- As represented by the Dow Jones Industrial Average, stock sold off 597 points from the moment the Fed announced a 0.25% hike in the Fed Funds Rate (the interest rate banks charge each other for lending excess reserves) at 2:00p on Wednesday through the close on Thursday only to rebound nearly 547 points on Friday as investors wrestle with the question of whether or not the Fed is done raising rates. We believe they are, but also believe they will be slow to cut.
- Within last week’s “Snapshot” we said to “expect a final 0.25% hike in interest rates after the Fed concludes its regularly scheduled two-day meeting this Wednesday. We believe their rhetoric will remain hawkish, but a little less so. However, we don’t anticipate much of a rally in stocks as the S&P 500 has risen more than 15% from its October 12, 2022 closing low.”
- When investing, like anything else in life, sometimes you just have to bide your time. However, what is different now versus the decade that ended December 31, 2021 is that holders of cash are being paid more than 4% (see Treasury Yields Below) rather than near 0% which had been the norm. That said, eventually inflation will punish those individuals as their purchasing power will erode. Despite the fact that we believe that at the present time, the financial markets are more or less fairly valued we do believe that over the intermediate- to long-run, the returns achieved by investors in the stock market will be higher than those invested elsewhere, including bonds and cash.
- Inflation data takes center stage this coming week as the Bureau of Labor Statistics releases the April Consumer Price Index on Wednesday and the April Producer Price Index Thursday. When members of the Fed mention being “data dependent,” this is exactly to what they are referring. This release will drive the market and help to form Fed policy.
- Notable Comments From Fed Chair Jerome Powell Post-FOMC Meeting
- “We on the committee have a view that inflation is going to come down not so quickly. It will take some time, and in that world, if that broadcast is broadly right, it would not be appropriate to cut rates, and we won’t cut rates.”
- “Inflation remains well about our longer run goal of 2%. Inflation has moderated somewhat since the middle of last year, nonetheless inflation pressures continue to run high and the process of getting inflation back down to 2% has a long way to go.”
- On whether or not monetary policy is sufficient restrictive at the present, “we’re going to need data to accumulate on that, [that’s] not an assessment that we’ve made that we’ve reached that point.”
- “Conditions in the banking sector have broadly improved since early March, and the U.S. banking system is sound and resilient.”
- We may disagree with some Fed Policy, but regarding the potential for a default on U.S. debt, we couldn’t agree more with Fed Chair Jerome Powell – “we shouldn’t even be talking about a world in which the U.S. doesn’t pay its bills. It shouldn’t be a thing.”
- Fed hikes Fed Funds Rate and Discount Rate by 0.25% to 5.00% and 5.25%. As a result U.S. Prime Rate rises to 8.25%. As opposed to one year ago borrowers will now have to weigh the purchase on its merits rather than just taking free money.
- Shortly after announcing the deal to purchase the assets of First Republic, JP Morgan CEO Jamie Dimon declared that “this part of the crisis is over.” Investors didn’t agree, pushing down shares of PacWest (PACW) and Western Alliance Bancorp (WAL) 36.49% and 25.47%. Furthermore, the SPDR S&P Regional Bank ETF (KRE) fell 7.50% as the large-cap dominated Financial Select Sector SPDR ETF (XLF) fell 2.27%. There is a chance that should this indiscriminate selling of banks continue regulators may ban short-selling of financial stocks. At this point that doesn’t appear in the cards as this turmoil is not at all about poor lending standards, but rather a mismatch of duration to deposits.
- This is the “old new normal” and we all just have to get used to it. In regard to interest rates, Post Great Recession through the end of 2021 was a historic anomaly and the sooner you realize this and begin to function in this world you’ll be better off. In fact, except for a brief period post 9/11, the yield on the 10-Year U.S. Treasury Note spent the entirety of the 50-plus year period beginning 1964 and culminating with the Great Recession above 4.00%.
- The objective of all media is to pump your anxiety level up to “DEFCON 5.” Don’t fall for it and ask yourself this simple question – “will you be more or less apt to make a substantial mistake in regard to your portfolio should you buy into the ‘end of America/dollar’ or you name it hype?”
- Upcoming Economic Reports scheduled to be released this week include the following, on Monday, March Wholesale Inventories; on Wednesday, April Retail Inflation as measured by the Consumer Price Index (CPI), on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance and April Wholesale Inflation as measured by the Producer Price Index (PPI); and on Friday, May Consumer Sentiment, polled by the University of Michigan.
- The quarter deluge of earnings reports rolls on. This week expect data from the following – Berkshire Hathaway (BRKB), PayPal (PYPL), McKesson (MCK), Occidental Petroleum (OXY), Airbnb (ABNB), Duke Energy (DUK), Toyota (TM), Disney (DIS), and JD.com (JD).
“This presentation is not an offer or solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be reliable, but its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. Fagan portfolio characteristics and holdings are subject to change at any time and are based on a representative portfolio. Holdings and portfolio characteristics of individual client portfolios may differ, sometimes significantly, from those shown. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities listed.
Additional information including management fees and expenses is provided on our Form ADV Part 2. The actual return and value of an account fluctuate and, at any time, the account may be worth more or less than the amount invested. Bond Investments are affected by interest rate changes and the credit-worthiness of the issues held in the portfolio. A rise in interest rates will cause a decrease in the value of fixed income positions. Past performance results are not indicative of future results.”
