Advice and observations from investment bulletins

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This commentary was posted recently by fund managers, research firms and market bulletin writers and was edited by Barron’s.

Do not rush

Comments from the morning technical meeting
by Piper Sandler
January 20: Technical damage continues to accumulate across the [


S&P 500

], as investors reassess rising rates and inflation risk. The index broke below its lower Bollinger band (4,566) yesterday and breached support from the September highs (4,537). The next downside support levels to watch are 4,513 (December low), the 4,500 point milestone and 4,480 (mid-August high). Momentum remains bearish, with limited signs of oversold conditions. Only around 13% of SPX shares are currently trading with an RSI [relative strength index] reading of 30 or less. The width holds relatively well. Yesterday, 60% of SPX shares were above their 200-day MA [moving average]. We recommend investors wait for support to be established and momentum to improve before buying the dip.

Focus on industry leaders

Equity Investment Prospects
by Osterweis Capital Management
First quarter: Due to rising secular inflation and the Fed’s shift from ultra-easy monetary policy to a more hawkish stance (to fight inflation), it looks like rates are about to rise.

Generally, equities tend to do well in the early stages of a rising interest rate cycle (although volatility may also increase), as higher yields generally correspond with an expanding economy and to an increase in corporate profits. It is only at the end of the cycle, when the Fed hikes rates more aggressively, pushing the economy into recession, that equities are hit. We believe we are a long way from that point, perhaps several years from now. However, rising rates should put some downward pressure on equity valuations, particularly the very high valuations of some high-tech companies, suggesting a shift from growth to value.

With interest rates still near 30-year lows (real rates are actually negative), stocks still look relatively attractive, especially those with steadily rising dividends. Given the likelihood of higher inflation, it is particularly important to focus on companies with pricing power, which will allow them to maintain or improve their profit margins in an inflationary environment. The key to stock picking over the next few years will be to invest in companies with a competitive advantage operating in growth industries where earnings, free cash flow and dividends are all up. Often, that means owning industry-leading companies.

Job growth looks solid, but…

Commentary on the economy and financial marketsby Maria Fiorini Ramirez Inc.
January 20: Initial jobless claims for the week ended Jan. 15 rose by 55,000, to 286,000, from a slightly revised 231,000 the previous week. The median forecast called for a modest decline to 225,000, so the result was well above that.

We warn you that weekly seasonal adjustment, which is never an easy task, becomes much more difficult during the holiday period until the end of January. It seems quite clear that the [latest] The rise in seasonally adjusted claims was greatly exaggerated by a seasonal adjustment process that “expected” a much larger drop in unadjusted claims than the 83,000 drop recorded. This may be the result of many factors, although we assume that at least some were due to the temporary impact of the Omicron variant Covid-19. The four-week rolling average of seasonally adjusted initial claims was 231,000 in the week of January 15 (up 20,000 from the previous week’s total).

Continuing claims (reported with a one-week lag) totaled 1,635,000 in the week ended Jan. 8, up 84,000 from 1,551,000 the previous week. While also subject to weekly volatility, Continuing Claims should remain in a downtrend as job growth remains solid and [unemployment insurance] recipients continue to exhaust their eligibility.

Despite recent volatility, the overall picture painted by the data points to a rapid pace of employment growth. With labor supply still tight, payroll gains, while solid, are nonetheless lower than they would be if companies could hire as many workers as they want.

The fall in stocks is the prelude to their strong recovery

360 market view
by Tigress Financial Intelligence
January 20: U.S. stocks continued to trade lower on Wednesday as the near-term path of least resistance remains on the downside. Equities still face higher rate expectations and their potential impact. However, [companies’] pricing power remains strong, driven by solid demand. December housing starts rose 1.4% to [an annualized] 1.702 million, better than the 1.650 million expected, the fastest pace since March 2021 and the second-best increase since September 2006. And new Omicron cases are showing signs of peaking in many hotspots across the United States.

Expectations of a strong post-pandemic cyclical recovery, driven by a further increase in consumer spending and inventory replenishment, and an expected ramp-up in capital investment, should begin to overcome worries about Fed tightening and be the bullish driver of the market once this short-term correction runs its course.

And here’s the good news

Navellier market notes
by Navellier & Associates
January 18: Uncertainty about where interest rates will reach equilibrium causes money to move on the sidelines of the stock market. The good news is that


Alcoa

[has kicked off] the fourth quarter announcement season [with strong numbers]. This is essentially the first wave after wave of better than fourth quarter results that I believe will propel growth stocks higher.

Ironically, the popularity of the Biden administration is extremely low, despite strong GDP growth. This is because inflation is the #1 problem. Consumers are increasingly frustrated every time they go to a gas station or grocery store. Companies are struggling to plan and prices for key components continue to rise. In the end, this uncertainty causes companies to raise their prices, which creates even more inflation, especially as the costs of services increase.

To rein in inflation, the Fed needs to engineer a “soft landing,” which is easier said than done. His toolbox is compromised; if he raises key rates too much, the interest burden on the nearly $30 trillion in federal debt will be unmanageable. Thus, inflation hedges, such as residential real estate and growth stocks, should remain an oasis for investors.

A saying for today

out of the box
by B. Riley Securities
January 18: Over the past 12 months, the Consumer Price Index has increased by 7% while the Producer Price Index has increased by 9.7% giving us an average figure of 8.35% . If you look at stock returns for the last six months and then for the last month, you’ll notice that everything, adjusted for inflation, is underwater. The same can be said for bonds. I think 2022 will be a much tougher year than 2021 for investors. Choices will require more care, and thoughtful deliberations may take longer. [As famed investor Peter Lynch put it:] “Know what you own and know why you own it.”

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