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The Fight to Bring Down Inflation Will Continue to Shape the Market Narrative

Inflation numbers continue to be the central issue shaping the market narrative. Last week’s market rally is based on the "not yet substantiated" narrative that inflation numbers will come down sooner and will necessitate less drastic action on the part of the Federal Reserve. In the short term, it's a speculative narrative.

The markets are forward looking so speculation is inevitably a component of how markets operate. However, the real determining factor will be the hard inflation numbers. Is inflation trending downwards? To answer this question will take several consecutive months of declining data to validate. Until such time, the Federal Reserve has no incentive - after miscalculating this issue through 2021 - to operate less hawkishly. Its credibility is on the line. As a result, they will look to declining inflation numbers over several consecutive months until they lighten their rhetoric and along with it, rate hikes. Until then, the Federal Reserve has no reason to veer off its already communicated path of more aggressive interest rate hikes.

The daily question and commentary that is in the news headlines - whether we will see a recession or not - is largely dependent on the still "unknown" question of "how long" it will take to bring inflation down and "how high do rates need to go for that to occurr"?

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When Markets Fall, Who do you Listen to?

When markets fall, who do you listen to? This may seem like an odd title for a blog post, but it is an important one from a pyschological, health and financial well being standpoint. When markets fall and the economy experiences a down turn, the mainstream media highlights worst case scenarios and how bad everything can get. It can make your stomach churn if you have money in the markets, even if you have gone through such events in the past. The media is highly trained on how to illicit response with headlines that make you want to read them. That is how they make their money. It is also built into human pyschology that any danger signals trigger the pre-historic or primordial functions of the brain that are about survival. Add a terrible war in Ukraine and ongoing economic cold-war with China and you have a recipe for doom and gloom.

Reading the daily media headlines can be bad for your health. As Baron Rothchild once said "Buy when there is blood in the streets". That is of course much harder to do for the very reasons we are just referencing. Our brains and bodies are trained to "flee" danger, and not walk into it for good reason!

Who do you listen to or turn to when markets are falling is an important question. When you have a professional seasoned financial advisor, you have an objective party to speak with who can share their perspectives about bear and bull markets over decades of experience. When you are in the midst of a bear market, it seems like it will never end. Likewise when you are in a bull market it seems like it will never end. Both statements are false however. No Bull or Bear market is permanent.

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Recession or Not? That is the Question

The speed at which the economy has nose-dived from optimism to pessimism has taken a lot of people by surprise. That's the impact the Federal Reserve can have on the markets. Consumer confidence is fickle so when the daily news is filled with fears of recession and declining markets it impacts people in a way that causes people to spend less: The Nasdaq is down over 31% from it's highs and this along with all the media headlines of "recession" is generating a more fearful and less optimistic mood.

SNAP just anounced a significant revision in its profit forecasts due to macro economic conditions. Advertising revenue is down.

The mood on the street is somber and consumers are concerned. The critical question is what impact will this decline in consumer confidence and demand have on inflation? Will inflation numbers trend down? If they do, the current economic news may provide sufficient impetus for the Federal Reserve that they need to walk and talk a softer line and send some easening signals, such as for example, that rate increases may be sufficient.

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Navigating The Rising Tide of Interest Rate Hikes

The Fed is Waking Up and Is putting its foot on the brakes!

“Hindsight says we should have moved earlier. . . . But there really is no precedent for this.”  Fed Chair Powell, March 3, 2022

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Fear of Recession and The Yield Curve

The Yield Curve inverting has been the most accurate predictor of the economy tipping into a recession for the last 50 years. Typically, it takes about 6 months from the time the Yield Curve inverts for a recession to kick in. So, what exactly does an "inversion of the yield curve" mean? An inversion of the yield curve is looking at and referring to the differences in interest rates being charged by banks over a 2 and 10 year lending horizon. Economists also look at the 3 and 10 year lending rates as well.

Typically banks will charge a lower interest for a short term loan than for a longer term loan. Banks are incentivized to lend out at higher interest rates over a longer term loan period. However, when the 10 year interest lending rate is less than the 2 year lending rate, banks have less incentive to lend. This is known as the "yield curve inversion" when the longer term 10 year lending rate is less than than the 2-year rate. It does not happen often but when it does, it has been a good predictor of an upcoming recession for over 50 years. 

The spread between 10-year and 2-year Treasuries has fallen from 0.89% in early January to just 0.18% on March 21. So while we are close, we are not there yet.

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