December 21: We appear to be near the bottom of the current business cycle. It’s a very shallow bottom with no clear signal as to when corporate profits might also bottom out. The upside will be characterized by slow growth and stock prices that become overvalued quickly during rally’s and lead to frequent bouts of profit taking and stock repricing. In fact, this scenario has just occurred.
Slower economic growth is partly a result of the Fed’s interest rate policy of slowing aggregate demand, but also due to our ever growing mountain of government debt. The Fed has mistakenly assumed a Phillips Curve trade-off between inflation and the unemployment rate. The idea is to decrease aggregate demand through rate hikes and thereby reduce inflation at the expense of the unemployment rate. This hasn’t happened (no unemployment rate increase) because there hasn’t been a Phillips Curve for over 25 years. Inflation has for the most part come down because aggregate supply has recovered from the Covid-19 pandemic.
Technically, rate hikes signal the direction of monetary policy which, in turn, entail the Federal Reserves Open Market Committee selling assets such as treasury bonds to soak up the money supply and bring down inflation. The Fed never did this. Instead, it simply let its shorter term bonds mature and role off its balance sheet which reduced the money supply only a very little. Now that it has weakened the economy through rate hikes, much more of its balance sheet debt will begin maturing and rolling off the Feds balance sheet and will need to be refinanced at much higher interest rates. As we face this mountain of debt rolling off the Feds balance sheet, it will continue to reduce the money supply as a kind of passive monetary policy and, at the same time, compete with private sector investment when it is refinanced. Less private investment will, in turn, lead to slower profit and economic growth.
The problem the Fed has is that if it tries to monetize (buy back) this debt to keep rising interest rates in check it will increase the money supply and inflation. The last time the Fed tried to monetize debt to hold down interest rates was in response to the G. W. Bush deficits. The increase in money supply caused the stock market and real estate subprime asset bubbles that subsequently burst and led to the Great Recession in 2008.
With this in mind, I’d try and keep my stock investments diversified and target technology and communication services on the positive side. At the same time, I’d also target defensive stocks in the consumer necessities, health care, and utilities sectors.
The growth stocks I picked for this month include: VTSI, CASY, GME, LMB, CAPL, NGL, SUN, WES, SHEN, REX, ACDVF, AMPH, EME, PLAB, and AVDX. For dividends and growth: BLX, EC, GGAL, RWAY, and SUN. Over the previous three months, the top ETFs were: SMH, SOXQ, SOXX, FTXL, and QTEC. As always, I wish you good investing, and also a Merry Christmas!
