I recently ran across an article titled “Don’t Fight the Fed”. It argued that the Federal Reserve knows what it’s doing and we should trust the process. In ‘20/’21 the Fed’s massive quantitative easing (QE) program resulted in tremendous gains for investors of the broad stock market, as well as, real estate. However, its intention was to simply keep us afloat – protect the economy from an economic downturn (recession) – during the Covid19 lockdowns. But it did much more than that – markets grew ~40% or more. So, ‘mission accomplished’ – or was it?
As a result of QE, and in parallel to supply chain issues domestically and abroad, we’ve found ourselves in the midst of hyper-inflation. As we know, Newton’s third law: “For every action, there is an equal and opposite reaction”. The Fed’s increase of the money supply by more than 40% will require a tightening of the belt – so to speak – in order to counter the massive money injection and its corollary: systemic inflation.
As the Fed now approached rate hikes with month punctuality. Many begin to question if the Fed really knows what it’s doing… “Don’t fight the Fed” they say.
In decades past, the Fed’s purpose has always been to give gentle nudges to markets and the economy. In 2008 the Fed announced a form of QE that we had not seen before – a bit more than a ‘gentle nudge’. It worked. But that time we didn’t end up with CPI at 8%. This time, we did. And this time, we’ve cumulatively dumped more financial capital into the market than we have in the last several decades combined.
Do we have any other choice? At this point one must roll with the punches and trust that Powell (Fed Chair) will deliver us his “soft landing” – as he eloquently promised.
Instead of fighting the Fed. Instead of demonizing it. Let’s work with it. Again, we don’t have much a choice in the matter now do we? Let’s understand that rising interest rates will, in fact, create recessionary effects. Lending will fall, employers will cut expense, home prices should contract, markets will ride further volatility, safe-haven bond values will dip, and fear will reign the hearts of many. But, opportunities will be abundant – many already are – to capture market lows and allocate to investments/companies we believe in for the ride back up.
Below is your Weekly Market & Economic Update by the numbers.
Interested in learning more about markets, inflation, QE or how you can take advantage of current investment opportunities? Schedule a call with me HERE.
Warmly,
Mark Sauer
info@AllOneWealth.com
+1(310)355-8286
Weekly Market & Economic Update
Market Update
- Global Equities: The rally in the early part of the week was short-lived, with the S&P 500 Index briefly entering bear market territory on Friday. The S&P 500 Index finished the week lower by -3.0%. The Nasdaq Composite fared even worse, down -3.8%. The Dow Jones Industrial Average finished the week down -2.8% and is now on an eight-week losing streak, which has not happened since 1932. Developed International stocks managed a positive week, up 1.2%, while Emerging Market stocks were positive as well with a weekly return of 1.6%.
- Fixed Income: 10-Year Treasury hovered under 3% all week, ending the week at 2.79%. Corporate High Yield bonds had another negative week with a loss of -0.5%. Investment Grade Corporate Bond mutual funds and ETFs saw over $4 billion in outflows while High Yield Bond funds and ETFs also experienced outflows of $2.6 billion during the weekly period ended May 18th.
- Commodities: Oil prices ended slightly lower for the week after they were up slightly on Monday and Tuesday. The US government’s strategic reserves of crude oil are now at a 35-year low. Gas prices in the US continued to hit new record highs daily with the national average of $4.59 per gallon, 50 cents higher than it was a month ago and bringing all 50 states above $4 for the first time ever.
Economic Update
- Retail Sales: Retail sales grew 0.9% for the month of April and March was revised upward proving that consumers’ discretionary income was not impacted enough by the rising fears of inflation. Markets opened opportunistically higher on Tuesday and the S&P 500 Index closed just over +2% for the day only to dramatically sell off during the remainder of the week.
- Big Box Retailers Selloff: Even though retail sales grew, the big box retailers felt the pain of rising costs. The nation’s largest retailer, Walmart (WMT) fell over -11% on Tuesday when the company released its first quarter earnings. Walmart expects sales to rise but profits to decrease due to the increased cost related to fuel prices, labor costs, and high inventory levels. Target (TGT) had a similar story on Wednesday, falling nearly -25% in a single day. This triggered a broad market selloff as investors became more concerned about the inflationary issues that are going on under the hood of these major corporations and how this will ultimately trickle down to the consumer.
- Monkeypox: After a long battle with COVID-19 and everything finally getting back to normal, there is the potential fear of Monkeypox, a contagious disease that causes a rash like chickenpox but rarely seen outside of Africa. 37 cases have been confirmed globally and 71 under investigation with a confirmed case in New York State and Massachusetts. Scientists believe that Monkeypox is unlikely to cause a pandemic and the spread could be the effect of increased travel demand. However, that hasn’t stopped a headline driven media from rendezvousing fear in many.
Chart of the Week
The Chart of the Week is a 1-year view of the S&P 500 Index dipping into bear market territory briefly on Friday. A bear market is defined as being down 20% from its peak. The S&P 500 Index will need to close in bear market territory for it to be official. Among other indices, the Nasdaq Composite is already in a bear market and down nearly -30% from its peak. Consumers and investors fear a recession is looming – though I would argue it has already arrived – due to rapidly rising costs of food, energy, rents, and everyday items. US GDP fell at a 1.4% annual rate in the first quarter. Two consecutive negative quarters, by definition, would mean a recession. Today, Monday May 23rd, markets seem to be bouncing back, however, we are under the 200 day-moving-average (red line) and have failed to get back above it last week which could prove to be a healthy line of resistance until further systemic fundamental changes occur.
Data Source: Hanlon Investment Management
