Broker Check

Good Luck, Jay!

July 07, 2022

The shifting of responsibility from the individual to the collective i.e. the government, usually happens around a crisis. First, the government steps in, then after the crisis passes, steps back...but never as far as it was before the crisis. It then needs resources, and gets them from individuals i.e. taxes...which hurts growth. Covid presented the crisis , the election furthered the administration's reaction, and this is the backdrop that the Federal Reserve has as it must deal with the greatest inflation since the Reagan administration. 

Inflation is an extremely regressive tax on lower incomes that are using their current income just to get by. That creates political incentive for the Administration and Congress to add fuel to the flame of inflation by further stimulus or government "assistance" programs.  The Fed "taps the brakes" on the economy by raising interest rates to slow down demand.   

Midterm election oddsmakers say the Democrats will lose the House while the Senate is up for grabs. That gives a sense of urgency to the White House to get whatever victory it can before it is too late. 

On the other hand the Fed Chairman has already been reappointed. The Fed has two tools in the spotlight at its disposal.  Media coverage focuses on the short term Fed Funds Rates.  We, and the Fed, expect them to top 3.5%, mostly by year end. But, just as effective, is the Fed' balance sheet where rolling bonds off influences longer term rates.  At this writing, the two and ten year rates have ever so slightly inverted inside a steeper, but still mostly normal, yield curve. Can Inversion be far behind?

Chairman Powell has said that inflation is his singular focus. He is determined to orchestrate a "soft landing" i.e., bring down inflation while keeping employment intact and not causing a recession. That is a very tough thing to do, and rarely accomplished. However, he has the strongest job market in many years with 2 jobs open for every job seeker and a supply chain that is beginning to open up, a worldwide pandemic that is becoming more manageable, a war in Ukraine that must end sometime and a population running out of excess spending money created by stimulus payments.  Sorting out what is temporary versus permanent is his first task.  Understanding the demeaner of Congress to give out money and/or take it away through taxes is the second. 

 Those watching this kabuki theater for market affects are enduring the volatility that goes along with it. The market has declined over 20%. We have already seen 98% of the normal market decline that is usually associated with a mild recession. Yet, earnings have continued to rise, making the S&P more attractive at a P/E of 15.9 versus over 20 just a few months ago.

You must ask yourself if you are a trader or an investor. Traders are now looking for an entry point in an attractive market that is searching for a sustainable bottom. Don't wait until you see it in your rear view mirror. Investors remain fully invested at this point with a longer view. Whichever you are, it appears that we are much closer to the bottom than to the top of this market. 

We wish Chairman Powell the best of luck.