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Market Update

Fed Signals No Letup in Inflation-Fighting Rate Increases

Morningstar - Preston Caldwell

September 27, 2022


Even as the Federal Reserve notched another aggressive interest-rate increase Wednesday, officials are once again letting investors, businesses, and consumers know there will be more where that came from in the months ahead.

With Fed Chair Jerome Powell acknowledging that inflation is not ”where we expected or wanted it to be,” the Fed’s forecasts suggested interest rates will go still higher than had been expected just two months ago. 

But the Fed also suggested a relatively quick pivot to lowering rates by 2024. As we’ve written, we think the turn will come even sooner, in 2023.

For now, however, the Fed continued its fight against stubbornly high inflation, raising the federal-funds rate by 0.75 percentage points to a target range of 3.0%-3.25%, up from zero at the start of the year.

This makes for the third consecutive meeting (following June and July) with a rate hike of this size, three times the size of the 0.25-percentage-point increases usually seen in recent historical periods of monetary policy tightening. 


Read the full article by Morningstar's Preston Caldwell here.


Preston Caldwell is Head of U.S. Economics for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He also leads Morningstar’s China macroeconomics research team. Previously, he served as a member of the energy sector team, covering oilfield services stocks and helping to craft Morningstar’s long-term oil price forecasts.

Before joining Morningstar in 2016, Caldwell earned his master’s degree in business administration from Rice University. Caldwell also holds a bachelor’s degree in economics from the University of Arkansas.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All performance referenced is historical and is no guarantee of future results.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Bonds in Perspective

September 14, 2022



What you really need to know about the likelihood of a recession.
It's important that you know.
Robert Reich

June 14, 2022

Last Friday, the Bureau of Labor Statistics released its May Consumer Price Index (CPI) report, which showed inflation worsening. Yet the bigger story — and bigger worry — is not inflation. It’s the distinct possibility of recession. Or perhaps both (what’s termed “stagflation.”) Here are the questions I’m getting asked most often, and my answers.

1. Are we heading for a recession? Many signs point in that direction. New home construction slowed in April. Mortgage demand continues to decline. Some of the country’s largest and most influential retailers are reporting disappointing sales and profits. The stock market is in bear territory. Futures markets are signaling trouble ahead.

2. What exactly is a recession? “Recession” is a technical term, defined as two consecutive quarters of shrinking gross domestic product. The National Bureau of Economic Research is the authority that declares recessions in the U.S., and its own definition is “significant decline in economic activity that is spread across the economy and that lasts more than a few months.” As a practical matter, recessions mean fewer jobs and lower wages.

3. When is a recession likely to happen — and should I panic? Don’t panic! If it occurs, it won’t happen immediately. I’d guess some time over the next six months. It’s a possibility that you ought to be aware of.


4. Who gets hurt most by a recession? Lower-income Americans are especially vulnerable because they tend to be the first fired when the economy slows (and the last hired when it rebounds). Recessions also hurt younger people trying to get their footing in the job market. And they can be hard on retirees whose IRAs or 401(k) accounts get clobbered.

5. Why are we heading toward a recession? Partly because of continued uncertainty from the coronavirus pandemic and Russia’s invasion of Ukraine. But the main cause is interest-rate hikes by the Federal Reserve. The Fed has raised interest rates by 0.75 percentage points so far this year, and Fed officials are signaling more aggressive increases ahead. When it meets Wednesday it will discuss raising its benchmark rate by as much as another 0.75 percentage points. That would be the largest single interest rate increase since 1994.

6. What’s the connection between Fed rate hikes and a recession? Rate hikes increase the costs of borrowing to individuals and consumers — which causes them to cut back on purchases of everything, including homes. This, in turn, causes the economy to slow.

7. Do Fed rate hikes always lead to recession? No. It’s possible we could have a “soft landing” that lowers inflation without causing a recession. But Fed rate hikes often over-shoot, resulting in recession — especially when they’re on the scale the Fed is contemplating. In 1981, for example, the Fed under Paul Volcker raised interest rates so high (to reverse double-digit inflation) it plunged the economy into deep recession.

8. Why is the Fed doing this now? Because it believes it must slow the economy in order to slow inflation, which is at a 40-year high.

9. Is the Fed correct? Slowing the economy will reduce inflationary pressures somewhat, but the Fed is operating under an old model of the economy — at a time when inflation was driven largely by wage increases. The way to slow inflation then was to take the steam out of wage increases by reducing employment. Essentially, the Fed drafted a certain number of workers into the fight against inflation by pulling them out of the labor force. That was when American workers had strong unions and it was difficult for companies to increase capacity by outsourcing abroad. These conditions no longer apply. Workers now have very little bargaining power relative to what they had thirty or forty years ago. Just look at the data: although wages are rising, they aren’t rising nearly as fast as prices.

10. But if raising interest rates will reduce inflationary pressures somewhat, why shouldn’t the Fed at least try? Because raising rates as much as the Fed seems likely to do will cause more harm than good. Current inflationary forces are worldwide — coming from huge global pent-up demand following the worst of the pandemic, coupled with supply shortages around the world, which have been aggravated by Putin’s war. In fact, inflation in the U.S. isn’t nearly as bad as in most other advanced economies. Slowing the U.S. economy may put a dent in these forces, but not much of one. Yet the cost here — in terms of a recession or near recession, and loss of jobs and wages — is likely to be huge.

11. Are there unique factors driving inflation in the United States? Yes. One of the biggest is coming from hugely-profitable corporations with significant market power, that are using inflation as a cover for raising their prices. (See my analyses here, here, and here.) Oil and gas giants, for example, are raking in record profits. In the first quarter of 2022, Chevron’s profits more than quadrupled from the first quarter of 2021, and ExxonMobil’s profits more than doubled despite taking a $3.4 billion hit for exiting its business in Russia. ExxonMobil won’t be using its sky-high profits to ease the burden on consumers at the gas pump, but to increase its stock buybacks. The oil giant now plans to buy back $30 billion of its own stock, up from the $10 billion it announced earlier this year. Note: The Fed’s rate hikes won’t stop this price gouging.

12. What will stop them? Three things: (1) Vigorous antitrust enforcement that reduces their pricing power (even the threat of such enforcement will make them more reluctant to raise prices). (2) A windfall profits tax that takes away a portion of their recent profits (and redistributes them to consumers), as the Conservative government in Britain is doing. And (3) publicity: the government should shine light on highly-profitable corporations that are most flagrantly raising prices (such as Tyson Foods and ExxonMobil).

13. So why doesn’t the Biden administration pursue these? It seems to be embarking on stronger antitrust enforcement, but it’s doing so very quietly — too quietly to get big profitable corporations to pull back from raising prices. Biden has begun shining a light on profitable companies that are raising prices. (Last Friday, he placed blame for rising prices on oil and shipping companies. In a speech at the Port of Los Angeles, when asked about Exxon-Mobil’s profits, Biden said “Exxon made more money than God this year.”) But he and his administration seem strangely unwilling to criticize big corporations any more extensively than this. And they have not embraced or advocated a windfall profits tax. I don’t know why. It makes enormous sense economically.

14. Speaking of politics, what’s the likely fallout if the nation succumbs to a recession? Bad news for Biden and the Democrats. Even though presidents and parties that control Congress don’t have much leverage over the economy, they get blamed for a bad one and get credit for a good one. Jimmy Carter and George H.W. Bush both lost reelection because of bad economies.

15. Ugh. Precisely. Which is another reason why it’s important for Biden and the Democrats to be seen taking all the actions I mentioned above — and calling out corporations and CEOs that are using inflation as a cover for hiking prices.

Robert Reich is an American professor, author, lawyer, and political commentator. He worked in the administrations of Presidents Gerald Ford and Jimmy Carter, and served as Secretary of Labor from 1993 to 1997 in the cabinet of President Bill Clinton. He was also a member of President Barack Obama's economic transition advisory board.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

 All performance referenced is historical and is no guarantee of future results.

 The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

 

Market Expectations

May 9, 2022

     It looks like, as they say in the industry “the baby was thrown out with the bathwater”. Although the next few months may continue to be volatile, we may be close to the bottom. Since 1950, there have been 36 corrections and that comes to one every 1.9 years. The other thing to remember is that historically, better returns tend to be a month or two after the market hits bottom. You will always have analysts predicting a correction and at the same time analysts predicting a strong market. The secret is to not invest based on emotions.

     According to the lpl weekly commentary on May 9th, individual investors are at their most pessimistic since 2009. As alarming as this seems, the height of consumer pessimism tends to occur around market bottoms. (I have e-mailed this detailed consumer sentiment report to my clients. Please contact me to receive this report.)

     In order to assess future expectations for the market there are several factors to consider. One must first understand the driving forces that caused the market to pull back and also to look at historical reactions to market corrections. As everyone knows, the pandemic put a major strain on the economy, creating shortages on goods and services. This has created a ripple effect, also putting a strain on the stock market. The second, more recent pressure has been the Ukraine conflict. The fear of the war escalating and the shortages of Russian oil abroad, have added significant worry to investors and this, in turn, creates volatility.  The VIX (index measuring expected 30 day volatility) has spiked. The VIX tends to spike when the S&P500 falls.

     Many sectors, especially in the cyclical and growth industries, are trading at extreme lows, relative to their 40 week moving averages. That being said, almost all analysts feel that there is now value in these sectors. The energy and the consumer defensive sectors are more over-valued and not expected to do as well longer term. Post pandemic behavior is expected to revert back to pre-pandemic behavior and unemployment is still low. As I have said before, keep your eye on the horizon and plan to white-knuckle it through the volatile times to have the best long term results as an investor in equities. And, if you have liquid funds, there are individual companies that are now trading at a discount, making them a good investment opportunity.

Kirsten Tangeman, CFP, APMA


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

 All performance referenced is historical and is no guarantee of future results.

 The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

 


.Managed Portfolio Updates

March 10, 2022

Investors in my managed portfolio have some welcome news! Amazon just announced a 20-1 stock split that is expected in June. This is in addition to a 10 billion share buyback. This still needs to be approved by shareholders, but is expected to go through without a hitch. This is the first of it’s kind for Amazon in over 20 years. This announcement will accomplish two things, which could help lead to increased share cost. When a stock, which is selling for just under $3,000 a share, splits 20-1, it becomes more affordable to smaller investors who may have been holding off on the investment for only this reason. More purchases than sales simply runs up the cost per share. The share buyback means that the company is repurchasing stock from shareholders and by reabsorbing the stock, they are increasing the value of the stock still held by shareholders. Your “piece” of Amazon should have more value because it will be less diluted. On February 1st, Google also announced that they would be splitting 20-1 as of record date July 1st. This means, with either company, for every share you own, you will be receiving 19 additional shares. One concern of some companies is that making their shares more accessible to smaller investors with a lower price per share, opens the stock up to more volatility. Smaller investors tend to have less experience trading and are more emotional investors prone to reactionary selling or purchasing as they often are managing their own accounts. Berkshire Hathaway A shares are an example of a company that chose to keep their shares with voter rights high, with a stock price of  almost $490,000 per share.  

Kirsten Tangeman, CFP, APMA

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful


Recap of Global Markets

March 4, 2022

I often attend conferences, (although most of them are virtual these days), that help me gather information which better helps me to offer financial advice and manage my portfolio. Today, I attended a Morningstar WebEx and wanted to recap some of my take-aways. This is my version of the opinion of the speakers from Morningstar’s WebEx, not a guarantee of information or future results.

 Many of the large-cap growth companies that are currently in my managed portfolio, are now considered undervalued and are ranked either 4 or 5 star by Morningstar.  Because this page is public, I won’t list the specific companies in my portfolio, but I’d be happy to give that information to my clients, directly.  Few US businesses have much revenue directly tied to Russia or Ukraine, so these analysts do not expect the Ukraine crisis to affect the US market, much. Semiconductor availability may be affected, short term.

 The interest rate hikes expected by the Feds in March to help slow inflation, is not a reaction so much to consumer prices that were affected by pandemic-related supply-side shortages. The biggest example is the increase in used car prices by over 40%. These issues should resolve, on their own. The concern is more the labor market, meaning the low unemployment. Interest rate increases, are for the most part, already built into the equity and bond market. A lot of the short-term volatility in the bond market is investors trying to market time.  Although short-term inflation has had an uptick, they expect inflation to settle to around 2.5% long term.

 It’s very important, especially during volatile times, to keep your eyes on the horizon and stay the course. The flight response and the “freeze” response is where investors tend to make the most mistakes. Short term, the market is rarely rational, so it’s important to take advantage of the volatility as opposed to reacting to the volatility. The biggest mistake is usually jumping out when there has already been a correction, during choppy times. For any questions, please feel free to contact me.

Kirsten Tangeman, CFP, APMA

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.