Weekly eLetter 2/3/2023 – Jay Powell Said ‘Disinflation’ – a Lot!
The biggest problem with having the Fed be the dominant element in market behavior is that it often results in bad news being seen as good news and vice-versa. Unemployment going up? That’s good news. Permits to build new homes dropping? That’s good news too. Retailers reporting less store traffic? More good news. This upside-downiness exists because investors see all of those as things that will perhaps influence the Fed’s thinking on interest rates. This focus on rates shoves aside the amount of importance paid to things like GDP Growth, corporate earnings, expanding CapEx, and so forth. While this may seem Machiavellian, there is legitimate reasoning behind it.
Borrowed money incurs an interest expense which must appear as a line item in any company’s operating and P&L statements. Since most companies, especially really big ones, rely on having open lines of credit with lenders, the costs of that borrowed capital is something that needs to be kept under control – just like any other line-item expense. A line item for ‘Interest expense’ may become pernicious if it becomes beyond the control of the company. If the Fed is raising base rates at the banks, it won’t be long before that ‘Interest expense’ line item also increases. In inflationary times, these dynamics can quickly take center-stage. And, if you add that to supply-line issues and ‘extra’ government spending (mostly Covid related) you have a volatile economic cocktail resulting in rapid inflation. Collectively, that explains why 2022 was such a dismal year for the markets.
On Wednesday of this week, Fed Chief Jay Powell spoke some near-magic words. As part of an answer to a question, from Reuter’s reporter Howard Schneider, Powell said “We can now say, for the first time, that the disinflationary process has started. We can see that.”
Holy cow! Does the Fed think that the inflation monster is being brought under control? Powell actually used the word ‘disinflation’ about 12 times during his press meet. Now, it’s important to know that disinflation does not mean de-flation: Prices are still rising but it is the rate of the rising that Powell now thinks has slowed.
Let me add one more thing that I think is very important: For months now, a key question has been ‘will the Fed be able to engineer a ‘soft-landing’ or will if fail and instead induce a recession?’ The pundocracy and now, seemingly, the Fed itself is tending to think that the likelihood of any recession at all is growing quite small. Well, I must say, ‘we hope so’.
Ron’s Market Minute — As January Goes, So Goes the Year
Now that January is behind us, you’re likely to hear prognosticators remark that ‘As January goes, so goes the year’. Well, January was up, does that mean the year will be an ‘up’ year? Well, as Yogi Berra famously said, “Making predictions, especially about the future, is hard.”
Sam Stovall, chief market strategist at CFRA offers this: “Since World War II, if the market is up in January, it has continued to rise in the remaining 11 months of the year more than 85% of the time and average gain is about 11.5 %.”It is important to note that high returns in January do not CAUSE high returns for the next 11 months. They just give stocks a little head start, and so the rest of the year has to lose more to finish the year down. Or think of it this way: The months of February through December are NOT higher because January was. Also, historically US stocks have ended UP in about 75% of the years; they often have positive years, even when January ends in a loss. (Sources: Thomson Reuters and S&P 500 Index: https://www.capitalgroup.com/individual/planning/investing-fundamentals/time-not-timing-is-what-matters.html
Here are some numbers for you keep in mind: In 36 of the years since 1929 the S&P Index* had negative January’s and then stocks went down in 20 of those years, or about 55% of the time. (Source: Howard Silverblatt of S&P Dow Indices) The takeaway is that a loss in January predicted a loss for the full year only a tad better than a coin flip would have done.
And our takeaway is that the phrase ‘as January goes, so goes the year’ has no meaningful ability to predict anything, except perhaps that someone is trying to scam you.
Two things are certain at this point. January was up, and we’re happy about that, and we need to remember that the bulk of the year is still ahead of us.
Ronald P. Denk, CFP®
Denk Strategic Wealth Partners
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*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.
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