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USA Today's: THE TOWN JOURNAL. 03.07-03.13.2022. Week 10.

This bi-weekly financial section is published in USA Today's: The Town Journal. This publication is distributed in Bergen County New Jersey, covering 4 towns with roughly 22,000 residents.


VIOLENT PRICE SWINGS AND MORE LOSSES FOR US MARKETS


US Markets

US financial markets continue their incredibly fierce daily movements. Price action has been reactionary, dominated by headline news. There were very few corners of the marketplace that did not lose money last week. On Monday and Tuesday some of the major averages experienced their worst one-day declines since October 2020. On Wednesday, the S&P 500 recorded its largest one-day gain since June 2020. By Friday the headlines were decidedly negative again as the market fell to end the week.


The intermediate trend of US markets, think weeks to months, is negative. The long-term trend, think months to years, remains positive despite the evident deterioration of market internals. Internals measure the participation of the individual components that belong to the broad market averages. This volatility market participants have been facing are hallmarks of periods of market corrections, either through price or through time.


The S&P 500 finished the week with a loss of 2.80%. The tech heavy Nasdaq 100 finished the week with a loss of 3.82%. The Dow Jones Industrial Average finished the week with a loss of 1.99%. The Russell 2000 small-cap index finished the week with a loss of 0.97%. The only S&P 500 sector to finish last week with a gain was the energy sector.


Market Moving Headlines

On Tuesday, 03/08, President Biden announced the U.S. would officially ban imports of Russian oil, liquefied gas, and coal. Russia is the world’s third largest producer of crude oil and oil products, according to the US Energy Information Administration. In 2021, the US imported less than 8% of its oil from Russia. That said, Russia is our 3rd largest source of crude oil behind Mexico and Canada. Said differently, in 2021, the US did not import 92% of its oil and oil products from Russia. Other countries such as Germany and the Netherlands import far more. The bulk of Russia’s energy exports goes to Asia.


While there is hope these sanctions will disrupt Putin, this remains a highly complex and an extraordinarily problematic issue. The US cannot have a massive impact on Russia’s economy through just banning the import of oil and energy products. Other countries must do the same in order for these energy sanctions to accomplish their goals. And it is not just energy products that need to be sanctioned to cripple Russia’s economy. Russia is a leading global exporter of iron, aluminum, nickel, wheat, gold, chemical fertilizers, copper, synthetic rubber, and iron ore to name a few. It is not the US, but China that is the largest importer of Russia’s exports. The US is number 10, behind Germany, the Netherlands, Belarus, Turkey, South Korea, Italy, Kazakhstan, and the UK. This is according to statistics compiled by the International Business Center of Michigan State University.


American companies including McDonald’s, Starbucks, and Coca-Cola have shut down their operations in Russia. McDonald’s has roughly 850 locations and 62,000 employees in Russia. Sales in Russian and Ukraine generated roughly 9% of the company's 2021 revenue. McDonald's CEO, Chris Kempczinski, alluded to the shutdown being temporary. He said in a statement, "It's impossible to predict when we might be able to reopen our restaurants in Russia."


On Wednesday, 03/09, Amazon, the 4th largest company in the S&P 500, announced a 20-for-1 stock split and a $10 billion stock repurchase plan to replace its current $5 billion repurchase plan. Amazon is following in the footsteps of Alphabet, the 3rd largest company in the S&P 500, which also announced it would execute a 20-for-1 stock split. Since Amazon began trading in 1997, this will be its fourth time splitting. In 1998 Amazon did a 2-for-1 and then a 3-for-1 split. In 1999 Amazon again did a 2-for-1 split. Companies split their stock price because it lowers the price at which it trades and garners tactical attention. Amazon said, "This split will give our employees more flexibility in how they manage their equity in Amazon and make the share price more accessible for people looking to invest in the company.” Splits do not change the company's underlying value or the value of shares already owned. The split simply adjusts the trading price. For example: if you own 4 shares of a company at $100 per share, your equity stake is $400. After a 2 for 1 split you will own 8 shares at $50 per share. This is still a $400 equity stake. The shares are doubled and the price-per-share is halved. There is no shift in the value of the company or of your shares. The only difference is the trading price.


Thursday’s main event, 03/10, was the CPI reading, the Consumer Price Index. The CPI measures the change in prices paid by consumers for goods and services. It is a measure of inflation. The CPI calculates how quickly inflation is changing over time. January’s year-over-year change was a stunning 7.53%, and February’s year-over-year change was even greater at 7.90%! This, the sharpest rise in inflation since the 1970s and the late 1940’s before then, though this was not a surprise to market participants and was in-line with expectations. Beyond gas, rent, and groceries, prices are rising across the board the Labor Department said. Prices for airfare, car insurance, recreation, personal care, and household furnishings are all contributing to inflation. Several categories recorded their largest annual increase in prices on record, including chicken, baby food, car parts, and lodging. There is little to no evidence that suggests the rapid pace of price increases should start to slow.


Also on Thursday, the American Automobile Association, AAA, revealed that the national average price per gallon, for regular gas, now exceeds $4 per gallon. This is a record all-time high, exceeding the 2008 record when WTI crude oil exploded to $147 per barrel. For reference, this week WTI crude oil closed at $109 per barrel. This is a massive pain point for many US citizens.


International markets

International markets finished lower last week on the whole. We did see strength in Sweden, Finland, Spain, Portugal, Germany, Hungry, and Poland. These are all countries that are beaten down year-to-date, so likely these gains are temporary. We also saw some strength from countries that are up year-to-date. These are Peru in South America, Indonesia in Asia, and South Africa. Of note, Russia’s stock market lost another 64% in value. This year-to-date, Russia’s RSX ETF, is down 78%. If you had invested $10,000 in Russia’s market at the start of this year you would be left with only $2,200.


Fixed Income

Bonds were down across the board, both domestically and abroad. There was some interest in buying US Treasury Inflation Protected Securities, TIPS. The US 10-Year Treasury Yield rose to 2%.


Commodities

The US Dollar had another strong week and closed up at $99.13. Gold and silver gained. Gold closed at $1,985 per ounce, which is a 52-week high. Base metals were down, though not Nickel. Russia is one of the world’s largest nickel producers. In fact, it produces close to a fifth of the world’s class-1 nickel. This is mainly used to produce stainless steel, but it is also used to make batteries for electric vehicles. It was a wild, wild week for Nickel. The price spiked 66% to over $48,000 a ton on the London Metal Exchange (LME), the metal’s greatest single day rise on record. On Tuesday, 03/08, the LME halted nickel trading for the remainder of the week to sort out the problems this price spike has created. This is the first time the LME has halted a market since 1985. The massive surge in nickel prices has inflicted severe financial pressure on nickel producers that sell nickel forward as a hedge. For example, the world’s largest nickel producer, Tsingshan Holding Group, has the largest short position in the metal. With Monday’s price spike, the company is sitting on a paper loss of $8 billion The Wall Street Journal reported. These kinds of numbers trigger margin calls and in some cases lead to bankruptcy. There is certainly a lot to sort out there. As mentioned above, WTI Crude oil closed at $109 a barrel, down 5.5% from last week. Gasoline also finished last week lower.


The Week Ahead

On Tuesday, 03/15, we have the Bureau of Labor Statistics giving us another update on inflation. They will release the PPI, Producer Price Index. In contrast to this week’s Consumer Price Index, CPI, which measures inflation for consumers, the PPI measures inflation on input costs for producers of goods. We will find out if inflation continues to surge for producers as it did for consumers, though it is likely that we already know.


Tuesday and Wednesday, 03/15 and 3/16, the Federal Reserve's policy committee meets. Chairman Jerome Powell's post-meeting press conference on Wednesday afternoon will be must-watch TV for market participants. These continued multi-decade highs in inflation adds pressure on the Federal Reserve to raise interest rates and fulfill its stated goal of inflation averaging 2% annually. The Fed is expected to raise interest rates for the first time since 2018. The market expects it to be a 25 basis point hike, though a 50 point hike is possible.


While markets will likely continue to trade wildly in the near future, there are always opportunities for flexible and engaged market participants. React to the conditions as they are in the present. On average, anticipating and executing based on a conclusion driven by emotions and biases will hurt more than help. As the old trading maxim states, “There’s always a bull market somewhere.”

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