Powell and Co. get aggressive … another 75-basis-point hike could be coming next month … retail sales disappoint … where/how to invest today
This afternoon, the Federal Reserve hiked the fed funds rate by 75 basis points.
It’s the largest increase in 28 years, surprising some investors who were expecting the 50-basis-point hike that the Fed had telegraphed in recent weeks.
The greater-than-expected hike is largely due to the hideous CPI print from last Friday that showed inflation at a 40-year high, killing the hope we’d passed peak inflation.
Also impacting the Fed’s higher-rate decision was that a separate report showed a substantial rise in consumers’ inflation expectations. The Fed watches this closely as inflation expectations can become self-fulfilling.
Today’s move brings the range to 1.5%-1.75%. That’s the highest level since just before the Covid pandemic began in March 2020.
In his live comments this afternoon, Federal Reserve Chairman Jerome Powell provided an idea of what to expect at the July meeting:
Clearly today’s 75-basis-point increase is an unusually large one and I do not expect moves of this size to be common.
From the perspective of today, either a 50-basis point or a 75-basis point increase seems most likely at our next meeting.
Looking further out into the year, the Fed expects the fed funds rate to climb over the next four policy meetings to finish 2022 above 3%. Specifically, the Fed’s dot plot shows the midpoint of the target range for the fed funds rate would go to 3.4%.
That’s pretty much exactly where the 10-year Treasury yield sits as I write, coming in at 3.39%.
Shifting to 2023, the dot plot shows the rate continuing to move higher up to 3.8%.
Here was Powell’s bottom line on how the Fed will move going forward:
We will…make our decisions meeting by meeting and we’ll continue to communicate our thinking as clearly as we can…
The pace of those changes will continue to depend on incoming data and evolving outlook on the economy.
***Meanwhile, Fed officials slashed forecasts for GDP growth
From CNBC:
Officials also significantly cut their outlook for 2022 economic growth, now anticipating just a 1.7% gain in GDP, down from 2.8% from March.
Putting all of this together, the data suggest we’re heading into a period of stagflation – low economic growth coupled with elevated inflation.
However, officials do forecast slowing inflation as we look ahead to 2023.
Back to CNBC:
…The estimates as expressed through the committee’s summary of economic projections see inflation moving sharply lower in 2023, down to 2.6% headline and 2.7% core, projections little changed from March.
As I write approaching the end of the session, all three major indexes are up big on the news. Rather than fearing the higher rates, it appears Wall Street is applauding what it interprets as a genuine dedication from Powell and Co. to crush inflation.
Of course, higher rates increase the risk of a recession. But for now, the market likes what it sees.
Keep in mind, market gains or losses on policy days are often reversed in the following two-to-three trading sessions as market participants digest the news.
But for now, let’s enjoy the relief rally.
***The second big headline from today was the unexpected drop in retail sales last month
Though inflation has been surging for more than a year, the “experts” have been telling us that the economy is still quite strong, with healthy consumers opening their wallets.
The numbers are beginning to tell a different story.
This morning brought the latest retail-sales report from the Commerce Department. To provide some context for its findings, back in April, consumer spending grew 0.7%. The expectation for today’s May figure was for a slowdown, but still positive spending of 0.1%.
Instead, retail sales turned negative. Spending fell 0.3% as inflation battered consumer pocketbooks.
If we exclude autos, sales were up 0.5%, but that’s still short of expectations for a 0.8% increase.
Here’s more from CNBC:
Miscellaneous store retailers saw a 1.1% drop in sales, while online stores posted a 1% decline.
Bars and restaurants registered a 0.7% increase, part of a broader trend that has seen spending gradually shift from goods back to services.
Looking at these data, it’s clear that inflation is eating into the disposable income and savings of the U.S. consumer. And given that the U.S. consumer shoulders the burden of about 70% of the GDP, today’s data points toward increasing risk of a recession.
***So, how do you respond to all of today’s news in your portfolio?
To help us answer that, let’s turn to legendary investor Louis Navellier.
For newer Digest, readers, Louis is one of the early pioneers of using predictive algorithms to scour the markets for quantitatively strong stocks. In other words, he’s a “quant” investor. Forbes even named him the “King of Quants.”
As a quantitative investor, he has a laser focus on cold, impartial numbers.
In tough markets like this one, such a focus can be even more important because it helps prevent fear-based “sell” decisions that can derail long-term investment goals.
In Louis’
Accelerated Profits Flash Alert yesterday, he began by reminding listeners what the historical numbers suggest about forward-looking returns in markets like this:
The market is grossly oversold.
Our friends at Bespoke have documented that the S&P 500 has fallen over 20% 14 times since 1946. The median return in the S&P in the next month is 2.89%, the next three months is 5.71%, and the next year is 23.9%.
Of course, it can be incredibly hard to buy when markets have been reeling. After all, it feels like the market bottom could be much deeper than today’s level.
But the numbers show that, even if the market has lower to go, buying when the market is down 20% has historically been a profit-making move.
Analyst Mark Hulbert ran the same study as Bespoke (with the same findings) and had this commentary:
You might object that “this time is different,” arguing that stocks are entering a longer and more severe bear market than any that’s been experienced since World War II.
In recent days I’ve received numerous emails from a number of you with this very argument, but contrarians tend to put a positive spin on such an outpouring of negativity. I wasn’t receiving such apocalyptic emails at the market high in January.
So long as you believe that the stock market will eventually go back up and surpass its January highs, however, purchases made now will show a bigger profit, and sooner, than the market itself.
If you’re ready to open your wallet and take advantage of these discounted market prices, where should you look?
Back to Louis:
If you want to go bargain hunting, I would recommend it, but clearly you should be in the stocks that have the earnings.
That’s going to put you in energy, fertilizer, food, shipping, and some specialty semiconductors.
***Keep in mind, even these fundamentally superior stocks can get caught up in the broader market pessimism and experience temporary declines
Just look at Monday’s brutal losses. Everything was down – all sectors (including the ones Louis just identified), along with all asset classes (including safe havens like gold).
Louis believes that we could see several more retests of recent lows. He noted that such retests can happen four or five times before markets have fully digested market news, stabilized, and gathered enough strength to begin a new climb.
If you’re a more cautious investor who wants to try to sidestep more retests and wait until the market appears on more solid footing, Louis has a tweak to his advice:
If you are a conservative investor, wait until early July.
We’ll have a rally going into July 4th weekend, then we’ll have another rally on good earnings.
***We end today with two well-deserved “congratulations”
Just a reminder that the market is not a huge monolith that rises and falls in unison. Even during a bear market, specific investments can soar.
On that note, congratulations to Eric Fry’s Speculator subscribers, who just closed out a 1/3rd portion of their iShares 20+ Year Treasury Bond ETF (TLT) trade for 300% gains.
I should point out that the companion trade, which is the Invesco DB Commodity Index Tracking Fund (DBC), is up 325%. Speculator subscribers are still in that trade with their remaining 1/3rd portion.
Meanwhile, last week, Louis Navellier’s Breakthrough Stocks subscribers closed out a half-portion of their Enphase Energy trade for a whopping 1,000% return.
Here’s Louis’ thinking on taking the gain:
I continue to see plenty of long-term potential upside in the stock, but with inflation likely to remain elevated, it’s important that we have some extra cash in our pockets now.
Just goes to show, there’s always a bull market somewhere.
Have a good evening,
Jeff Remsburg
