Posted March 11, 2023
By Zach Scheidt
Connecting the Dots After a Tumultuous Week
It's been quite a week in the markets. And next week will likely be even more eventful!
Thank goodness for the weekend when we get a much needed chance to catch our breath and review what's happening.
Today I want to go over a few important points to keep you up to date on your investments and where I'm seeing the best opportunities.
Let's dive in!
Two Situations on the Fed's Radar
A pair of very important situations popped up this week that are pulling Fed Chair Jerome Powell’s attention.
First is the meltdown of Silicon Valley Bank, officially known as SVB Financial Group (SIVB). Take a look at the devastating chart for this bank below.
While SIVB isn't one of the top-tier banks that could cause a full-blown financial crisis, its meltdown is still a sobering warning.
Without getting too far into the weeds, I'll tell you that higher interest rates have caused some of the assets SIVB held to lose value.
This is also true for many other banks across the country and around the world. And investors are growing more concerned about the financial system in the wake of SIVB's decline.
While I'm still confident that the larger U.S. banks are in sound financial condition, the concerns are weighing heavily on everybody’s minds.
In some ways, this situation benefits the Fed, because the concerns help to slow down the economy and keep it from overheating. This has the added effect of reducing inflation.
The second major situation is the U.S. job market.
Yesterday, we learned that the economy created an additional 311,000 jobs in February, above what investors were expecting.
Despite this high number of new jobs, the unemployment rate also ticked higher. That’s because more workers are coming back into the market and looking for jobs.
More participation in the job market is a good thing for inflation. If there are more available workers, companies may not have to keep raising wages to entice employees.
So even though the job number was strong, the details behind the headlines are encouraging for the problem of inflation.
Two Takeaways From This Week's Data
As investors, it's important to determine how this week's information will affect our investment opportunities.
I've got two important takeaways, and they both tie to how the U.S. dollar is reacting to this week's data.
After rebounding for much of February, the U.S. dollar turned sharply lower on Friday.
That's because investors don't expect the Fed to be as aggressive this week thanks to the bank uncertainty and the rising unemployment rate.
If the U.S. dollar is about to resume its downtrend (and I believe it is), two areas of the market will benefit.
First, precious metals should surge.
On Friday, the price of gold jumped sharply higher. This makes sense because it takes more dollars to buy an ounce of gold.
Look for this trend to continue. And consider buying shares of gold mining stocks in addition to holding physical gold as an inflation hedge.
Second, blue-chip international stocks have an advantage.
When the U.S. dollar is weak, it makes American products and services more competitive in overseas markets.
That's because customers with euros, yen, or other relatively stronger currencies have more buying power.
International dividend payers like Procter & Gamble (PG), Coca-Cola (KO), and Yum! Brands (YUM) tend to do well in this type of environment.
I'll be keeping a close eye on the economic data set to come out next week. And of course, the next Fed decision is scheduled for March 22.
But for now, the picture looks bearish for the dollar, bullish for gold, and bullish for large international dividend stocks.