June 28, 2023: Because the Fed intends to carefully proceed by looking at downside (recession) risks versus inflationary risks, we can expect them to try to avoid causing a recession. But, recent strong economic activity in areas such as capital goods manufacturing, housing construction, strong service sector and a still fairly resilient labor market mean that a recession would be relatively more difficult to accomplish. This gives the Fed ample room to pursue it’s anti-inflation goal. Inflation is still too high: About 3% above the 2% target, depending on what measures you look at.
Thus, we can expect the Fed to increase the discount (short) rate some more. Given that inflationary expectations must be contained so that businesses will quit marking up output higher than necessary and thereby causing inflation, the Fed should be expected (based on the Taylor Rule) to get short rates up to where they are above the actual inflation rate by about one to two percentage points. That would actually require another series of quarter point bumps in the 4 to 8 range.
The bottom line for investors is that the end of this long tunnel of dismalness and despair may be in sight, yet still be a ways off. In the meantime, the market will have several more short-lived rallies followed by profit taking, as we just experienced. Eventually, one of these rallies will be for real — and you don’t want to be out of the market when that happens — but for now be patient.
There are actually some growth stocks to consider such as: HUBB, PKOH, KMT, ENS, FELE, RRX, and CASY. Growth and dividend stocks you might also consider include: EPM, MDC, AROC, IBM, CCAP, CTO, HRZN, PFLT, and SBGI. The previous 3 months recorded the best ETF performance from: XNTK, IYW, SOXX, IGM, and XLK. In general, I’d stay invested and look to take profits after any short rally, but then be sure to re-invest theme in a “rinse-and-repeat” fashion for about the next 4 – 6 months or so. In the meantime I’ll wish you good investing!
July 13 update: With a better than expected CPI and PPI read than was expected, all expectations for future FED rate hikes shift down. In other words, the lower inflation readings cause the discount rate to be relatively higher now than before. Thus, the number of future rate hikes is reduced significantly. The latest readings lower inflation about 1 – 1.5 percent making that discount rate about 1 – 1.5 percent above the current inflation rate, thus the target rate for the discount rate to reduce inflationary expectations is nearly met.
All this sounds rosy but corporate profits have been in decline for about a year. All else held constant, this pushes up P/E ratios and tends to short-circuit any rally that pushes up prices. Until the downward corporate earnings trend bottoms and an uptrend begins to develop, any stock market rally should remain suspect. Given that inflation trends remain downward, attention should be shifted more toward corporate earnings. Any earnings driven rally is like catching a good wave. In the meantime, hang loose!
