Digesting/Correcting!
All major indexes, including junk bonds, are trading below their 50-day moving averages (DMA), signaling an increased risk environment. Friday’s employment report exceeded expectations, causing stock indexes to gap lower and yields to spike as inflation concerns resurfaced. The U.S. dollar reached an all-time high as foreign investors converted their currencies to purchase our higher-yielding Treasuries.
20-year Treasury bonds are nearing the 4/25/24 low, which may act as support. This week, we’ll see key inflation data with the Producer Price Index (PPI) on Tuesday and the Consumer Price Index (CPI) on Wednesday, making this a pivotal week. I expect that bonds will hold support and stocks will experience a rally. However, if I’m wrong, I plan to hedge or sell positions to stay aligned with the market trend.
Leading stocks with accelerating earnings and sales are performing well, and I expect them to continue their positive momentum—unless higher inflation pushes us into a recession. Inflation is often driven by excessive money printing. For context, Obama spent $8.6 trillion over eight years, and Biden spent $8.5 trillion in just four years, which explains the market’s concern about the pace of price increases. While inflation has fallen from 9% to 3%, wage growth has not kept up with rising prices. We may be on the brink of a recession, but no one wants to lose their job or face slow growth and high food prices (stagflation).
The market had anticipated the Fed would lower rates on 9/18/24, and since then, the Fed Funds Target Rate has dropped over 18%, while 20-year Treasury bond yields have risen more than 25%. Typically, the stock market rises when the Fed lowers rates, and longer-term rates decline. This time, however, the market seems to be signaling that the Fed was politically motivated (lowering rates before an election to influence votes) and made a mistake by cutting rates, which added to inflationary pressures.
Gold is trading above its 50-DMA, acting as both an inflation hedge and a potential haven as stocks face headwinds. International stocks are underperforming due to the stronger dollar, as overseas earnings lose value when converted back into U.S. dollars. The AI sector remains strong, with major players investing heavily to capitalize on the AI boom. The revolution in AI is still in its early stages, presenting ample opportunities. I am focused on companies benefiting from AI, particularly those with accelerating earnings and sales, as that’s where the greatest profit potential lies.
Bottom Line: Stocks are digesting and correcting, but if bond prices hold their support levels (less than 1% lower), we could see a tailwind for stocks by the end of the week. Mortgage rates are above 7%, credit card rates are near 25%, and the Commodity Price Index (CRB) is at a 14-year high, up 28% in the past seven months. My best guess is that bond yields will decline, and stock prices will rise this week. If I’m wrong, I’ll act quickly to avoid significant losses for myself and my shareholders. Grace and Peace to Everyone!
Grace and peace be multiplied unto you through the knowledge of God and of Jesus our Lord. 2 Peter 1:2
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Dexter Lyons, Portfolio Manager
337-983-0676 Dexter@ChristianMoneyBlog.net
Active (BRI) Risk Management, CANSLIM Investing
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