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Weekly Economic and Stock Market Commentary: January 10, 2021



Note: The US investment markets, and my office, will be closed Monday, January 17th in honor of the Martin Luther King, Jr. holiday.

As for the stock market specifically:

The New Year good cheer lasted all of opening day. We then sustained four consecutive losses in the US. The good news is that the international markets finished ahead of last week.

I will have a little fun – and that is all this deserves. We now have January barometers in the complete column, and they contradict each other. I will have some more fun with this in a few weeks when I do my offbeat indicator recap from 2020 and have the third version of the January barometer complete.

What seemed to be the major influence on sellers coming to Wall St. last week was the release of the Federal Reserve meeting minutes. Investors took them to believe that there will be 3, or perhaps, 4 short-term interest rate increases this year.

That would indicate they would raise short-term rates to about 1 percent. The theory holds that longer-term interest rates would rise to some extent also.

Last week saw the yield on the 10-year treasury note rise to 1.75%.

My personal opinion: I am not-so-sure interest rates will rise significantly as the US government would need to divert more money to debt service than we do currently if interest rates rise significantly.

I have not checked when the Treasury debt comes due, and what the interest rates on the instruments coming due yield to the lenders, but let’s, for the sake of argument, say that the US will need to borrow and/or refinance $10 trillion dollars this year – this is not the total national debt, nor is it this year’s deficit.

Let’s say the average interest paid on the new debt is 1%, the debt service for one year is $100 billion dollars. Changing the average interest rate to 1.5% would add another $50 billion of required interest payments each year.  Despite the absurdity we see from “our friends in Washington” on a regular basis, I don’t think they want to spend $50 billion on interest payments when they can spend it elsewhere.

I believe the members of the Federal Reserve do not want to see interest rates rise appreciably either, as they may lose votes in Congress at reappointment time.

The bullish percent indicators gave a split decision last week. While this may seem surprising given how the market averages declined for the week, it doesn’t surprise me. What happened nearly every day last week was that we saw strength at one point in the trading day, followed by bad numbers at the close. Under the rules of charting, stocks made buy signals during the good parts of the day but didn’t fall far enough to make sell signals as stocks fell later. We are in WEALTH ACCUMULATION mode in all areas.

Remember, Xs mean OFFENSE or wealth accumulation, while Os mean DEFENSE, or wealth preservation.

Below is where our indicators stand as of January 7, 2021 (Courtesy Dorsey, Wright, and Associates).

On a general note:

The Department of Labor announced the US economy gained 199,000 jobs in December. That was well below the expected 400,000 jobs. For 2020, the economy added 6.4 million new jobs, but still remains 3.4 million jobs below the high watermark of 2020. The unemployment rate dropped to 3.9 percent. Average hourly earnings were 4.7% above December 2020 levels but lagged inflation by a significant amount. The number of people who quit continued to grow, as did the number of job openings. I can’t give a definitive answer as to how the various factors are proportioned.

Questions or want to talk? Email me at philip.rongo@ibexwealth.com.