In collaboration with Global X
The market has a high adaptability, and according to current sentiment, the market seems to have become somewhat accustomed to the new state of war and inflation. However, it is not to be expected that the high volatility we have witnessed in recent weeks will completely dissipate, given the continuation of the war in Ukraine and the fact that the Fed has begun to roll up its sleeves in its just struggle to curb inflation. Therefore, given the fact that we are at the beginning of a round of interest rate hikes, investors will prefer shares of profitable companies that pay handsome dividends, and will be reluctant towards growth companies that rely on raising capital in the capital market.
One of the sectors that benefits from the war is, naturally, the defense sector. Defense stocks have been rising recently, amid war and arms shipments by the European Union and the United States to Ukraine and neighboring countries, and the expected increase in NATO countries ‘defense budgets is raising defense companies’ revenue forecasts in the longer term, giving a boost to their stocks.
Data from the U.S. economy are beginning to point to a slowdown in growth. The volume of orders for durable goods fell by a monthly rate of 2.2% in February. The volume of purchases of new homes also declined in February, and we will likely continue to see this trend in light of rising real estate prices such as the rising cost of mortgage lending.
This week, more and more members of the Federal Reserve are expected to speak out, and any remarks may motivate the market. We believe that the Fed understands that it is lagging behind inflation, and therefore the possibility should not be ruled out that the bank will raise interest rates faster than the market expects. It is even possible that we will see the Fed raise the interest rate by half a percent in each of the next two meetings, and then return to a quarter of a percent.
US government bond yield spreads are also shrinking and the curve is getting flatter. We are also witnessing a reversal in the curve, with the 5-year bond yield higher than the 10-year bond yield. The interest rate curve is an indication that the market believes there is a danger of a recession.
This week, the most significant publication will be the monthly employment report, which is expected to indicate an addition of about 450-500 thousand jobs to the American economy, and as a result the unemployment rate will fall to 3.7%. Saturation in the labor market causes workers to leave their jobs in favor of higher-wage jobs, and this produces inflation at wage levels.
The author is an analyst at Global X ETFs. The above should not be construed as investment advice, recommendation or opinion regarding any financial products.