Dow Jones Industrials 31,288.26 -0.16%, S&P 500 3,863.16 -0.93%,
Nasdaq Composite 11,452.42 -1.57%, US Ten Year 2.918%, West Texas Intermediate $97.42
If you have been following my Weekly Market Update you may recall my skepticism in the Spring of 2021 when both Federal Reserve and Administration officials were insisting week after week that inflation was “transitory. ”We have seen how that unfolded:
It gives me no pleasure being right about this issue when client portfolios decline in value because of the federal government’s undisciplined monetary and fiscal policies. The Fed’s delay in raising short term interest rates and reducing its balance sheet to combat inflation in the face of surging inflation that began a year and a half ago is almost unexplainable. But the central bank was in a quandary; had it done so it would have been at cross-purposes with the government’s March 2021 “American Rescue Plan,” which added another $1.9 trillion that the Fed had to put on its balance sheet. That spending binge was hardly necessary, given the economy’s 4.1% GDP growth rate in the fourth quarter of 2020 as it rocketed out of the Covid-19 shutdowns. Better late than never that Federal Reserve has rediscovered its alleged independence from political pressure. The June inflation report from the Bureau of Labor Statistics of 9.1% has led to interest rate futures indicating a possible 100 basis point increase in Fed Funds at the July meeting. The 11.3% jump in the Producer Price Index released yesterday only fortified that. To reduce demand, which is out of balance with constricted supply, the Federal Reserve has no choice but to dramatically raise interest rates. And that may lead to recession. First quarter GDP was a negative 1.6%. The Atlanta Fed is estimating a 1.9% drop in GDP for the second quarter. The economic outlook is not good. These unfavorable conditions can continue for months. For bond investors, keep your duration low. That means favoring shorter maturities and bonds that have higher coupons, until interest rate increases are over. Focus on investment-grade corporate paper, although a sprinkling of high yield bonds by those willing to take on the added risk can enhance income and total return. But be wary of lower-rated corporate debt of issuers whose business may be vulnerable to a slowing economy. With the dollar climbing to highs against foreign currencies stay with dollar-denominated debt. For stocks, with the Euro and Yen reaching long-term lows against the dollar US equity securities should outperform developed overseas stocks. Emphasize equities with secure dividends and prefer those that pay more than the S&P 500’s yield of 1.66%. That could mean consumer staples stocks like food, beverages and toiletries, health care companies including pharmaceuticals and health care equipment, and energy companies, notwithstanding the latter’s retreat from prices that peaked a month ago as crude and natural gas surged. The flat yield curve will continue to hamper banks, recessionary fears will pose challenges for industrial and technology companies as capital spending declines and will similarly affect Consumer Discretionary stocks as households reign in spending. If you have any questions or would like to discuss these topics, please reach out to us! CONFIDENTIAL AND GENERAL NOTICE: |
