Category: Markets

The Week Ahead – Window Dressing, FedEx Earnings, and Consumer Confidence

Posted on by phoffman@channelchek.com

The Holiday Weeks Ahead are Likely to Include Lighter Trading Volumes

End-of-year window dressing occurs when mutual funds and other managed money sell their losing stocks before December 31 to avoid sitting in front of trustees early in the new year and having these stocks still listed as holdings. This often has the effect of concentrating end-of-year selling in stocks that are already the worst performers over the ending year. These same stocks are then favored early in the new year. Keep in mind some of this money may temporarily move to the fixed-income markets. Volume for the next two holiday weeks is typically lighter than usual.

Speaking of bad-performing stocks, FedEx reports earnings on Tuesday, December 20 (4:30). If you recall, they last reported on September 15 and missed expected earnings. That earnings call caused the stock to move from $204 to $161 during the following trading session. FedEx earnings will be of particular interest for this reason and because it’s an early indicator of this holiday shopping season.

It’s a light week for economic numbers; those that have the strongest possibility of moving markets occur on Wednesday’s Consumer Confidence and Friday’s Durable Goods data. Friday is a regular trading day for the stock exchanges, the bond markets enjoy an early 2 PM close.

Monday 12/19

• 10:00 AM ET, the Housing Market Index is expected to show a 34, according to Econoday’s consensus numbers. This would halt the downward spiral of this measure. Last month the reading was 33.

Tuesday 12/20

• 8:30 AM ET, Housing Starts and Permits are expected to be 1.4 million from the previous 1.425 million. Residential construction has been slowing and slowing significantly.

Wednesday 12/21

• 8:30 AM ET, The third-quarter current account deficit is expected to narrow to $225.0 versus the $251.1 billion reported in the second quarter. The current account is a quarterly measure of the U.S. international balance in goods and services trade as well as unilateral transfers.

• 10:00 AM ET, Consumer Confidence is expected to edge higher to a marginally less depressed 101.0 versus November’s 100.2. Trends in consumer attitudes and spending can be one of the most impactful influences on the stock market. This is because strong economic growth translates to healthy corporate profits and higher stock prices.

Thursday 12/22

• 8:30 AM ET, Gross Domestic Product (GDP) third estimate for the third quarter is not expected to change at all from the previous estimate of 2.9%. This is the final read from the third quarter, it indicates we were not in a recession and instead had better growth than the first two quarters.

Friday 12/23

• 8:30 AM ET, Forecasters expect Durable Goods Orders to fall 0.7 percent in November following a 1.1 percent rise in October. This is a true leading indicator as orders for durable goods show how active factories will be in the months to come as manufacturers fill those orders. The data not only provide insight to demand items such as refrigerators and cars but also business investments such as industrial machinery, electrical machinery, and computers. So it may also indicate how confident the industry is for a period into the future.

What Else

Were you able to watch the equity analysts from Noble Capital Markets discuss stocks within their areas of expertise on Wall Street Wish List aired last Thursday through Channelchek? A replay may become available this week for those that wish to rewatch or those that prefer to digest all the information in smaller bites. Those signed up for emails from Channelchek will be given a heads-up when this replay happens.

Happy Hanukkah, Merry Christmas, and peace to all from the entire content team at Channelchek!

Paul Hoffman

Managing Editor, Channelchek

The Markets Seem to Just Keep Saying “NO!” to Fed Chair Powell

Posted on by phoffman@channelchek.com
Image Credit: Seinfeld Season (Flickr)

Fed Chairman Powell is Being Ignored by the Markets – What Next?

Is Fed Chairman Powell getting the George Costanza treatment from the bond market? I asked myself this as I listened to the Chair double down on his hawkishness yesterday while at the same time watching the bond market yawn. Rates were effectively unchanged out in the periods. It reminded me of the Seinfeld episode where George tells his girlfriend, point blank, I’m breaking up with you.” She simply replies, “No.” Similar to George, Powell’s wishes are not being recognized by the market which would be hurt by them. Today mortgage rates dropped along with treasury yields, this all makes Powell’s job tricky.

The FOMCs final episode of the 2022 season ended as expected with a 50 bp increase, and the Fed Chairman addressing reporters and trying to be taken seriously by the markets. Afterall, he can say he’s raising rates all he wants to slow growth, if lending rates don’t rise, the Fed doesn’t achieve its goal. Since October 24, the Fed has raised overnight rates 1.25%. As seen below in the chart, despite the increase from a 3% target to a 4.25% target (which is a 42% increase in bank lending rates), the ten year which is a benchmark for consumer lending rates, declined by 0.75% (which is an 18% decline).  

U.S. 10- Yr. Treasury Note Market Rates

Source: Yahoo Finance

What’s Going On?

Markets are forward looking. Currently they seem to be, more farsighted than usual. As Chairman Powell repeats after each increase that officials anticipate that “ongoing increases” in the Fed Funds rate will be “appropriate,” this would be expected by someone of Powell’s experience to cause the market to look toward rate increases and shift the yield curve higher. The Fed has done more than this. The official one-year-out Fed forecast is for the Fed funds rate to end 2023 at 5.1% and 4.1% for 2024. These were 4.6% and 3.9% previously. Mortgage rates today hit recent lows.

Meanwhile overnight interest rates this year have increased by 50 times from where they started (.08% to 4.00%). By comparison the benchmark Treasury was trading at 1.73% at the start of the year, so its level has gone up by two times.

Source: NewYorkFed.org

But the current market has been so forward-looking in 2022, that each time the Fed puts on its hawkish face, the bond markets take it as more assurance that the U.S. will fall into a recession. They trade on the reassurance that the Fed will need to ease, and it effectively eases borrowing rates as benchmark yields decline. The bond and even stock markets expect the tightening to be transitory. They also only half listen to the Fed Chair because they know how wrong he was when he suggested inflation was transitory just one year ago.

CPI is also causing markets to be optimistic. Two consecutive consensus misses of inflation have led the participants to believe we are getting very close to the peak for interest rates, and rate cuts will soon be on the agenda. The Fed has been doing everything it can to change people’s minds.

The Fed’s View

While the market may be saying “no” and not allowing Powell to impose higher rates along the curve, the Fed certainly is going to keep trying. A 2% inflation target with inflation running approximately three times this won’t allow for an easing of policy. Even if overnight Fed Funds are so high that they are near historical norms.

For the Fed to accept what the market is pricing for, it will want to see substantial evidence that inflation is slowing. This will take more than just one or two months, where core inflation has come in less than the market was expecting. It isn’t an exact science to bring down inflation, but mathematically to get inflation to 2% YoY, over time, we need to see month-on-month readings averaging 0.17% MoM. We are not close, considering it is the core PCE deflator that the Fed pays the most attention to. In fact, the Fed just revised its inflation forecast upward because the core PCE deflator is likely to be stickier than core CPI. The revision has its core PCE estimate at 3.5% for the end of 2023 versus 3.1% previously, with 2024 revised up to 2.5% from 2.3%.

Take Away

What happens when monetary policy throws us huge increases in Fed Funds in seven out of its eight meetings, and late in the year, the interest rate markets decides, “No?”

It seems the Fed is working on its ability to jawbone rates higher. We saw this after the FOMC meeting with Powell doubling down on his rhetoric. We can expect more Fed addresses trying to move rates in a way that direct action concerning overnights has failed to accomplish. In the end, it’s the markets that set levels; if the bond market and stock market participants keep taking this hawkish language as recessionary, the hawkish stance could continue to backfire on the Fed.

Comments from Fed Chair Powell emphasized that the FOMC  wants financial conditions to “reflect the policy restraint that we’re putting in place”. After all, inflation is indeed still running well above target, the jobs market and wage pressure remain hot, and activity data is pointing to a decent fourth-quarter GDP report after a healthy 2.9% growth rate in the third quarter. Will he succeed? If my memory serves me correctly, in the Seinfeld episode George wound up engaged to the woman he was breaking up with.

Paul Hoffman

Managing Editor, Channelchek

How Equity Analysts Can Improve Your Performance in 2023

Posted on by phoffman@channelchek.com
Image Credit: Kampus Productions (Pexels)

Everything You Always Wanted to Know About Equity Analysts* (*But Were Afraid to Ask)

Determining the potential of a company stock involves more time and perhaps more understanding than the average self-directed investor can provide. Fortunately, there are investment analysts that specialize in equities and spend their days staying current on the industry, individual companies, and the risks associated with the overall market. The investment world is becoming more transparent as the work of these well-educated professionals has become more accessible to DIY investors.

Just what is it that equity analysts do, and how do individual and professional investors benefit from their work?

The Value of Equity Analysts

Equity analysts have a deep understanding of company financials. This begins with formal education, as most true analysts have an accounting background that may include an MBA and, in many cases, the highly esteemed Chartered Financial Analyst (CFA) designation.

In addition to being able to read and pull data for analysis from financials, they understand the industries they cover. This is important because external trends up or down in input prices or competition will impact the whole sector, including the companies they cover. A macro view of what is impacting the industry is foundational to understanding a company within the industry.

For individual investment opportunities, the analysts’ focus is on the equity portion of the capital structure, but understanding debt levels and factors that could impact debt financing is critical to building an overall financial picture. Comparing the financial structure to company goals and initiatives provides information on how realistic they may or may not be based on internal factors.

Using data from the past and present, an analyst will build a model tailored to the specific company. These models are usually detailed spreadsheets with many interconnections between the various categories. The models generally include industry growth trends, the company’s own numbers (past, current, and projected scenarios), and then what-if scenarios. Financial models are a tool used to estimate the valuation of the company, how it changes under various scenarios, and then compare the business to its peers.

Shocking a forecast for different risks is important to assess the overall risk to the forecast.

Learn More

The main risks impact different industries differently. For example, a healthcare company may be more or less immune to inflation, a mining operation could benefit from it, and a hospitality-based business could be hurt by it. Analysts assess the potential impacts of known risks and weigh them into their evaluation.

Primary Risks

The primary risks impacting any industry could be thought of as Business Risks, the challenges of a particular company’s circumstances. This could include the ability to hire talent, legal changes that could be impactful, natural resource availability, etc.

Market Risk or systemic risk is the idea that a sinking stock market will weigh on all stocks. While an analyst may choose top performers if the price target assigned was from an evaluation under average market growth of X%, an actual experience of negative Y% is a risk to the forecast.

Sovereign Risk has become a much bigger concern as trading partners like Russia, and China has shown us that politics and business policies can greatly impact U.S. trading partners. This risk tends to be greater among large international companies.

Foreign Exchange Risk. An analyst will review the impact of conversion back to the native currency and profit impacts. They may even project whether customers could be lost if the U.S. dollar becomes too costly.

Inflation Risk, what might the impact be on the company under various possible scenarios? A company with a large inventory may actually go through a beneficial period while prices are rising.

Interest Rate Risk is the real threat of inflation because it typically raises the cost of money. If the company is a large borrower and will be rolling maturing debt at new interest rate levels, the analyst will determine how this impacts operating costs and profit going forward.

Liquidity Risk. If a company’s stock is not well followed and trades sporadically, selling shares to raise capital may be severely hindered and, therefore, negatively impact the company’s ability to finance its business plan. What is interesting to note here is that analyst coverage of a company by itself has been shown to improve a stock’s liquidity. This is because more information about companies, even if not positive, helps investors understand the company, its risks, and its value.

Equity analysts benefit investors (retail and institutional) that are looking for information and an evaluation from a professional to weigh against their own evaluation. But they also benefit issuers as their stock may get less attention if there is minimal quality information available.

Direct Access to Management

Analysts essentially have a hotline to the covered company’s CEO and CFO to ask questions and get details of any change within the company or outside change that may impact results. Most investors don’t have this, so relying on analysts takes on even more importance.

Nuances Known to Analysts

The best reason to check the thoughts and forecasts of a seasoned analyst as part of your own due diligence is that every company has so many moving parts. A good analyst will be aware of what a DIY investor won’t know about the company. For example, the veteran analysts that provide research to Channelchek. On an ongoing basis, they have their finger on the pulse of the companies they cover.

There’s an opportunity you will want to take advantage of on Wednesday, December 15. You will meet online the Wall Street Analysts who are behind the research published on Channelchek. During this no-cost meeting, the veteran analysts have been asked to uncover what they are looking at, especially as it relates to companies they are bullish on.

This could be a great kickoff to organizing your portfolio for 2023 as these analysts cover the less talked about and perhaps the most overlooked stocks – stocks with great potential and “nuance” that you may have missed.

Learn more by clicking here, or the banner above.

Paul Hoffman

Managing Editor, Channelchek 

Fed Pivot, Money Supply, and Investment Returns

Posted on by phoffman@channelchek.com
Image Credit: Karolina Grabowska (Pexels)

Why Investors Are Obsessed with the Fed “Pivot”

“Investors should not care whether the Fed pivots or not if they analyze investment opportunities based on fundamentals and not on monetary laughing gas,” writes economist Daniel Lacalle, PhD. In his latest article, published below. LaCalle takes on the journalists and economists that see market risk differently than himself. This is a thought-provoking read for anyone who has been living on a diet of mostly CNBC, and Yahoo Finance, as exposure to diverse market viewpoints is considered healthy. – Paul Hoffman, Channelchek

Obsessed Investors

In a recent Bloomberg article, a group of economists voiced their fears that the Federal Reserve’s inflation fight may create an unnecessarily deep downturn. However, the Federal Reserve does not create a downturn due to rate hikes; it creates the foundations of a crisis by unnecessarily lowering rates to negative territory and aggressively increasing its balance sheet. It is the malinvestment and excessive risk-taking fuelled by cheap money that lead to a recession.

Those same economists probably saw no risk in negative rates and massive money printing. It is profoundly concerning to see that experts who remained quiet as the world accumulated $17 trillion in negative yielding bonds and central banks’ balance sheets soared to more than $20 trillion now complain that rate hikes may create a debt crisis. The debt crisis, like all market imbalances, was created when central banks led investors to believe that a negative yielding bond was a worthwhile investment because the price would rise and compensate for the loss of yield. A good old bubble.

Multiple expansion has been an easy investment thesis. Earnings downgrades? No problem. Macro weakness? Who cares. Valuations soared simply because the quantity of money was rising faster than nominal GDP (gross domestic product). Printing money made investing in the most aggressive stocks and the riskiest bonds the most lucrative alternative. And that, my friends, is massive asset inflation. The Keynesian crowd repeated that this time would be different and consistently larger quantitative easing programs would not create inflation because it did not happen in the past. And it happened.

Inflation was already evident in assets all over the investment spectrum, but no one seemed to care. It was also evident in non-replicable goods and services. The FAO food price index already reached all-time highs in 2019 without any “supply chain disruption” excuse or blaming it on the Ukraine war. House prices, insurance, healthcare, education… The bubble of cheap money was clear everywhere.

Now many market participants want the Fed to pivot and stop hiking rates. Why? Because many want the easy multiple expansion carry trade back. The fact that investors see a Fed pivot as the main reason to buy tells you what an immensely perverse incentive monetary policy is and how poor the macro and earnings’ outlook are.

Earnings estimates have been falling for 2022 and 2023 all year. The latest S&P 500 earnings’ growth estimates published by Morgan Stanley show a modest 8 and 7 percent rise for this and next year respectively. Not bad? The pace of downgrades has not stopped, and the market is not even adjusting earnings to the downgrade in macroeconomic estimates. When I look at the details of these expectations, I am amazed to see widespread margin growth in 2023 and a backdrop of rising sales and low inflation. Excessively optimistic? I think so.

Few of us seem to realize a Fed pivot is a bad idea, and, in any case, it will not be enough to drive markets to a bull run again because inflationary pressures are stickier than what consensus would want. I find it an exercise in wishful thinking to read so many predictions of a rapid return to 2% inflation, even less, when history shows that once inflation rises above 5% in developed economies, it takes at least a decade to bring it down to 2%, according to Deutsche Bank. Even the OECD expects persistent inflation in 2023 against a backdrop of weakening growth.

Stagflation. That is the risk ahead, and a Fed pivot would do nothing to bring markets higher in that scenario. Stagflation periods have proven to be extremely poor for stocks and bonds, even worse when governments are unwilling to cut deficit spending, because the crowding out of the private sector works against a rapid recovery.

Current inflation expectations suggest the Fed will pivot in the first quarter of 2023. That is an awfully long time in the investment world if you want to bet on a V-shaped market recovery. Even worse, that pivot expectation is based on a surprisingly accelerated reduction in inflation. How can it happen when central banks’ balance sheets have barely moved in local currency, reverse repo liquidity injections reach trillion-dollar levels every month and money supply has barely corrected from the all-time highs of 2022? Many are betting on statistical bodies tweaking the calculation of CPI (consumer price index), and believe me, it will happen, but it will not disguise earnings and margin erosion.

To cut inflation drastically three things need to happen, and only one is not enough. 1) Hike rates. 2) Reduce the balance sheet of central banks meaningfully. 3) Stop deficit spending. This is unlikely to happen anytime soon.

Investors that see the Fed as too hawkish look at money supply growth and how it is falling, but they do not look at broad money accumulation and the insanity of the size of central banks’ balance sheets that have barely moved in local currency. By looking at money supply growth as a variable of tightness in monetary policy they may make the mistake of believing that the tightening cycle is over too soon.

Investors should not care whether the Fed pivots or not if they analyze investment opportunities based on fundamentals and not on monetary laughing gas. Betting on a Fed pivot by adding risk to cyclical and extremely risky assets may be an extremely dangerous position even if the Fed does revert its pace, because it would be ignoring the economic cycle and the earnings reality. 

Central banks do not print growth. Governments do not boost productivity. However, both perpetuate inflation and have an incentive to increase debt. Adding these facts to our investment analysis may not guarantee high returns, but it will prevent enormous losses.

About the Author

Daniel Lacalle

Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020), Escape from the Central Bank Trap (2017), The Energy World Is Flat (2015), and Life in the Financial Markets (2014).

Information

Why Rate Increases May be Nearing an End

Posted on by phoffman@channelchek.com
Image Credit: Jernej Furman (Flickr)

Arguments Can be Made for Rates Being Too Low and for Rates Being Too High

The Federal Reserve has raised the Fed Funds rate from an average of 0.08% in January 2022 to its current 4.05%, and a likely adjustment to 4.25% to 4.50% tomorrow. Inflation, as measured by CPI and even the Fed’s favorite, the PCE deflator, has been showing a decreasing rise in prices. So investors within all affected markets are asking, how much more will the Fed raise rates?  Ignoring any suggestion that “this time it’s different,” I looked at US interest rates and inflation going back to 1962 and may have found enough consistency and historical norms to help determine what to expect now and why.

Are Increases Nearing an End?

I’ll start with the conclusion. The data suggests that the movement of market rates depends on whether higher current inflation is being caused by temporary or long-lived factors. The 10-year Treasury Note market believes current inflation is mostly temporary. This is shown by its yield, having touched 4.25% in late October, and then falling. The ten-year is now near 3.50%, despite the 0.75% increase in overnight rates implemented on November 2. If the combined wisdom of the Treasury market is reliable, this suggests FOMC rate increases are nearing an end. Perhaps one more smaller hike and then a wait-and-see period. The Fed would then monitor prices while past increases work their way through the economy.

 

Powell’s Concerns

At his last address on November 30th,  Fed Chair Jay Powell indicated he’d rather go too far (with tightening) and then reignite the economy rather than err on the side of not doing enough and having a bigger problem. The markets and the media largely ignored this, but it’s important to know what the Fed Chair believes is prescient and is sharing publicly.  Powell also said, “Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.” And then he said something very telling, Powell added, “It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”

Market Thinks Inflation is Temporary

But, the markets are overjoyed by the last two months of inflation data. Despite what the nations top central banker is saying. Markets may be right, but if they are wrong (bond and stock markets) spotting it early can help stave off losses. If inflation, which is lower than it had been, but not historically low,  proves more permanent, for example, if employers continue to have to bid up the price of workers, and demand for goods causes commodity prices to rise, then the Fed will have paused too early. This will lead to a more difficult challenge for the Fed as compared to tightening too much.  The data used in this article are from the Federal Reserve Economic Data (FRED) maintained by the Federal Reserve Bank of St. Louis.

Actual and Expected Inflation

The St. Louis Federal Reserve publishes a market estimate of expected average inflation over the next ten years.  It is derived from the 10-year Treasury constant maturity bond and 10-year Treasury inflation-indexed constant maturity bond.  It was first published in 2003.  Over 2003-2021, 10-year inflation expectation averaged 2.0%, the same as GDP deflator inflation.  During the second quarter of 2022, the expected 10-year inflation was 2.7%, or less than 1.0 percentage point above its 2003-2021 average.  In contrast, GDP deflator inflation was 7.6%.  A significant wedge exists between current and expected inflation.

Source: St. Louis Fed

The breakeven inflation rate represents a measure of expected inflation derived from 10-Year Treasury Constant Maturity Securities (BC_10YEAR) and 10-Year Treasury Inflation-Indexed Constant Maturity Securities (TC_10YEAR). The latest value implies what market participants expect inflation to be in the next 10 years, on average.

Beginning with the end of the last recession on April 1, 2020, the Treasury bond data used in calculating interest rate spreads is obtained directly from the U.S. Treasury Department.

Take Away

The Market’s expectation of 10-year average inflation is dramatically different from current inflation, even at inflation’s new lower pace. This implies the market believes it to be temporary.

If the market’s expectation of inflation is accurate, there is an average difference between Fed Funds and the PCE deflator of 1.6% (since 1962). The last read on PCE was October 2022 at 6%. Reducing this by 1.6 would provide a Fed Funds level of 4.4%. This level is in line with historic averages and likely where we will be after the FOMC meeting wraps up on December 14. This comparatively high rate relative to where we began the year may be considered neutral.

Will the Fed stop at neutral? Are the markets right? Powell said he’d rather err on the side of going beyond what is needed, which suggests the Fed will continue some. As for the markets, being on the side of the markets is how you make money, but getting out before trouble arises is how you keep the money. Markets are not always accurate forecasters and since economic behavior and debt levels tend to adjust slowly, prudent portfolio management suggests it is wise to keep an eye out for today’s interest rates still being too low.

Paul Hoffman

Managing Editor, Channelchek

Source

https://www.federalreserve.gov/newsevents/speech/powell20221130a.htm

https://beta.bls.gov/dataQuery/search

Cathie Wood Expands on Her Expectations of Deflation

Posted on by phoffman@channelchek.com
Image Credit: Singularity University (YouTube)

An Alternative View of Today’s Economy by Cathie Wood

Cathie Wood made the argument that investors comparing the current economic crosscurrents to the 1970s are developing forecasts based on the wrong data-set. Speaking at the Finimize Modern Investor Summit via video, the ARK Invest funds founder instead suggested the current economy and inputs are similar to a different period – she then made a case for her reasoning.

“If you go back to the 19-teens (1912-1922), then the period was very similar to the period we’re in today,” she said at the Investor Summit. That period featured a war, a pandemic (Spanish flu), and supply-chain problems. “It was the most prolific period for innovation in history,” she said, pointing to the disruptive impact of electricity, the telephone, and the car.

Wood explained that inflation went from 24% in June 1920 to -15% in June 2021. She made clear she isn’t forecasting deflation this severe; however, she is expecting year-over-year inflation to swing into negative territory, with prices going down. “What has happened during the last few years is going to flip, and we think that the market will flip back to a preference for growth stocks and our innovation strategy,” she said.

Wood also elaborated on a tweet she issued earlier about how deep the inversion was of the yield curve.

Twitter @CathieDWood

“That’s the bond market saying, ‘hello, Fed, are you watching?'” She said Federal Reserve Chair Jerome Powell is trying to be the reincarnation of Paul Volcker at a time when it’s not appropriate. “I think that’s a mistake because this is not a 15-year problem; it’s a 15-month one,” said Wood. She highlighted that commodity prices are tumbling, supply chains are improving, and companies are

Ark Invest funds have been positioned in a more concentrated waiting pattern while Wood waits for inflation dynamics to be supportive of innovation. She gave an example; the innovation fund, for instance, has been narrowed to 32 companies from 58, Wood said, as she highlighted that the firm has become less convinced China is supportive of innovation.

Take Away

It’s worth reviewing the differing opinions of several investors that have made above-average returns in their careers. While almost no one is always correct, there are many different right ways to make money in any market.

The Ark flagship fund is down 63% this year; in the past, Wood has indicated her funds’ time period to measure return is five years, not one. Perhaps investors with a longer holding period can garner useful ideas from her pounding the deflation drum, while investors with a shorter time horizon are concerned about inflation.

Paul Hoffman

Managing Editor, Channelchek

Crude Prices vs. Energy Company Prices –  Will the Gap Narrow?

Posted on by phoffman@channelchek.com
Image Credit: Mussi Katz (Flickr)

The Argument for Higher Oil Market Prices is Fairly Straightforward

The price of oil is near its 2022 low. This lower per barrel cost is normal when the commodities market perceives the economy as slowing or that it will slow. What is surprising is that the price is near the low for the year when the Chinese are easing Covid restrictions and will soon be requiring more fuel; at the same time, a Russian oil cap, which is sure to bring less supply to the market, was just instituted this week. In the meantime, energy producers, up 60.8% on the year, are not sinking at the pace of oil prices.

Source: Koyfin

Energy shares have been the big winners for 2022. And it is rare that they are flying solo, without the help of price increases of their underlying product. According to Bespoke Investment Group, last month marked the first time since 2006 that the S&P 500 energy sector has traded within 3% of a 12-month high while the price of West Texas Intermediate retreated more than 25% from its one-year peak.. 

The divergence has caught the attention of investors. Since drillers and miners tend to rise and fall with the prices of the commodities they produce, many expect the gap to narrow to its more historical norm. Most are looking for oil to rise rather than drillers to fall.

Pressures that could cause oil to rise include the EU winter season, the U.S. Strategic Reserves bumping up against depletion, OPEC+ keeping production quotas unchanged, and Western governments’ $60-a-barrel price cap on Russian crude. These, taken together, are expected to put upward pressure on per-barrel prices. The commodities market is not moving in accordance with these factors. Futures contracts for U.S. crude closed Monday 3.8% lower at $76.93 a barrel, its fourth-lowest settle of the year.

Working against the argument for higher crude prices is the expected slowing of world economies. The possibility of a recession in many global economies while central banks raise interest rates, is unknown. Any impact remains to be seen.

Paul Hoffman

Managing Editor, Channelchek

IRA Matching – Another Robinhood First

Posted on by phoffman@channelchek.com
Source: Robinhood.com

Robinhood’s One Percent Match Program is an Industry First – Can it Attract More Buy and Hold Users?

Robinhood (HOOD) has entered the IRA market and is offering a 1% match on each dollar contributed to a retirement account on its platform. For someone putting away $5,000 in a qualified account, the funds would also be credited with an additional $50. The thought on this new product is that this seemingly small amount could compound dramatically over the years into much more than the original incentive.

While Individual Retirement Accounts (Roth and Traditional) are standard brokerage offerings, Robinhood is a decidedly different animal than most. A high percentage of its 22.9 million users tend to view themselves as shorter-term traders or investors in highly speculative assets. This customer trait tends to buck the trend at other brokerage firms that see a higher percentage of assets parked in market-indexed ETFs instead of individual stocks. In one quarter of 2021, 26% of Robinhood’s revenue came from trading in Dogecoin, the cryptocurrency that started out as a goof on crypto.

Developing an account base with larger, more stable assets per account is important for the company’s development. Robinhood users generally hold less in their accounts than at other brokerage firms. Shortly before the company went public last year, the Financial Industry Regulatory Authority (FINRA) said in a report that the median Robinhood user had $240 in their account. A move toward longer-term savings that builds over time could help increase the average size. And it is important enough to the company that they decided they would compensate investors with the first-of-its-kind a matching program.

“We recognize that this is a pretty big moment for us as a company,” said Sam Nordstrom, an executive in product management at Robinhood. “Retirement is something that folks take very seriously, and we fully expect them to need to trust the institutions that help them save for retirement. So we’re looking to earn that trust over a period of time.”

What’s the IRA Match?

The Robinhood IRA Match provides an extra 1% paid by the brokerage firm. It’s not counted toward the account holders annual contribution limits and is typically available to invest immediately.

The IRA contribution limits for 2022 are $6,000 for people under age 50, which means they can earn up to $60 extra. For people age 50 and over, the limit is $7,000, which means they can earn up to $70 on top of their contributions.

Take Away

Developing a more diverse customer base by offering standard brokerage products has investment app Robinhood providing IRAs to its offerings on the platform.

In typical Robinhood style, they rolled out the offerings just before IRA season with a twist. And the twist may be just what it takes to earn new accounts and attract rollover assets from existing qualified money.

Paul Hoffman

Managing Editor, Channelchek

Click for Updated Information

Sources

https://www.irs.gov/taxtopics/tc557

https://www.barrons.com/articles/robinhood-stock-price-earnings-dogecoin-51629318854?mod=article_inline

https://www.barrons.com/articles/robinhood-ipo-stock-value-51625166659?mod=article_inline

One Way to Play Small Cap Stocks

Posted on by aweinsoff@channelchek.com
Image Credit: Eleanor (Flickr)

The Small Cap Effect Suggests Oversized Gains if You Weed Out Certain Stocks

According to a June 5th article in the Wall Street Journal, “small-cap stocks are priced for jumbo gains.” The Journal explains that small-caps have experienced lower average volatility than large-caps during periods of market stress. Examples are the 2013 “taper tantrum,” when investors turned bearish after the Federal Reserve said that it would reduce bond purchases; also the United Kingdom’s Brexit referendum in 2016; and the Covid-19 pandemic. This fact is counter-intuitive to what investors expect from what are considered the riskier securities.

The Journal reports that one prominent money manager predicts that the smaller companies will outshine large-caps by close to four percentage points a year over the next five years. They also report a large investment bank is even more bullish on small-caps for the coming decade.

What are Small-Caps?

Small-caps are most commonly defined as companies with lower-than-average market capitalizations. This is most often defined as between $300 million and $2 billion. However, the index that is often quoted to reflect small-cap stocks overall performance is the Russell 2000 Small-cap Index (RUT). The stocks represented in the RUT have a median market cap of $1 billion and the largest stands near $13 billion. Well outside of the range of the more common definition.

Small-Cap Effect

The small-cap effect was documented decades ago and demonstrates the propensity of small companies to produce higher average returns than companies over extended holding periods. The thought process includes the idea that small companies are riskier, so additional expected return is necessary to compensates investors for taking extra risk.

But the past decade has left the small caps with a lot of catching up to do. The large-company Russell 1000 (RUI) has beaten the small-company Russell 2000 by three points a year over the past decade, returning an average of 13.1%.

The lack of comparative performance is not because small-caps have been bad performers. Larger companies, particularly those at the very top, had a fantastic run during that decade. Now, there’s an ongoing debate over whether the small-cap effect is still valid, if it is, there is much catching up to do in terms of performance. Time will tell what direction and pace prices change moving forward. It is unknowable right now. What is knowable is that many small-caps are currently cheap.

According to the Wall Street Journal, The Russell 2000 is flirting with 20 times earnings, a hair above its long-term average and certainly not deep value territory. But weed out the index’s unprofitable companies and statistical outliers, and the price/earnings ratio drops to about 12, versus a long-term average of 15.

This adjustment to the index make-up makes sense for two reasons. One is that 33% of Russell 2000 members today have negative earnings, up from 20% a decade ago, and at a record high.  But there’s a bigger reason to exclude unprofitable companies when sizing up the Russell 2000: The adjusted P/E has been a better predictor of future returns than the unadjusted one, (based on a B of A analysis of data going back to 1985. Right now, the adjusted P/E has B of A to predicting 12% annual returns for small-caps over the coming decade. That’s five points more than it sees for large-caps. The analysts calculate that small-caps are 30% cheaper than large-caps now. This would be the biggest discount since the dot-com stock bubble more than two decades ago.

What do Equity Analysts Think?

On December 15th, 2022 – 9:00am EST there will be a rare opportunity to hear from analysts covering different sectors of the small-cap space. 

At no cost for investors, the well-recognized veteran analysts will highlight how they set their price targets and market ratings. And the underlying fundamental reasons to consider an investment. As an attendee, you can get further involved by submitting your own questions. And learn which stocks the research analysts may favor.

This is the season to set your sites on maximizing returns in the coming year and the years that follow. This event is online and free, courtesy of Noble Capital Markets and Channelchek.

Get ahead of your investments in the coming year by attending this special event, learn how by going here now.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.forbes.com/advisor/investing/small-cap-stocks/#:~:text=Small%2Dcap%20stocks%20are%20shares,pose%20higher%20risks%20to%20investors.

https://www.barrons.com/articles/small-cap-stocks-funds-51670023712?mod=hp_LEAD_1

https://www.channelchek.com/news-channel/wall-street-wish-list-an-investment-shopping-list-from-seasoned-analysts

Four Reasons Oil Prices Could Gain Upward Momentum

Posted on by phoffman@channelchek.com
Image Credit: Phillip Pessar (Image Credit)

The Odds May Again be Stacked on the Side of a Prolonged Oil Price Rally

Oil markets and the related energy industry have been cheered this year as the one clear winner, yet within the past few days, crude has brushed up against its low recorded at the start of 2022. The commodity has since bounced, and there are at least four reasons to believe that it will continue to rally.

On Wednesday, November 30, news that China will take steps to ease lockdown restrictions, a drop in U.S. oil supplies, a weaker U.S. dollar, and a signal of OPEC+’s intentions helped push crude prices up by more than 3.5%.

China

Major Chinese manufacturing cities are lifting Covid lockdowns, including the financial hub Shanghai and Zhengzhou (the location of the world’s largest iPhone factory). Renewed expectations that China’s economy may strengthen after being held back by restrictions on movement to contain Covid-19 helped lift prices. After lockdown protests last weekend, Chinese authorities reported fewer cases of the virus on Tuesday. Guangzhou, a city in the south of the country, relaxed some rules on Wednesday. Increased economic activity in China could come at a pace that dramatically increases the demand for oil and related products.

US Supply

U.S. petroleum stockpiles declined by 7.9 million barrels last week, according to reports from the American Petroleum Institute. Official figures from the U.S. Energy Information Administration (EIA) shown below indicate a declining trend that is unsustainable and will soon need to be turned around.

Source: EIA

The decline in the days supply is effectively borrowing against future stockpiles as there will need to be a time when this reverses, and more output-increasing stockpiles will add to demand on production.

U.S. Dollar

A weakening dollar has also helped enhance demand globally for crude by making contracts priced in the U.S. currency more affordable for overseas buyers. The dollar index, a measure of strength against a basket of six other major trading currencies, slipped 0.3% on Wednesday. It’s down about 5% in the past month.

While the effect of this FX change may not be felt by U.S. buyers, the added demand by requiring less local currency to translate into dollars effectively creates demand by virtue of its lower cost.

Source: Koyfin

OPEC+

The Saudis had been considering increasing their output to help soften price pressures and increase availability. This would occur when the cartel meets this weekend to decide output levels. It is reported that the meeting will not be in-person. When OPEC+ agrees to meet virtually, it tends to indicate they are not discussing any major changes to output targets.

Expectations of an increase in output had been built into the price; the new expectations are putting upward pressure on crude.

 Take Away

A number of factors have caused crude to trade off since late Spring. A number of forces are now stacked up that could push crude levels back upward. These include fewer lockdowns in China, a declining U.S. supply, the added global demand that will be attracted by a weakening dollar, and the new realization that members of OPEC+ are not likely to increase output limits. Additionally, there has been a looming concern as to how much supply will be taken offline with price limits that are to be placed on purchases of Russian oil early next week.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.marketwatch.com/articles/oil-demand-dollar-china-crude-51669810965?mod=markets

https://oilprice.com/Energy/Crude-Oil/Source-Dont-Expect-Any-Oil-Supply-Surprises-From-The-Sunday-OPEC-Meeting.html

https://www.eia.gov/petroleum/weekly/crude.php

Self-Directed Investors May Find Opportunities by Watching Insiders

Posted on by phoffman@channelchek.com
Image Credit: InsiderMonkey.com (Flickr)

Is it Better to Shadow Trade Insiders Rather than Congress Members or Fund Managers?

As tricky as the overall market has been, a new crop of investors that had been primarily index investors have spent the past 11 months gravitating more toward creating their own diversified mix of above-average probability stocks. One proven way to put the odds more on your side as a self-directed investor is to watch trends in insider buying. It was Peter Lynch of Magellan Fund fame who said, “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.”  To be sure, management only has so much control over performance, but they are likely to have greater clarity than anyone else evaluating their company.

Why Shadow Insiders?

Following insiders into stocks you otherwise are positive about is a form of shadow investing. Shadowing successful investors is a growing trend. There are websites dedicated to highlighting the transactions of investors like Paul Pelosi, Warren Buffett, Michael Burry, Cathie Wood, and others. But shadowing directors or key executives of publicly traded companies provides investors with much more current information – SEC Form 4 is used to disclose a transaction in company stock within two days of the purchase or sale. Compare the two-day reporting to institutional funds managing over $100 million that report 45 or more days after quarter-end on quarter-end holdings using SEC Form 13F. Or Congress-persons that can wait 45 days after a transaction to report it. Moreover, the insider is generally restricted to trading windows, so their holding time tends to be longer term. So their commitment level may be much higher than say a hedge fund manager like Michael Burry that may have purchased a security just before his 13F statement date, and then sold it a week later.

And the performance is above average. University of Michigan finance professor Nejat Seyhun, the author of “Investment Intelligence from Insider Trading” wrote stock prices rise more after insiders’ net purchases than after net sales. On the whole, insiders do earn profits from their legal trading activities, and their returns are greater than those of the overall market.

Current Example

I thought to write about following legal insider buying of stocks on your watch list after a link to a research note posted on Channelchek appeared in my inbox. It was on a company I follow and it highlighted legal insider trading by an executive.  The report, available here, reported that the CEO of an expanding company in the cannabis sector name Schwazze (Medicine Man Technologies), was adding substantially to his ownership of the company he runs. The note by Noble Capital Markets Sr. Research Analyst, Joe Gomes, said:

“In a series of Form 4 filings, between November 14th and November 23rd Schwazze CEO Justin Dye purchased 1,325,852 SHWZ shares at a cost of $2.36 million, or a per share average of $1.78. According to the most recent Form 4 filed on November 25th, Mr. Dye directly currently owns 1,368,062 SHWZ common shares and indirectly owns 9,287,500 SHWZ common shares through Dye Capital & Company.”

Schwazze (SHWZ) is up 42% over the past month.

How Do You Screen and Watch for Insider Buying Activity?

There are websites such as SECForm4.com and InsiderMonkey.com that aggregate SEC Form 4 filings and post them in a searchable, fully filterable online environment so you may search for characteristics you may prefer in your stock selections. While using insider activity, whether it be raw from the SEC or served up on online screening tools, here are four things to keep in mind to help hone your skills.

Some insiders are better than others. As a rule, directors tend to know less about a company’s outlook than top executives. Key executives are the CEO and CFO. The people day-to-day running the company are better able to assess risk of an investment in their company.

More insiders are better than a few. If one insider is buying in unusual amounts, it is a green flag to dig deeper. If several have begun adding to their holdings, it can be seen as a stronger signal.

People at small companies may have more insight.  At smaller companies, a higher percentage of insiders are privy to company plans, changes in strategy, and financials. At big corporations, information is more dispersed, and typically only the core management team has the big picture.

Stay the course. Insiders tend to act far in advance of expected news. This is in part because of trading windows and also to avoid the appearance of illegal insider trading. A study by academics at Pennsylvania State and Michigan State contends that insider activity precedes specific company news by as long as two years before the eventual disclosure of the news.

Take Away

Insider tracking takes some work, but the resources to monitor a list of stocks you are interested in do exist to make it easier. Investors that would prefer to build their own diversified portfolio rather than own an index fund may find that watching insider buys helps point the way toward stocks more likely to beat a particular index. Another Peter Lynch quote says, “Know what you own, and why you own it.” Following insider buying allows you to have a methodology where you do know exactly why you are in a position. And although I have no hard data, I’d guess over the past five years it has paid better to follow insiders’ reported trades rather than social media influencers’ suggestions for a trade.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.secform4.com/insider-trading/1622879.htm

https://www.channelchek.com/research-reports/25422

https://www.investopedia.com/articles/02/121002.asp#:~:text=Stock%20prices%20rise%20more%20after,those%20of%20the%20overall%20market.

http://mitpress.mit.edu/9780262194112/investment-intelligence-from-insider-trading/

The Week Ahead – Powell’s Address on Inflation & Economy, PCE, Beige Book

Posted on by phoffman@channelchek.com

Will the Fed Indicate an Altered Course This Week?

Economic numbers may take a back seat to Fed Chair Powell’s address on Wednesday and other regional Fed President addresses throughout the week.

The PCE, which is an inflation adjuster to GDP, is reported on the same day as the Fed Chair’s midweek address, the potential for volatility is high.  

Monday 11/28

  • 10:30 ET, Dallas Fed Manufacturing Survey, is expected to show general activity down 20.5 vs. down 19.4 the prior month. This would be the seventh straight reduction in manufacturing.
  • 12:00 ET, John Williams, the President of the New York Federal Reserve Bank, will be speaking. Although the NY Fed President has only one vote on the Federal Open Market Committee deciding monetary policy, the NY Fed tends to have more sway as the NY Fed President assumes the role of second after Chair Powell in the level of power.

Tuesday 11/29

  • 9:00 AM ET, The FHFA House Price Index is expected to have fallen 1.2 percent in September after falling 0.7 percent in August and 0.6 percent in July. August marked the sharpest fall and first back-to-back fall in 11 years.
  • 10:00 AM ET, Consumer Confidence for November 2022 is expected to come in at 100 vs 102.5 in October. The report measures consumers’ assessments of the labor market, business activity, and consumers’ own financial conditions. This could be one of the more important numbers of the week as consumer expectations and behavior can lead stock market movements and play into overall expectations as consumer spending is two-thirds of the U.S. economy.

Wednesday 11/30

  • 8:30 AM ET, GDP this will be the second estimate of the third-quarter GDP. The consensus is 2.7 percent growth. The previous estimate for the same period came in at 2.6%. The Personal Consumption Expenditures (PCE), which is considered the Fed’s favored measure of inflation, is expected to show a rise of 1.5% for the month vs. the previous 1.4% monthly increase. The PCE component of GDP may get more attention than the GDP itself since it is considered a measure of inflation.
  • 8:30 AM ET, The U.S. Goods Deficit is expected to narrow by $1.3 billion to $90.6 billion in October after narrowing by more than $6 billion in September to $91.9 billion. Changes in the levels of imports and exports, along with netting the two (trade balance), are gauges of economic trends here and abroad. These trade figures can directly impact all financial markets; however, they do this in how they impact the valuation of the dollar.
  • 8:30 Wholesale Inventories are expected to be revised downward to 0.5%. This follows a build-up in inventories in September. A decline could suggest supply-chain difficulties are increasing.
  • 10:00 AM ET, JOLTS consensus is for job openings to fall 10.4 million vs. 10.7 million in September. This number will be focused on as the September number was at a level that caused some to question whether the economy still has job shortages.
  • 1:30 PM ET, Federal Reserve Chair Jerome Powell will speak on the subjects of inflation and economic outlook; this could very well be the most market-altering event of the week. Watch it live by clicking here.
  • 2:00 PM ET, Beige Book released. A look at how each of the 12 Federal Reserve districts are reporting economic activity in their regions is important in this is a source of information the FOMC uses to make their decisions.
  • 3:00 PM ET, Farm Prices month-over-month is expected to have declined by 0.2%. Year-over-year the inflation contributor is expected to have risen 21%.

Thursday 12/1

  • 8:30 AM ET, Jobless Claims for the November 27 week are expected to come in at 235,000 versus 240,000 in the prior week. Employment is one of the Fed’s mandates; as such, any number that significantly varies from consensus could alter the markets thinking.
  • 9:25 AM ET, Dallas Fed President Lorie Logan is scheduled to give an address.
  • 10:00 AM ET, ISM Manufacturing Index was 50.2 in October; the ISM Manufacturing Index has been gradually slowing to nearly breakeven. November’s consensus is 49.9.
  • 10:00 AM ET, Construction spending is expected to fall 0.2 percent in October. This would be dramatic relative to September’s modest 0.2 percent gain.

Friday 12/2

  • 8:30 AM ET, The Employment Situation or Non-Farm Payroll is expected to rise by 200,000, which would compare with 261,000 as reported in October. October was the sixth straight month and eight of the last nine that payroll growth exceeded consensus. Average hourly earnings in November are expected to rise 0.3 percent on the month for a year-over-year rate of 4.6; these would compare with 0.4 and 4.7 percent in October.

What Else

There are more rumblings about the Fed easing up on how rapidly it is braking to tame an inflationary economy. The Powell’s words and promises on Wednesday, taken alongside of the other Fed President addresses may confirm a turning point – a tapering of the tightening.

Paul Hoffman

Managing Editor, Channelchek

Sources

www.econoday.com

https://www.federalreserve.gov/newsevents/calendar.htm

When Will Monetary Policy Finally Score?

Posted on by phoffman@channelchek.com
Image Credit: Pixabay (Pexels)

Why the Fed Needs to Gain Trust, Gain Momentum, and Gain More Yards

Monetary policy and its implementation is as much sport as science. Economics is actually a social science, so it relies on human behavior to mimic past behaviors as its prediction guide. But as in sports, victory is difficult if there is distrust in the coach that’s calling the shots (in this case Powell), or if there are people on your side that have reason to work against you, (an example would be Yellen). Consistency in blocking and tackling (doing the right thing) and not giving up, over time, wins games. Knowing what to expect from the opposing team (consumers) wins a healthy economy.

One repeated trait in monetary policy is that there is a lag between implementation (easing or tightening) and a change in economic conditions. It isn’t a short lag, and the impact varies. Since it could take more than a year for a policy change to begin to impact the economy, the Fed usually moves at a slow and measured pace in order to not overdo it.

The slow pace allows policymakers to observe the impact of their moves and change tactics (positions on the playing field) mid-game.  

Federal-Funds Rate During Tightening Cycles

Note: From December 2008, midpoint of target range. December 2015 hike excluded from 2016-18 cycle

Source: Federal Reserve

Over the past nine months, we have been in a tightening cycle. During this period, the Fed has raised rates by 3.75%. On average (since 1975), when the Fed has tightened rates, they are notched up by 5.00% over 20 months.

The Fed’s current pace is faster than average. This is because inflation took them by surprise, and rose rapidly. Putting up a strong defense against inflation that has been rampant is necessary to not be shut out and allow the Fed to gain control over the outcome.

Because one has to be able to reflect back more than 40 years to have experienced the Fed raising rates this fast. Many have lost confidence in its ability, and are in their own way working against a winning outcome.

Pace of Fed Hiking Cycles

Note: From December 2008, the midpoint of target range

Source: Federal Reserve

The stock and bond markets move in group anticipation of expected policy moves by the Fed. This has been more pronounced in recent years as the Fed has basically shared its expectations after each meeting, setting up for the next. Higher rates make bonds and bank deposits more attractive. Higher rates also weaken the economy and corporate profits, and that induces investors to move away from stocks and even real estate.

Bonds now offer the highest yields since 2007. The stock market may have anticipated what was to come as it peaked in early January of this year, more than two months before the Fed began hiking in March.

Fed Hikes and S&P 500 Bear Markets

Sources: Federal Reserve; Dow Jones Market Data

Sources: Federal Reserve; Dow Jones Market Data

Employment

The Fed is concerned with a wage-price spiral feeding on itself. It likely won’t be  satisfied that its tightening has been sufficient until it can be confident that it has avoided a wage-price storm on the economy.

Ideally, this would happen without unemployment rising. Soft landings took place in 1983-84 and 1994-95. But when inflation starts out too high, as it is now, unemployment usually rises notably, and a recession occurs.

Historically, this doesn’t happen until several years after the first increase. This time it is hoped it will be different, since the Fed is playing more aggressively.

Periods of Fed Hiking and Rising Unemployment

Note: The unemployment rate rose to 3.7% in October, up from the pandemic low of 3.5% a month earlier.
Sources: Federal Reserve; Labor Department

Inflation

Historically, inflation has only fallen to acceptable levels after unemployment has increased, and long after the first rate increase – the exact timing has varied. If the fall in core inflation (which excludes the volatile food and energy components) between September and October continues, and September proves to be the peak, the time between the first Fed increase and the high point of inflation will be one of the shortest of any Fed hiking cycle.

Often, the break in inflation has been accompanied by a recession. The economy receded in each of the first two quarters and then grew in the third. The changes in the inflation component in Gross Domestic Product may have borrowed from one quarter and have been additive to the next. The fourth quarter reading should help level the growth averages out to see if we were indeed in a shallow recession.

Proximity of Peak Inflation and Recessions to Initial Rate Hikes, from Year Hiking Cycle Began

Note: Inflation refers to core CPI.

Sources: Federal Reserve; Labor Department

Take  Away

As in many team sports, once one side gets momentum, they are difficult to stop . The Fed needs to gain the trust of the individual players in the economy in order to be successful. Saying one thing, then doing another, would undermine this trust. So far, despite the Fed originally being wrong about inflation, the Fed has done what it has said it would do. Stock and bond markets, which are a considerable part of the economy, have been slow to understand the Fed’s resolve.

It has been implementing the balance sheet run-off plan and raising rates toward a level it believes would equate to a future 2% inflation rate. Like so many other things in the social sciences, widely held expectations of the future become self-fulfilling.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.wsj.com/articles/move-over-inflation-here-comes-the-earnings-crunch-11668300124?mod=article_inline

https://www.wsj.com/articles/fed-raises-interest-rates-for-first-time-since-2018-11647453603?mod=article_inline

https://www.wsj.com/articles/feds-aggressive-rate-hikes-are-a-game-changer-11669006579?mod=economy_lead_pos5

www.BLS.gov