Fed up with The Fed
“If you’re not confused by the stock market, you haven’t been paying attention."
The Portfolio Performance
The portfolio is UP +42.69% YTD
The S&P 500 is UP +16.63% YTD
The Fed, The Market, and Tomorrow
I haven't written in a long time; I simply couldn't think of anything to say until I felt the Federal Reserve was out of the way. The Fed is still a significant influence on the market, and now the rate increases are impacting China to the extent that the US market is feeling the pain. Over the last 15 months, the Fed has raised interest rates to a 22-year high in an attempt to slow the economy to bring down inflation. We need to forget that the inflation we're experiencing was brought on by a rapid and dramatic supply shock that began in 2020 due to COVID-19 and a series of mounting problems at US and foreign ports and inland terminals. On top of the supply shocks, we've seen a decline in truck drivers and new legislation eliminating 80% of the existing fleet from operating in the nation's largest markets. Our current inflation has been further exasperated by a flood of liquidity (lots of cash) that continues to be approved by Congress. We haven't felt the impact of the Federal government's liquidity yet because not much of the money approved in three pieces of legislation has been spent. I'm speaking of the Infrastructure Investment and Jobs Act ($1.2 trillion), the Inflation Reduction Act ($430 billion), and the CHIPS Act ($52.7 billion). In fact, it's been a year, and semiconductor companies are building plants with their own money and have yet to receive a single dollar from the CHIPS Act. Even though the CHIPS Act money hasn't been spent, the economy is still seeing robust investment and hiring because of the anticipated funding to come.
Tomorrow we get the July Consumer Price Index (CPI) report, and the consensus estimates suggest a +0.22% month-over-month increase. Let's forget that the CPI is backward-looking and is not the favored metric used by the Fed. The Fed prefers Personal Consumption Expenditures (PCE). Regardless of which measure they use, as investors, we should know what's in those market baskets and, more importantly, how the components of the CPI can impact the headline inflation numbers.
First, the stock market will not appreciate a +0.22% MoM increase. Second, just because 67 economists surveyed by Bloomberg produced a consensus +0.22% increase doesn't mean I will accept that number as factual. The consensus is simply too high.
I think the MoM increase will be closer to +0.15%, and anything below 0.20% will ignite the stock market.
The two most significant contributors to inflation have been used autos and shelter. Since the end of 2019, shelter and autos account for 66% of the increase in inflation. In the chart below, you can see the dramatic increase in the used vehicle index and also the steep decline.
Housing, rents, and services combined as shelter costs in the CPI have risen significantly over the last several years, but in 2023 we've seen house prices and rent asking prices drop sharply. If the Fed raises again, we will see more cracks in the US economy. The main issue is the lag effect of the Fed's actions. Raising rates in one month may not show up in the economy until several months later, and the combined effect of raising rates as fast and as high as the Fed has done may not show up until next year.
Shelter costs are still high but declining. The St Louis Fed stated in their recent letter,
The models indicate that shelter inflation is likely to slow significantly over the next 18 months, consistent with the evolving effects of interest rate hikes on housing markets.
The Federal Reserve has hiked interest rates to a level that revealed weakness in some banks, slowed home purchases, took money out of the stock market, and parked it in money market accounts and bonds. Bonds are just investing in the debt of the US Government. By raising rates, the Fed has made it more expensive for the government to make payments on bonds. Bonds produce nothing, while investments in companies add to productivity, job creation, and the nation's overall growth. Higher rates have hurt everyone with higher food costs, higher housing costs, and higher manufacturing costs.
The consensus for the July CPI seems too high to me; I've pegged it at +0.15%. While this may seem like a slight difference hardly worth being riled up about, 0.15% would annualize to a 1.8% inflation rate, below the Fed's 2% target. Should the Fed keep hiking rates? I think they're done, but I can't point to a single year in history when the Fed got it all right.
The pendulum always swings too far in both directions, so when the Fed raises too far and triggers a sell-off in the stock market, I hope my readers will be savvy and look for high-quality companies to buy. I like technology, big healthcare, both fossil and sustainable energy companies, and industrials like Deere, AXON Enterprise, GE, and many more.
"Markets don't go to zero, Portfolio's do.
Buy quality, be patient...and look twice for motorcycles."
- Clay Baker
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Rule #1: Don't lose money
Rule #3: Portfolios go to zero, markets don't, Stay Invested
Rule #4: When good stocks you own drop 10% below your cost basis, add shares
Rule #5: Bull markets aren't sustained without the Transports
Rule #6: When Forward P/E is lower than TTM P/E, expect earnings to increase
Rule #7: When an investment bank sells below book value, buy it
Rule #8: Tips are for waiters. Do your own homework.
Rule #9: Don't sell a stock because you're bored with it. Do your own homework.
RULE #10: Being early and being late is the same as being wrong...move on.
Rule #11: Investing is easy. Waiting is hard; waiting is the hardest part.
Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested 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 Stay Invested 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. I am invested long in these securities mentioned in this post:
AMD, AMRN, AMZN, AAPL, ARKK, ARKG, CNRG, ENPH, FB, GNRC, GBTC, GLD, HRTX, HD, IPOD, MSFT, NVDA, PSTH, TWLO, VBIV
I am invested short in these securities mentioned in this post:
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.