An Alternative To Money Market Funds
February is behind us and what a rough month it was!! The Dow Jones Industrial Average, S&P 500 and the Nasdaq all finished the month in negative territory. Meanwhile, the 10 Year US Treasury ended the month with a yield of 1.84% while both Brent and WTI crude oil each leapt up towards the $100 per barrel level. In fact, the energy sector was the only sector of the S&P 500 to post a positive return in February.
Last Friday’s Nonfarm Payroll Report (NFP) was surprisingly strong with 678,000 jobs added.
The forecast was for a gain of 440,000 jobs in a sign the omicron virus impact is fading. The U-3 unemployment rate dipped to 3.8% in December. Meanwhile the closely followed U-6 rate edged higher to 7.2%. Also positive in the report was the Labor Participation Rate. It rose to 62.3%. While encouraging, this figure is still 1.1 percentage points below the pre-pandemic high in February 2020. The next Nonfarm Payroll Report will be released on Friday, April 1.
Fed Chairman Powell made clear the Fed will begin raising rates by 25 basis points during his testimony before the House and Senate March 2 and 3. The Fed next meets March 15-16. In addition, Powell said the Fed would soon wind down its asset purchases and he acknowledged the inflation picture continues to be a problem. As a result, additional rate hikes will likely be needed.
Keep in mind that the US is now servicing a debt load of more than $30 trillion. This enormous debt load can only be handled with extremely low interest rates. For example, if the interest rate paid by the US increased just by 1% (100 basis points) the US budget deficit would increase by $300 billion annually!! So, the Fed is limited in how far they can push rates higher.
STOCKS TO WATCH
The homebuilding sector has had a rough start since 2022 began. Fears of rising interest rates and commodity prices have lessened investors' appetite for the sector. Value investors may find the group attractive due to their extremely low forward Price Earnings (PE) ratio. Several in the sector are trading with a forward PE below 5. For example, Pulte Homes (PHM) is trading with a forward PE under 5, Hovnanian Enterprises (HOV) is trading with a forward PE under 3 and Toll
Brothers is trading with a forward PE under 5!! HOV shares have declined over 40% from its 52 week high, while PHM is off nearly 25% and TOL is off nearly 30% from their recent highs. All of the above figures are as of the close of trading on March 4.
If you are unhappy with the returns now offered by money market funds, feel free to contact us.