Weekly eLetter 3/3/2023 – Great News: Fed ‘Acutely aware’.
If you noted a tinge of cynicism in our headline, good for you. Your eyebrows might find a sympathetic rhythm with ours.
Via a press release we learn that the Fed is clearly of the opinion that it is still they who occupy the driver’s seat vis-à-vis the U.S. economy. From the report:
“The U.S. Federal Reserve is “acutely aware” of the challenges high inflation poses to the economy and is “strongly committed” to its 2% target for price increases, the central bank said on Friday in its latest semiannual report to Congress on monetary policy and the economy.”
The document, largely a backward-looking summary of recent economic developments and Fed policy meetings, noted what have become the dominant themes for Fed debate – a labor market where workers remain in short supply, economic growth that likely needs to slow further to temper price hikes, and inflation that remains “well above the Federal Open Market Committee’s objective.”
“In response…the FOMC continued to rapidly increase interest rates and reduce its securities holdings,” the report said, and also “anticipates that ongoing increases in the target range will be appropriate.”
The document noted that U.S. financial conditions have tightened since the Fed’s last report to Congress in June and hinted that the impact of monetary policy was intensifying in some corners of the economy.
Business loans by banks grew through 2022 “but decelerated in the fourth quarter,” the report said. “Some indicators of future business defaults are somewhat elevated.”
Household loan delinquency rates were rising, and mortgage issuance “continued to decline materially.”
Fed Chair Jerome Powell will discuss the report and Fed policy in back-to-back congressional hearings next week, appearing at 10 a.m. EST Tuesday before the Senate Banking Committee and Wednesday at 10 a.m. before the House Financial Services Committee.
One point we wish they – the Fed – had included in their comments was a view on where we are on the time line of excess liquidity and the absorption of that liquidity. While the Fed is still focused on a ‘need’ to drag the economy down – as is their strategy to defeat inflation – we would be more encouraged if they recognized the ‘pig-in-the-python’ problem of money supply which, by the measure of M2, is falling dramatically. That’s good thing – since the very root cause of inflation is too much money chasing too few goods – reducing the output of the money-printing machine will have the greatest effect on reducing inflation.
We have some concern that rising mortgage delinquencies and increasing credit card balances will, if the trend is sustained, become a serious drag on consumer confidence and spending. That would not portend a bright future for equities. However, our job is to always protect our client’s interest and find the best balance offered in, and by, every situation.
Ron’s Market Minute – Whiplash!
I believe most everyone has heard the phrase ‘The trend is your friend’ which means that all one needs to do is determine what the trend of the market is (up or down?) and follow it. A piece of cake. Sometimes.
But the market has been a tough place for trend-followers since the beginning of January 2022 when we experienced a bearish trend signal. Let’s simplify with this chart.
The chart illustrates that daily price of the S&P 500 Index over the past twelve months. Each day’s indicator shows the range of price of the index for that day. You’ll note that we’ve drawn a blue line across the chart from left to right. This is the 200-day moving average of the price and is one of the most widely followed indicators of the trend of the market. Most technical study courses begin with this indicator as it’s easy to follow (sometimes). When the price of the index is ABOVE the line the market is said to be in an upward trend, and when it’s BELOW the line it’s said to be in a downward trend. An investor that follows this trend indicator would then be IN the market when the trend it up and OUT OF the market when the trend is down. A trend continues until something changes.
In an ideal world, the trends tend to be long-lasting which allows investors to hop on the main trend and invest into the market or avoid the downtrend and step aside. But alas, it is not an ideal world much of the time. And of late, there have been rather more crosses above and below the line than investors would like to see. This frequent crossing above and below an indicator is known as ‘whiplash’. It causes us, as portfolio managers to invest in a holding only to find that, in short order, we have a signal that says it’s time to avoid that particular holding, or even to perhaps avoid the ‘market’.
So, the point of this is: if prior signals are resulting in whiplashes, why should we respect the signals now? (Yes, you have probably been wondering about this!)
Whipsaws are a part of the process for trend-following indicators. We can reduce the number of whipsaws by smoothing some of the lines, but we cannot totally eliminate (or even illuminate) them.
Traders and investors are always looking to catch the big main trends but to do so they must learn to live with the whipsaws. It is an occasional headache and is a cost of doing business. We never know when a signal is the beginning of a long, profitable trend, or merely a whipsaw. In order to catch those profitable trends, we must follow the indicators and invest when they indicate that a current trend COULD BE the start of something useful.
Ronald P. Denk, CFP®
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite D406A
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
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