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Energy & Precious Metals – Weekly Review and Outlook By

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By Barani Krishnan — The Federal Reserve is letting the stock market crash in order to bring U.S. inflation under control. If fuel and food prices continue rising, will the property market be the Fed’s next target, along with the job market?

For the majority of U.S. history – or at least as far back as reliable information goes – housing prices have increased only slightly more than the level of inflation in the economy. Only during the period between 1990 and 2006, known as the Great Moderation, did housing returns rival those of the stock market. 

The stock market has consistently produced more booms and busts than the housing market, although it has also had better overall returns as well. Not now.

Wall Street fell for a seventh straight week last week, suffering its longest losing spell since the dotcom bust of the late 1990s, as fears of an economic slowdown continued to hammer investor sentiment.

The , which tracks the top 500 U.S. stocks, closed near flat at 3,901 on Friday. Earlier in the day, it fell to 3,810, marking a loss of 20% on the year. In general market terminology, any asset down 20% from its most recent high or from any particular period like a quarter or year-end is defined as having entered a bear market. The S&P 500 finished the week down 3%, and registered a cumulative loss of 14% over the past seven weeks. Year-to-date, it is down over 18%.

The finished down 0.3% on Friday at 11,355. It lost 3.8% on the week and was down 27% on the year. The , a broad-based blue-chip indicator, was flat at 31,261. For the week, it lost 2.9% while for the year, it was down almost 14%.  

The stock market’s tumble accelerated over the past two weeks after the Fed Reserve said it will raise interest rates non-stop and even slow the U.S. economy if necessary to bring down from 40-year highs.

After contracting 3.5% in 2020 from disruptions forced by the coronavirus pandemic, the U.S. economy expanded by 5.7% in 2021, growing at its fastest pace since 1982. But inflation has grown just as fast as the economy, or maybe quicker, with some price gauges showing growth of as much as 8.3% on the year.

Since this year began, has been on a weaker trajectory, coming in at a negative 1.4% in the first quarter as the Russia-Ukraine crisis led to runaway inflation in food and energy prices.  If the economy does not return to positive territory in the second quarter, the United States will technically be in recession going by the definition that it takes just two negative quarters in a row to make up a recession.

Despite the correlation between stocks and the economy, experts have repeatedly pointed out that the stock market is NOT the economy. 

That’s because the richest 1% of people own 50% of stocks and the bottom 50% own 0.7% of stocks. The day-to-day performance of major stock indices like the S&P 500, Dow Jones Industrial Average and Nasdaq Composite has little-to-no reflection on what’s happening in most Americans’ lives.

While past downturns sent the Fed rushing into the phone booth in Clark Kent-style to play superhero, don’t expect it to save the day this time around, says Bloomberg columnist John Authers. His reasoning is that a big stock market sell-off is exactly what the Fed wants to see in order to slow economic activity, and in turn, bring inflation back to normal.

The situation is a little different for the central bank though where housing and real estate are concerned. The property market has a rather important role in the U.S. economy, with roughly 65% of occupied housing units being owner-occupied. This makes homes a substantial source of household wealth and home construction a key provider of employment. 

In the 2008/09 financial crisis, a crash of the housing market precipitated what later came to be known as the era of the Great Recession. Since then, the U.S. property market has rapidly recovered on the back of economic recovery as well as demand from buyers. 

Even during the 2020 economic collapse from Covid, the property market only saw a brief bump lower before picking up again to the record growth we are witnessing today. While any particular sector of the economy with such resilience might be something for policy-makers to glow about, now is possibly the worst time for the U.S. housing market to be growing like this because it is also one of the bigger drivers of inflation.

Just like the housing and property market, the oil market is also exhibiting extraordinary resilience – which is really quite unprecedented, given the challenges across markets, economist Adam Button said on the Forex Live forum. 

“At virtually any other time in history if you had one of the worst stretches for stocks coupled with widespread economic angst, you’d see oil underperforming,”  Button wrote in a Friday post. “Instead, it’s not only outperformed, but it’s made gains. Oil is up 10% in the past four weeks. This is the first close above $110 since March 25.”

Button said he has been “waiting for this shoe to drop as the mood out there worsens but it’s just not happening. Now there’s talk about Shanghai reopening and at some point stocks need to at least bounce.”

Button said the problem with the oil rally is that it’s driven as much by speculation about forthcoming demand, as it is a case of energy prices reacting to current real demand versus short supply. “It’s increasingly clear that there just isn’t enough supply,” he added. “I fear how high prices could go, particularly if predictions of Russia losing 3 million barrels per day come true.”

The biggest problem though is that energy-driven inflation is having a major negative impact on Americans’ lives. 

“Gasoline prices have risen every day since April 26,” said Button. “Oil spending is taking up a larger share of the wallet.”

So, is the Fed eyeing – or willing – a property market tumble next?

The Atlantic’s Derek Thompson says the housing market has, in fact, peaked. Here are his reasons:

* Sales of existing homes fell 2.4% in April to their lowest level in almost two years. It’s the third straight month they’ve declined, showing how record prices and skyrocketing mortgage rates have made potential homebuyers close their Zillow tabs in frustration.

* The home inventory shortage, a leading contributor to the demand-supply imbalance, is starting to ease in the hottest markets, such as California and Colorado.

* Google searches for “homes for sale” were down by double-digits in major cities such as LA, Boston, and SF in mid-March, according to Redfin.

* Redfin agents also reported that they were getting fewer calls from potential buyers in major cities, and agents in California said the number of showings and offers had dropped off.

But the bottom line is this: The “housing market downturn” is unlikely to be like the meltdown of 2008, which was fueled by cheap credit, lax regulation, and rotten subprime mortgages….

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