The ‘Rolling Bear Market’ Continues… Don’t fight the Fed is a common warning in the markets but especially while the Fed fights inflation.
What it means— At year’s end, major analysts and Wall Street bankers forecast the S&P-500 for December to be as high as 5300 to as low as 4400. This morning, the index traded as low as 4003. So far this index has not been declared a “bear market” by the standard rule of a 20% decline. The Fed struggled to abandon “transitory inflation.” The Fed is apparently struggling to avoid using “recession” which seems to be the consensus among investors.
The U.S. Economy Added 428,000 Jobs in April…The unemployment rate remained unchanged, at 3.6%.
What it means— Well, that’s not the bad news that investors wanted. The jobs numbers were slightly better than expected, which gives the Federal Reserve confidence to stay on the path of raising rates and reducing its bond holdings. Average hourly earnings rose a bit less than expected, up 0.3% instead of 0.4%, which could take some pressure off wage-driven inflation. It won’t do much to ease the supply chain constraints created by the Chinese COVID-19 lockdowns or the energy and food disruptions caused by Russia’s invasion of Ukraine. Expect inflation to remain elevated and unemployment to remain low, which will keep the Fed on track.
The Fed Raises Rates and Lay Out the Plan for Shrinking Its Balance Sheet… The central bank raised the overnight rate 0.50% and announced it will allow $47.5 billion in bonds roll off in June and July, and then will allow $95 billion in bonds to roll off monthly after that.
What it means— We got the known, the unknown, and the unknowable. If it was a western movie, it could be the “The Good, The Bad and The Ugly.” Everyone expected the Fed to raise rates by 0.50%, so that was baked in. Chair Powell then threw investors a bone by stating there doesn’t appear to be a need for a 0.75% hike. That news allowed investors to breathe a sigh of relief and sent the markets higher which was reversed the next day. Former IMF Chief Economist Rogoff opined the Fed isn’t doing enough. The Fed should move rates to 5%.
We still must deal with the unknowable. The bankers announced their plan for letting Treasury and mortgage-backed bonds mature when due gradually reducing the balance sheet. Now, we hold our collective breath to see how this affects interest rates in the months ahead. We can’t know if there’s enough demand to make up for the Fed’s absence or if rates will continue to march higher as we adjust to life without the world’s biggest bond buyer. With so much turmoil around the world and inflation still high, expect rates to melt up in the weeks ahead. We addressed the serious consequences for investors in Saturday’s webinar. Watch it here.
Put the last week of July on your calendar. That’s when the Bureau of Economic Analysis will release the first estimate of second quarter GDP. If the number is ugly, long interest rates should roll over even if inflation remains elevated.
The Dow Jones Gained More Than 900 Points on Wednesday, and Then Dropped 1,000 Points on Thursday… Investors cheered Powell when he took a 0.75% move off the table, but then turned pessimistic as they considered higher rates and less Fed involvement in the bond markets.
What it means— Volatility is the name of the game. Expect more of it as we play the same investment game that we’ve played for more than a decade, “What Will the Fed Do?” If employment remains strong and inflation remains high, the Fed will stay the course, pushing up rates and taking more air out of the equity markets. If the economy falters, the Fed should pause, which will lead to massive equity market rallies. It should be a busy summer in the financial markets.
Locals Fix 14th Century Clock in Part with American Remedy, WD-40… A church minister in Grimsby, England, wanted to get his clock fixed. It had been stuck on two minutes past twelve for more than a decade, but not that many people work on massive, centuries-old timepieces. An engineer who worked on restoring Big Ben quoted the church a repair price of more than $50,000. Two locals, a cheesemaker and a 15-year-old student, decided to have a look. They found dead pigeons clogging gears and dried-up works impeding motion. After clearing the dead birds and liberally applying grease and WD-40, the clock sprang back to life.
Data supplied by HS Dent Research
“When the facts change, I change my mind.
What do you do?” ~ John Maynard Keynes
Our plan is “the plan will change.”
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