Stocks closed under water yesterday despite best efforts for gains as yields spiked in anticipation of today’s expected jumbo hike. Ford’s warning about supply chain shortages reminds us that the Fed can’t control the supply problems that sparked inflation in the first place – does that mean the burden will fall on consumers?
Fed up with the Fed? Well, are you… fed up with the Fed? I am sure that you are. Even if you are not in the market to buy a new home using a mortgage or if you stay away from revolving credit, if you are reading this market note, it is likely that you have an investment portfolio which has caused you a bit of stress over the past, let’s call it, almost a year now. Why? Because there is no shelter when the Fed gets on the warpath with inflation. Bond yields go up causing fixed income prices to go down and stocks suffer as higher interest rates crimp future growth prospects and cause values to slump. It is worth noting that there is a big emotional factor at play as well. At this point, most well-informed investors are uncomfortably comfortable and sitting tight, only making only minor tactical tweaks to portfolios. They are seeking to ride out the storm WHICH WILL PASS. That leaves the markets in the hands of speculators and traders. Though they may know the formulas and the history, they trade without concern over which way policy goes or whether stocks are over or under valued. They are simply interested in the possibility of reaping short-term gains in a volatile market. If the Fed gets frisky with interest rates? Sell short fast and hard and hope to cover shorts after the market panics. If some bit of economic news is bad for the economy which might deter the Fed from raising rates so fast, buy hard and big, hoping to sell and make a short-term profit once weak-handed investors jump in too late. All these strategies and many of similar ilk take place over minutes, hours, and days and while some of them work out, history shows that those types of gains cannot be consistently reaped. What’s worse, is that sometimes committed, long-term investors get sucked into short term volatility and end up making costly mistakes. That is why I often urge long term investors to act with prudence and measure their success over years rather than sessions, months, and even in some cases, quarters.
Inflation has come, and with a vengeance. This is not news. Nobody likes inflation. It is the job of the Fed to fight inflation. The Fed MUST raise interest rates to put pressure on demand in order to slow price growth. We must expect that. We do. The market has factored most of those expectations in as well. I will not go through all the probabilities today, but let’s just say that the market is expecting rates to be over 4% by the end of the year and to peak somewhere around 4.5% by mid-year of 2023. In order for the Fed to achieve maximum inflation-fighting efficiency, it must also remind us often, that it is on the attack, which is also a part of its policy making. We MUST expect that. We do. Chairman Powell threw us his worst threat yet at last months’ Jackson Hole Symposium when he warned that pain would be necessary to achieve lower inflation. He was referring to us being the recipient of the pain. Well, we are certainly feeling it in our portfolios and in our interest sensitive purchases. Remember, the Fed’s goal is to cause consumers to lessen demand and cause prices to moderate. There is growing evidence that the Fed’s plan is working. More and more retail-oriented companies have warned of headwinds. Industrial companies have also warned of headwinds.
The Fed will have to weigh these and much, much more when it finalizes and announces its policy this afternoon. It appears that a +75 basis-point rate hike is a given with a full percentage point hike not out of the question. What investors, economists, and analysts will be looking for is some more definition around what we already know. There are still 2 more Fed meetings this year. Will Powell tell us that the Fed will be more lenient now that rates are clearly in the restrictive zone? Will Fed policy makers agree with the market’s assessment of where interest rates will be at the end of the year? What we really want to get out of today’s meeting is more clarity on what Powell’s “pain to households” words meant. How much and for how long? For now, it is senseless to fight the Fed. But worry not, at some point, the Fed will be back on our side, we just have to remain patient… though it may be painful.
Stocks faded yesterday, held down by jumping bond yields ahead of today’s Fed announcement. The S&P500 fell by -1.13%, the Dow Jones Industrial Average lost -1.01%, the Nasdaq Composite Index declined by -0.95%, and the Russell 2000 Index gave up -1.40%. Bonds fell and 10-year Treasury Note yields gained +7 basis points to 3.56%. Cryptos fell by -1.99% and Bitcoin declined by -2.81%.
- You want to know: Existing Home Sales (August) may have fallen by -2.3% after a -5.9% decline in July.
- You really want to know: What the Fed’s policy decision is. It will be released at 2:00 PM Wall Street Standard Time. But…
- You really, really want to know: What Jerome Powell will say in his press briefing that follows the 2:00 PM announcement.
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