Published May 6, 2022

Bull markets don’t die of old age. According to an oft used axiom, “they are murdered by the Fed.” The Federal Reserve has to get its policy just right in order to avoid killing the market. The problem is that getting it just right – like for Goldilocks, “not too hot, not too cold” – is akin to a fairy tale.

Coming to the end of a long-term bull market the Fed faces many challenges in carrying out its dual mandate of full employment and inflation control. Fed Chair Jerome Powell addressed this in his recent report on the vote by the Federal Open Market Committee (FOMC) to increase interest rates by 50 basis points, saying the Fed governors will continue to evaluate employment and inflation data before they commit to the timing and amounts of future raises.

Currently, inflation is running much higher than the Fed target rate of about 2 percent, yet its tools for fighting inflation are limited. With inflation running hot, the Fed has opted for a moderately aggressive interest rate policy, with more rate increases forecast. Such actions are challenging to the market and threaten economic growth. Without the rate increases, however, inflation will go unchecked.

Inflation can be a serious threat to the economy and economic growth, as history has shown. Runaway inflation, such as seen by Germany in the late 1920s and early 30s, can have serious social and political dislocation effects in a country. Revolutions have been fought over the price of bread. The resulting political instability has allowed demagogues to come to power.

Government spending is a strong contributor to inflation. The only thing the Fed can […]

Published April 8, 2022

The market has come not just to a fork but a crossroads.

On the one hand, there is a war in Europe that is roiling stock markets everywhere.

On the other, we have inflation leading the Federal Reserve to raise interest rates.

The war

Vladimir Putin’s declaration of war on Ukraine not only caused specific damage but also upset markets across the globe. In creating chaos in financial markets and on the ground, the war is threatening to undo the global connections created since World War II. Mutual defense pacts and commercial agreements have been tested.

As of this writing, it is not clear if the war will become a global conflict. Spread could happen if the U.S. or other NATO members and Russia come into direct conflict.

Ukraine would like the U.S. to take a more active role in the conflict, but the U.S. has so far been reluctant to escalate the situation. China remains a wild card.

At this moment, China and Russia appear to be friends. That could change. They have had border conflicts in the past. Furthermore, the price of friendship with Putin’s pariah state could be higher than the Chinese want to pay. However, China aspires to be the global leader, upending the role the U.S. has enjoyed since World War II. So, if the Chinese see an opening to further their ambition, they might take it. The U.S has made it clear that it wants China to stay out of the fray. The U.S. is not as persuasive as it once was.

If the war does spread, we can expect it to become a long and protracted struggle. Can Ukraine survive in such a […]

Published March 11, 2022

As if the Federal Reserve, struggling with elevated inflation, did not have enough on its plate, there is now a war in Europe after 83 years of peace.

Historically, Europe suffers a war about every 50 years or so. Countries there just don’t seem to be able to keep the peace. Too many countries and not enough space. However, after the horrors of World War II, with the threat of atomic Armageddon and the benefit of the American nuclear umbrella, Europe found a way to peace. That interlude was broken when Russia invaded Ukraine. Why Ukraine and why now, you may ask?

Ukraine is a rather large territory by European standards and therefore provides more living room. Hitler found it inviting in his search for Lebensraum. Putin finds it so now too; plus Ukraine is a breadbasket for Europe, and provides many commodities that Russia finds attractive.

Ukraine has historically shipped these commodities from its 18 port cities on the Black and Azov seas, which Putin is currently blockading and attacking. If he is successful in taking them, Ukraine will be blocked from shipping its products directly to buyers. Putin’s invasion and appropriation of the Crimean peninsula in 2014, unopposed by the West, was his first step in implementing this strategy. According to Reuters, Ukraine in 2022 was predicted to account for 12 percent of global wheat exports, 16 percent of corn, 18 percent of barley and 19 percent of rapeseed, with much of it going to middle eastern countries already hard-hit from diminished food supplies.

Ukraine also houses several nuclear plants, including the largest nuclear power plant in Europe, which like Chernobyl, is just across […]

Published February 11, 2022

The market finally hit a pothole, falling in and almost breaking an axle. Rising interest rates, elevated inflation and a hawkish Federal Reserve rattled the market in January; big tech stocks were the hardest hit. In intraday trading during the month, according to the New York Times, the Nasdaq fell 18.5 percent from its November high and 16.3 percent for the month. There was some recovery, however; by the end of January the Dow Jones was down 3.3 percent, the S&P was down 5.6 percent and the Nasdaq was down 8.98 percent.

The market had lived in fear of the Fed for some time. But when the minutes of the board’s December meeting were released, suggesting a more hawkish tone than was expected, the market bears stepped on the accelerator. The Fed minutes suggested that interest rate increases would come sooner than market pundits anticipated. The minutes also warned that the Fed was considering reduction of its balance sheet, thus shrinking the money supply and so further tightening credit. Bond yields trended higher, to the detriment of both bond and equity markets.

2022 is the Year of the Tiger, according to the Chinese zodiac. The Year of the Tiger exemplifies courage and the routing of evil. The market started the year in need of a new tiger in its tank.

That the Fed was supporting higher rates and tightening of the money supply should have been no surprise to markets, as the Fed had been telegraphing these moves for some time. Nevertheless, the reality was hard for the markets to hear. Except for energy (up 17.07 percent), all industry sectors closed the month with losses.

The […]

Published January 7, 2022

In spite of rising numbers of virus cases and threats of interest rate increases fueled by inflation, the market has powered forward. For the first time in five years, the S&P 500 outperformed the Nasdaq. The S&P in 2021 posted a 26.89 percent gain.

Still, the virus has been disruptive in various sectors of the economy. Especially hard hit were travel, leisure and entertainment. Technology companies benefited, as businesses sought to operate more efficiently.

The world appears to be having difficulty vanquishing the COVID-19 viruses, and as soon as we get an upper hand, a new strain crops up. Perhaps that is to be the way of the future. A knockout blow appears to be elusive.

The mutating virus also is causing problems for logistics and planning, and thus cost increases. Prices for many things are going up. For a long time, the Federal Reserve considered those price increases as transitory, but the board eventually capitulated and decided to raise interest rates to counter inflationary pressures. The market does not like inflation, but it doesn’t like higher interest rates either.

The Federal Reserve previously raised interest rates late in 2018, in the waning days of the longest-lasting economic expansion in U.S. history. It didn’t take long for the Fed to rethink its increases, and it was forced to roll back the benchmark rate all the way to zero, as the economy went into a shocking tailspin. So, are we to see a repeat of the prior experience? Some people think the Fed can tighten things multiple times before the economy suffers. So far, the markets have been holding up. The coming rate increase has been well […]

Published November 5, 2021

The S&P 500 rose 6.9% in October in spite of negative news, its best October performance in six years. Disappointing earnings from the likes of Amazon and Apple could not overshadow the strength of the overall market, with more than 80% of stocks meeting or exceeding earnings forecasts. Supply chain interruptions are the cause of revenue misses at both Apple and Amazon, costing Apple $6 billion in sales in the quarter. Interest rates ticked up, but the yield curve did not invert (when short term rates become higher than long term rates), which is usually a sign of a recession. No such sign is apparent.

In short, there are many reasons to sell stocks, but one good reason to buy: stocks are going up. With the market up strong for October, it is now entering the historically best three months of the year for stocks.

Even the pandemic seems to be winding down. Nationally new cases dropped below 75,000, less than half the rate in August. While no cymbals are crashing, the virus appears to be subsiding. Will it experience an uptick during the northern hemisphere traditional cold and flu season? Is the virus becoming endemic and we learn to co-exist? Time will tell. President Biden’s economic package has yet to affect the economy, but if the stimulus comes, it should have a positive effect, in spite of the massive tax offsets. Employment numbers in October exceeded expectations, with many workers trading up to higher paying jobs, thereby increasing their purchasing power. Increased purchasing of things as opposed to services has resulted in supply chain disruptions and increases in prices for things, reversing a […]

Published December 10, 2021

A new strain of the coronavirus and rising interest rates are taking their toll on the market.

With the S&P 500 up 23.2 percent year to date through Nov. 30, the U.S. equity market hit a speed bump. At the end of November, the market dropped sharply, as fears about a new strain of the virus appeared. Although the market recovered in ensuing days, Federal Reserve Chairman Jerome Powell mentioned accelerated credit tightening and increased rates, just to put an exclamation point on the drop.

A new strain of virus is especially worrisome to the market because COVID has already demonstrated the damage it can do to the economy. Rising interest rates are negative for the market as well. It is often said that the job of the Fed is to take the punch bowl away at the end of the party. It is also said that bull markets don’t die of old age (ours is 11 years old), but that they are murdered in their bed by the Fed.

The Fed has been talking more about interest rate increases. Board members have removed “transitory” as a modifier for inflation. Increased virus activity could mean fewer workers and more friction in the supply system, resulting in more inflation. The Fed has pledged to give ample advanced warning for any rate increase. Fed futures are showing summer as a likely date for increased interest rates, so any rate increase signals should come soon.

The CPI reflected more inflation in November. The job market is tightening. The Department of Labor reported a 4.2 percent unemployment rate in November. Full employment is usually considered to be between 4 percent […]

Published October 8, 2021

Stocks ended the most recent quarter with the worst month since March 2020 but recovered some lost ground on the first day of the new quarter.

Plagued by a host of issues, the S&P suffered its worst month in over 10 years.

The virus continues to confront the economy with no end in sight. As this virus continues to circulate and mutate, it will wear on the country. Other viruses will follow, as they always have. Exhortations from the central government will not be enough. The impact of this virus on the workplace and schools adds uncertainty to the economy, making Federal Reserve and budget decisions harder.

Interest rates are rising. That makes bonds more attractive to hold and diminishes enthusiasm for equities, causing a big sell-off in tech stocks.

Logistics become harder as the virus roils the workforce. Supply chains, in general, are disrupted due to factory closures and skilled labor shortages around the world. In particular, microchips, a necessary product of manufacturing today, are not being produced in quantities needed.

Inflation is haunting efforts to plan for the future. Federal Reserve Chairman Jerome Powell concedes that inflation will be with us longer than expected. Even dollar stores, which advertise everything for a dollar, are becoming dollar-and-a-quarter or dollar-and-fifty-cents stores, as the costs of goods rise.

Elizabeth Warren, a prominent Democratic senator, threatens to oppose Chairman Powell’s renomination. The financial markets do not like uncertainty, and Powell is a known quantity.

Congress has experienced stalemates over the deficit and debt ceiling increases and so is unable to plan for the budget, and budget goals cannot be met. Capital markets are very worried about a failure to increase the […]

Published September 10, 2021

It took the S&P 500, a proxy for the U.S. stock market, 354 trading days to double in value from its 2020 bottom. That was the fastest bull market double since WWII. Usually, it takes a bull market 1000 days to reach that milestone, according to CNBC analysis.

What powered the rally? Relief from the pandemic ignited the rally, as people ached to get out, liberate themselves from virus-related constraints (however misplaced) and spend money.

In 2020, the Federal Reserve slashed interest rates to near zero and released $120 billion in emergency bond purchases in response to the fastest drop in S&P 500 history. The federal government also injected trillions of dollars in COVID relief spending into the economy. The response of the Fed and the legislative and executive branches of government primed the pump and overwhelmed the sagging economy.

The resulting massive earnings comeback further fueled the rise. Corporate profits jumped off the pandemic bottom, with S&P companies reporting a 53 percent year-over-year growth in earnings in the first quarter and poised to post a 98 percent surge in the second quarter, according to Refinitiv market data services.

The second quarter of 2021 was characterized by not only a large number of beats but also an impressive magnitude of surprises, said David Kostin, head of equity strategy for Goldman Sachs. For example, the economy added 943,000 jobs in July, above the consensus estimate, but failed to follow through in August.

Can the market continue to move in this direction? Now, the Fed is reevaluating its easy-money policies and weighing whether to raise interest rates. The market has not had a sizable pullback in about 10 months, […]

Published August 6, 2021

The U.S. stock market bursts out to new highs. Big tech profits surge. Recent news gives reason for optimism … or does it?

Much of the current growth in the economy is based on various stimulus programs sponsored by the federal government. More than five trillion dollars have been poured into the economy, with perhaps more to come; in dollar terms, this equates to about 25 percent of the annual U.S. gross domestic product (GDP). No wonder the economy is steaming.

The forecast was for the GDP to rise 8 percent in the most recent quarter, but it managed to increase only 5 percent. Is the economy slowing down? Well, it has been growing at the fastest pace since 1983. Consequently, the Fed says the drop in GDP growth rate is nothing to worry about. The Federal Reserve’s view is that the reopening of the economy after the virus surge has been stronger than expected and caused bottlenecks in distribution. When that sorts itself out, things will get back to normal. Is this just whistling through the graveyard?

Inflation appears to be surging, but again the Fed posits that this is transitory and linked to reopening and related supply and distribution issues.

China is restraining segments of its economy, which appears to be having negative ramifications for China and the U.S. It started with censorship of children’s textbooks and spread to its large technology companies and related U.S. IPOs. The Chinese government says “it is helping these companies to grow properly.” (This reminds us of the most feared words in the English language: “I’m from the government, and I am here to help you.”) The microchip […]