, and supply chain misery, have hurt economic growth and consumers’ willingness to spend and sustain expansion afloat.

Omicron’s restrictions have been largely limited to mask-wearing and, in a few cities like New York, mandatory vaccination papers for restaurants, gyms and other indoor public spaces. There were no business closures and the economic effects were expected to be limited to lower levels of ridership.

Nevertheless, there are some signs that the US economy is slowing down.

Retail sales were dismal in December, falling 1.9% and the three-month holiday season was flat at 0.1%. The control group, which mimics the consumption component of the GDP calculation, was even worse, down 3.1% in December and 1.8% for the holiday season.

Consumer inflation hit a four-decade high of 7% in December. With the Producer Price Index (PPI) at 9.7%, US households are in even more trouble.

The consumer price index (CPI) has been above 5% since last May. Wages from Average Hourly Earnings (AHE) lost 2.3% to inflation in 2021. For many low-income American families, the growing pain of inflation is considerably worse than the headline rate of the CPI. Spending on many items, from gasoline to steaks and used cars, has risen much faster than the general inflation rate. A gallon of regular gasoline, an inflexible necessity for most Americans, is up 47% from January 2021 and 58% from November 2020. Inflation has outpaced wage gains for most people. With no end of price hikes in sight, the inevitable spending contraction may have already begun.

Hiring was much weaker at the end of the year than expected despite the record number of vacancies. Non-farm payrolls added only 488,000 workers in November and December, barely half of the 950,000 forecast.

Non-agricultural payroll

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Initial unemployment insurance claims began to rise. Unemployment insurance claims were 286,000 in the week of Jan. 14, well above the previous 231,000 and the third straight increase. Jobless claims jumped 43% from 200,000 on Dec. 24. They are still low by historical standards, but the increases likely indicate that the Omicron wave was not without economic impact.

Consumer optimism has been mired in near-recessionary levels for six months. Michigan’s Consumer Confidence Index fell to 70.3 in August and has not recovered.

Michigan Consumer Sentiment

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Fewer people working means less income generated for consumption. Disgruntled consumers quickly lose their incentive to bet on the future and spend. Inflation forces families to allocate more resources for the same goods or less. Real wages have fallen in 2021. If these trends continue much longer, the consumer base of the US economy is at risk.

The economic keys are in the hands of American households. If consumers begin to restrain their spending, the logic of the recovery fades quickly.

Conclusion

Much of the decline in equities so far has been driven by rising interest rates. The much steeper decline in NASDAQ is due to its predominant technology mix being heavily dependent on debt financing, the costs of which are suddenly much higher.

However, fears that the first signs of an economic slowdown have begun are growing rapidly.

Falling or halting US economic growth, continued weakness in job creation, rising inflation and layoffs, falling consumer spending, supply chain breakdown, product shortages, the list of current issues is long. Two of them are enough to undermine stocks, all together are a formula for a market-wide correction.

If the US economy weakens in the first half of the year, the equity sellers of the past two weeks will have been prescient.

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