Making sense of the markets this week: May 24, 2021

Each week, Cut the Crap Investing founder Dale Roberts stocks fiscal headlines and offers context for Canadian investors.

Stocks may collapse when the Fed struggles inflation

How can the U.S. Federal Reserve and other central banks fight inflation? By raising prices. And the fear is that inflation-fighting in 2021 will kill stocks.

Let’s back up a bit and look at how that functions. As always, among the best threats to stocks is bonds. Higher prices increase borrowing costs on cool inflation and cool off the economy. From design, the speed increases could put a heavy lid , or even reverse, economical development. 

Within this post on Yahoo! Finance, hedge fund manager Dan Niles suggests that stocks may fall by 10% to 20 percent when we see those speed increases. 

From that article …

“& & lsquo;If you’t got food costs, energy costs, protector costs moving up as rapidly as they are, that the Fed’s going to get any alternative,’ he said, forecasting that the Fed could indicate the start of a movement to wind down its yearly $120-billion-a-month pace of asset purchases through this summer. ‘They could say what they want, but this reminds me into a degree of them saying back in 2007 that the subprime crisis was well-contained. Clearly it wasn’& t & & rsquo;. ”

(That said, as we found in last week’therefore article, higher prices don’t have to follow inflation. After the Second World War, we had strong inflation, but prices were suppressed.) 

But are stock losses that the only possible consequence of the central bank plan? This informative article from BMO offers that while rising rates could cause stocks to drop in the brief term, positive gains have more commonly followed a rising-rate environment. 

From that BMO article … 

“On the flipside, CFRA Research, an independent investment research firm, found that at the 16 instances the Federal Reserve cut rates as World War II, that the stock exchange was higher six months later 11 occasions, while it was still higher 12-months later 13 times. ”

And this Barron’s article offers… 

“If the wider economy is growing, this thinking goes, higher prices may only reflect the climbing rate of economic activity. Economic expansion has historically been a part of corporate earnings growth, which historically has frequently been identified as a catalyst of long-term stock yields. ”

Barron’so suggests a purchasing opportunity would present itself… 

“In the U.S., large-capitalization equities have regularly staged a short-term dip as investors assess the change in surroundings, but these episodes have often proven to be purchasing opportunities. ”

This informative article from Economics Help offers a very good overview on the effects of rising prices. In addition, it suggests that a rising-rate environment led to 2 noteworthy UK recessions. 

This tweet and chart courtesy of Lance Roberts and Real Investment Advice appears at the U.S. Fed fund rate versus U.S. stocks from 1982. We can see a rising-rate surroundings accompanied marketplace corrections in certain periods. Aggressive speed rises resulted in the recessions and severe stock exchange corrections referred to as the dot-com crash from the early 2000s and the fiscal crisis that started in 2008. 

pic.twitter.com/lmY2AdO5g6

— Lance Roberts (@LanceRoberts) May 20, 2021

Roberts offers that lots of posts or studies simply look at short-term stock yields, not the way the speed increases play out over the next a few decades, or much more. 

Here’s that the tell-all table on rising rates and U.S. stock yields. 

Source: Lance Roberts and Real Investment Advice

Stock exchange corrections show up, finally. Some corrections are small and others are somewhat more significant. And, yes, we still all see that word “recession” look with regularity. Rising rates over did the job of cooling off the economy, on over a few occasions. And, certainly, recessions are the huge game changers–and perhaps the best risk. 

This post shows the yields and inflation from the year following the first rate rise. We may see the differentiation between periods of low and moderate-to-high inflation. 

Remember that certain sorts of stocks may flourish in periods of a rising-rate surroundings, and that includes banks and insurers –where Candians and Canadian markets are notoriously obese. Inside this Million Dollar Journey article , I revealed the way REITs can (amazingly ) enjoy a rising-rate environment. 

We can use short-term bail and bonds ladders to offer increased income with time at a rising-rate environment. We know that long-term bonds (treasuries) will generally show their worth when purposeful stock-market corrections happen. They could go up in price as stocks are getting struck. But, needless to say, the longer-term bonds will get struck in price as bond prices rise. 

In this article we talked about the bond barbell (short and long bonds). 

The speed environment is out of our hands. What we can control is our asset allocation and our portfolio risk level. 

Be prepared–for corrections and recessions alike. 

The duopoly of both Home Depot and Lowe’s

Readers will understand that I adore wide moats and oligopolies, so I wanted to dedicate a space to 2 U.S.-based home renovation retailers who dominate their distance. 

All of us know Home Depot and Lowe’therefore, because they have significant operations in Canada and the U.S. Lowe’s also owns and operates the Rona brand. 

We own Lowe’s stock in one of my spouse ’so account, and so were happy to see their earnings report weekly. In actuality, both Lowe’s and Home Depot reported this past week. 

This near-duopoly is within an outstanding run. They had been 2020 pandemic proof, at the work-from-home and work-on-your-home pandemic economy. And they’re turning out to be wonderful economic recovery stocks. 

Courtesy of Seeking Alpha, here’s the summary of Lowe’s for the first quarter of 2021: 

Source: Seeking Alpha

There is some extraordinary increase on the earnings and earnings fronts.

And here will be the topline amounts for Home Depot for the first quarter of 2021: 

Source: Seeking Alpha

Both of them are very well-run businesses which work in a very profitable space, with plenty of growth. I’d be more than happy to possess Home Depot too. 

Investors might bolt on his home-reno tag team should they manage their inventory and ETF portfolios. It’therefore a simple means to take advantage of this housing boom and our collective fascination with home improvement. 

Lowe’s has improved my spouse ’my portfolio yields. 

Investors bail on bitcoin and move to additional cryptocurrencies

Yes, we are seeing a significant correction in bitcoin, which suffered the brunt of this first crypto correction this past week as investors transferred funds from bitcoin to additional crypto currencies. 

And the correction has accelerated. From the highs from mid-April, when bitcoin eclipsed $64,000 U.S., it has fallen to as low as $31,478 on May 19. On Thursday, May 20, bitcoin had recovered slightly, to nearly $42,000. 

The takeaway? Bitcoin is significantly more than volatile, so as advertised. And this correction (meltdown) was accelerated by Elon Musk’s tweets. 

Tesla & Bitcoin pic.twitter.com/YSswJmVZhP

— Elon Musk (@elonmusk) May 12, 2021

Musk questioned the quantity of electricity employed in bitcoin mining via computer use, and declared that Tesla will no more accept bitcoin as payment to get their electric vehicles. 

China has also declared a ban on the use of cryptocurrencies for payment and financial institutions. 

There were other casualties. Ethereum, the 2nd hottest cryptocurrency, fell by 47 percent within this week, from recent all-time highs. Dogecoin fell by 65%. (You can locate cryptocurrency price graphs on Coindesk.) 

It won’t be an easy ride for bitcoin, also we all ’ll should get ready for violent volatility on both sides of this coin. 

Here’s post and chart in Visual Capitalist that places the recent bitcoin correction into context. 

I am not surprised in the correction or the volatility. This ’s par for the crypto training course, as we offered at our bitcoin explainer. I will continue to take care of bitcoin for a portfolio asset–and, as with other portfolio resources, I am going to have target allocation, and I shall rebalance on program. In my portfolio, bitcoin has slipped below a 5 percent weighting, so it will find some fresh money. 

It seems Canadian bitcoin and ethereum shareholders are largely unfazed. Purpose Investments guided me via email that, for May, bitcoin ETF flows are comparatively level to positive, while the ether ETF has observed positive inflows. 

In the same way, CI Galaxy reported at an email that they have had days of positive inflows this week for their bitcoin and ether ETFs. 

For me, bitcoin is digital gold. I maintain it like a potential hedge against inflation, also largely against currency debasement due to surging debts and deficits and borrowing expenses. 

I continue to maintain my gold and products. Aged gold has just had a nice run lately. Maybe gold also functions as a bitcoin hedge. 

My portfolio has barely noticed the bitcoin correction. 

The Canadian good-news quandary

Thanks to surging commodity prices, the Canadian dollar is that the best-performing major currency this season, along with the loonie is in a six-year high in contrast to a basket of international currencies. It is certainly strange to strike a financial site and realize the Canadian dollar in more than 83 cents when compared with this U.S. greenback. 

And, thanks to this resource boom and quite generous stimulation packages, it’therefore potential the Canadian economy will be working at full potential in 2021. As always, COVID will be the card, but vaccinations are hitting new levels and COVID cases are falling over most of the nation. 

Here’s a very good Canadian and international vaccine tracker. It seems that Canada will soon top the U.S. at the percentage of taxpayers that have received their first dose. 

That’s even good news for the market –and mostly for our wellbeing, naturally. 

But a strong Canadian dollar Makes a potential economic breakup in Canada based on the Financial Post article… 

“For instance, soaring costs for timber, oil and grain are wonderful for Western Canada, the country’s breadbasket and the source of over 90 percent of its crude production. The higher prices, prices and currency that come with it are more difficult on the manufacturing sector, according to Ontario, also on cities.

One out of every 2 jobs lost due to the pandemic and still not replaced have been at Toronto, Montreal and Vancouver. Low-wage workers, women and youth are hit hardest. Yet, these areas and groups likely won’t benefit directly from any strong resource-driven recovery.

The strong dollar makes it a struggle for the manufacturing sector, since it makes our products more costly. 

“The issue becomes more severe when a commodity boom heats up the economy but exacerbates disparities. A jump in resource costs in Canada creates sharp regional differences in who benefits and who loses.

Inside this space in 2020, we reported on more than one event on the way in which the pandemic targeted those who were economically challenged and much more vulnerable. 

On the economic disparity front, it might be déjà vu all over again.

Dale Roberts is a proponent of all low-fee investing who sites at cutthecrapinvesting.com. Find him on Twitter @67Dodge. 

The article Making sense of the markets this week: May 24, 2021 appeared initially on MoneySense.

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