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Will The Fed Raise?

Mother's Little Helper portfolio was DOWN today -$257.83 (+0.22%)

Overall GAIN YTD: -$123.25 (-0.10%).

Our benchmark index, the S&P 500 is DOWN Year-To-Date -0.70%

"“This would be a great world to dance in if we didn’t have to pay the fiddler."

- Will Rogers

I made my buys for the year on December 28, 2017, see the new portfolio here (Click Here).

Will The Fed Raise Rates

Wow, Apple really dominated the day and may have been dominating the market sentiment since last quarter. Apple's good quarter and better than expected earnings and higher than expected iPhone sales and the growth in services and wearable's brought a universal sigh of relief that could be heard from Wall Street to Silicon Valley.

Okay, Apple is out of the way, now what? What else can we ‘choose’ to worry about? How about the rising dollar and interest rates. The FOMC is meeting and tomorrow we expect to hear from Jerome Powell. The question is will the Fed raise interest rates again or leave them alone? Will we get three raises this year or four? With a raise being 0.25% you might wonder why anyone would care but the simple fact is that with interest rates so low these changes mean a lot to the bond market and in turn this impacts the stock market. There are a lot of interconnections in all this, but basically as rates go up many investors find bonds more attractive than stocks.

Yeah I know, I told you the exact opposite last year.

When rates were between 0% and 2% money rushed into stocks because locking up money in a 10 year bond at rates that are half what dividend stocks are paying is just silly. Why own a 10 year bond at 1.5% when you can own Verizon paying 5%. Now interest rates are tapping on the door of 3% and rates above 3% are in sight which causes many investors to rotate their money back into bonds.

There's A Catch

Here’s the catch. The delta between the 2 year bond and the 10 year bond is really tight. The 2 year closed today at 2.512% and the 10 year at 2.976%. With just .46 basis points difference money is flowing into 2 year bonds bringing the two rates closer together. As the Fed raised rates over the past two years one thing has stood out, the difference between the 2 year and the 10 year have gotten tighter. The 10 year should be substantially ahead of the 2 year bond, but they seem locked at the hip. So what!

If the 2 year rate rises above the 10 year rate we get a condition called an ‘Inverted Yield Curve’, this is typically a leading indicator of a recession. Don’t freak out, I did not say we are near to a recession. There is nothing in the economic data that would suggest we are near a recession. In fact I’ll stand tall and tell you that I think we are probably somewhere just past the middle of this business cycle, not near the end. The problem is we’re living in the midst of a great experiment. Ultra-low interest rates, ultra-high stimulus, global synchronized growth and global populism in politics. Tightening rates in this environment is tantamount to playing Russian roulette; we know something bad can happen, we just don’t know when. Inflation is not only on the rise, we actually surpassed the Feds target of 2%.

In manufacturing, Caterpillar and a host of other companies all commented in their earnings calls that rising commodities prices (oil, steel, aluminum, etc.) were effecting their businesses and tightening margins. I thought the report from the services sector was really interesting stating, “the services sector witnessed its average cost burdens climbing month over month as well.” This can only mean that wages are finally increasing because labor is getting harder to find. This week we also got the U.S. Personal Consumption Expenditures Price Index Report which indicated that the PCE rose 2.4% year-over-year. The reason I like this number is because this is the second month in a row the PCE rose and this is the Fed’s preferred indicator for inflation.

The Fed Won't Raise

I think when the FOMC presents their view of the economy we’ll see that they looked at all factors, including the yet to be announced job numbers on Friday, and will decide that a rate hike is not necessary at this time because inflation is in check and the economy is still growing.

Keep Me Honest

I am attempting to keep track of my calls and predictions by logging them at the bottom of every post.

1. We are near the middle of this business cycle, meaning 2025-2028 ending with some corrections in between.

2. The Fed will not raise rates Wednesday May 2, 2018

Stay Invested,

Clay Baker

Disclosure: I am personally invested long in some or all of these funds that appear in the Mother's Little Helper portfolio or manage these investments for my Mother's portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the MLH portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. Since I may on occasion discuss Bitcoin and other cryto currencies I disclose here that I personally own investments in the cryto-currencies listed here: DBC, VTI, VWO, VEA, VIG, XLE, MUB, TBT, GLD, Bitcoin, LiteCoin

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.

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