2022 has been a mess for long-term investors globally.
Few asset classes have positive returns, and if they do, they have huge volatility.
What's the culprit?
Treasury bond interest rates increasing at the fastest pace in decades.
Take a look at the change in Fed funds rate chart on how fast the Fed is raising rates
vs. prior cycles.
Over the last 40 years, only Greenspan in 1994 comes close.
I'm Chris Perras, Chief Investment Officer with Oak Harvest Financial Group.
And This is our investment team's mid-week release when we examine a news item, headline,
or story making the rounds from publicly available sources and ask, "Is it News or Noise?"
for your money.
This week we discuss last week's FOMC news conference where Chairmen Powell essentially
said, and I'm paraphrasing, "We are raising short-term rates by 75 basis points to a range
of 3-3.25%.
We have the inflation fight in our sites.
We are ok with an economic slowdown or worse.
Our inflation fight isn't over, but we will get it under control.
Damn the torpedoes, full steam ahead."
With those words, the computers took over trading the Fed's "dot plot," which is their
interest rate forecast.
They sold stocks and risk assets because the Fed was more hawkish than markets expected.
The FOMC talk suggests another 75bps and 50bps in hikes this year, taking the monetary policy
into a very restrictive place.
Stocks dropped, commodities dropped, and credit spreads widened.
This is at the same time, the two things that investors really want to see peak before getting
excited about risk assets moved higher on the day.
First, the Dollar hit new decade highs versus almost every currency in the world.
We've discussed this previously.
While great for traveling, it's bad for the S&P500 overall as it hits corporate revenue
growth and earnings.
Here's a chart of the DXY, dollar index.
Up and to the right remains bad for most stocks in the big US-based indexes.
This is All-star Charts overlay of the broad, 3000 stock, NYSE composite against the Dollar.
It's still pretty clear.
The broad market needs a top in the Dollar, still thought of as the world's safety currency,
to find a sustained low in stocks.
And the second asset that hit new highs in yields, and lows in price, are real interest
rates, also known as TIPS.
Here's a chart of the 10-year TIPS yield for the last 12 months.
It, too, is up and too the right., This has been pressuring the overall stock
market for all of 2022 except during those two brief rally periods in late March and
then again in mid June through mid-August.
What do those two time periods have in common?
Back then, the market looked at the real-time inflation data, which has been slowly rolling
over.
It looked at that data, and the market anticipated that the Federal Reserve would slow the pace
of their rate increases.
Both times the market has been disappointed, and stocks reversed course and sold off.
Remember, the Fed's Dot Plot has a very poor track record in predicting exactly what the
Fed will end up doing.
As we've discussed many times over the last four years, Fed Funds Futures have been horrible
at predicting the future.
Only a year ago that DOT Plot and Fed Funds futures said, the Fed would raise rates once
or twice in 2022 to about 75 basis points.
The Fed has already raised rates 3x by 75 basis points at a time in the last three meetings.
If you want two real-time, tradeable assets to watch to figure out if and when the S&P500
is troughing, keep these two indexes on your screen.
The US dollar index and one of the real interest rate or TIPS yield charts.
The Dollar affects corporate revenues and earnings, and that real interest rate yield
has a huge influence on stock valuations.
What's this mean in terms that a retiree or near retiree can understand?
Does the Fed need to cut rates to get stocks moving higher again?
No, I don't think so.
But what they most definitely need to do is slow the pace of their actions down and let
the economy and markets absorb what they have done year to date.
Stocks and markets can handle higher interest rates, and history proves that.
Here is Ben Carlson's data showing average stock returns during different interest rate
and inflation periods since 1928.
The best environment?
Past peak inflation.
Viewers, it tends to be the speed you drive, not the path you take, that causes car wrecks
on the way to your final destination.
The market wants the Fed to mind the speed limits and let the economy catch up to their
initial moves.
Are you trying to meet your needs or your greed in retirement?
Give us a call here and schedule an initial consultation with an Oak Harvest Advisor.
We will sit down with you and help you and your family do the math to figure out if you
will be able to meet your retirement goals and needs.
At Oak harvest, we think our clients are best served by us helping them plan for their future
needs, instead of focusing on the past.
The future is always uncertain and that's why our advisors and retirement planning teams,
plan for your retirement needs first, and your greed’s second.
Give us a call to speak to an advisor and let us help you craft a financial plan that
helps you meet your retirement goals.
Call us here at (877) 896-0040, and schedule an advisor consultation.
We are here to help you on your financial journey into and through your retirement years.
I’m Chris Perras and from everyone here at Oak Harvest Have a blessed week.