Effects of Rising Rates on Stocks, Manufacturing Takes a Hit, and Pre- vs. Post-Pandemic Test Scores

What effect will a 1% rise in rates have on your portfolio? A look at rate increases and their effects on equity markets.  We hope you refinanced your mortgage as mortgage rates follow suit. Is the sell-off in small-caps overdone? The first Fed survey of the year was not promising. Producer price inflation continues to rise here and abroad. Finally, some collateral damage from Covid to our “most important” citizens.

1. This is why many investors are concerned about rising interest rates.  After ~35 years of declining rates, yields are too low to offset the loss of principle:

Source: JP Morgan Guide to the Markets, 12/31/21

2. …And a 1%+ rate hike is exactly what the markets expect the Fed to do this year:

Source: The Daily Shot from 1/19/22

3. This should help cool off the housing markets:

Source: The Daily Shot from 1/19/22

4. We wrote about this months ago. Rapidly rising interest rates are causing collateral damage to the equity markets, particularly those that rely on low rates for their valuations. There are few places to hide as the volatility is present in most markets. Changes in market leadership for any reason provides new opportunities. We shall see if new trends emerge but staying nimble and keeping losses from becoming too large could be key.

Source: The Daily Shot from 1/18/22

5. Historically, equity markets react poorly at the beginning of rising interest rates:

SSource: MRB Partners  

6. Small caps, as measured by the Russell 2000, have been hit hard even though they have done “better” historically in inflationary environments. They not only broke out of the support zone, they also created a death cross:

The Daily Shot from 1/19/22

7. Is a buying opportunity forming? Note the S&P 600 is about 7.5% better than the Russell 2000 YTD.

Source: MRB Partners 

8. While equity markets as a whole have yet to endure serious damage, the NASDAQ entered correction mode yesterday. Many, indeed most, individual companies are deep into correction or bear market territory:

Source: The Daily Shot from 1/18/22

9. Has U.S. manufacturing enjoyed the last of the pandemic make-up activity from the dearth of activity in early 2020? The New York Fed report was abysmal:

Source: The Daily Shot from 1/18/22

10. Instead of reporting any easing of inflation, prices paid and received accelerated:

Source: The Daily Shot from 1/18/22

11. PPI in Germany is reaching extreme levels:

Source: The Daily Shot from 1/20/22

12. The waves of Covid and the disruptions caused by the disease has had a profound effect on our educational system—it has caused the inevitable drop in knowledge. What will the long-term effects be on our children K-college?

Source: The Economist