Big Picture Market Outlook
US and global growth is slowing after a strong initial recovery. We have the fiscal cliff ahead of us as well as the Fed’s planned tapering of its QE purchases. Growth will likely slow well into the first half of 2022 and with it some moderation in inflation but not much given supply chain issues as well as sticky housing inflation. We have strong seasonal trends into year‐end that will likely keep the growth slowdown at bay but as we enter 2022, growth concerns should bubble to the surface.
Recent Market Developments
Inflation surge lifts precious metals. Precious metals are moving up on higher inflation and a Fed that will allow the economy to run hot and resist market’s pricing of rate hikes. Gold has clearly broken its bearish 2020‐2021 trend and will likely test its former highs in the coming months, implying roughly an 11% move higher. Silver likely has 14%‐18% upside to its 2020 highs.
Getting ready to reduce credit risk. Credit spreads follow economic growth rates and, with growth rates peaking, there is the risk that spreads could widen, which would hurt the performance of both junk and investment grade bonds. Shown below is the Conference Board’s LEI inverted for directional similarity with credit spreads (red). As the LEI falls (rises in chart), credit spreads rise.
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