These are tough times for investors to navigate, but the latest data and Fed direction are on the table. Are we at the start of the new bull market? Read on as my latest post delves into the current market dynamics, discusses the Government's impact, and sheds light on our perspective as we navigate these uncertain times. Let's start with a quick recap of this week's indicators:
- CPI (consumer price index) – overall prices rose 4% year-over-year, a 56% decrease from the high of 9.1% this time last year. But that doesn’t tell the entire story. Core CPI, that is, without food and energy, was 5.3%
- PPI (producer price index) – wholesale prices fell 0.3% because of falling gas prices. Still, the decrease beat estimates and further signals slowing inflation.
- Interest Rates: With the numbers above, the Fed decided on no increase to rates but no decrease. Furthermore, the Fed remains hawkish and signals two additional increases by the end of the year, which sent the markets lower at yesterday's close.
1. Yes! But.
These numbers are good and show we’re headed in the right direction. Yet, the macroeconomic data still indicates that rough waters are still ahead. Until now, the markets have shrugged this off; they do not seem to care about the fundamentals. What does that mean? At KEY Advisors, we are Fundamental Investors, which is a different school of thought than that of the Technical Investor. A top-down and bottom-up analysis, in our opinion, provides a better opportunity to manage risk for our clients:
- As Fundamental Investors, before making investment decisions, we look at everything--the macroeconomic picture, industry conditions, as well as the management and balance sheets of specific companies. We also observe current trends and patterns to assist us in timing the market cycle.
- Technical Investors analyze trends--they believe the stock price reflects the fundamentals, so there is no need to go any deeper. It’s basically about looking at charts to identify patterns and predict what will happen.
We’re not here to say which approach is better, but we believe in fundamentals because you don’t want an economic undercurrent to disrupt an investment strategy when trying to grow and protect your client’s hard-earned wealth.
2. The Fed’s Pause and…Dilemma:
The Federal Reserve proved the consensus' anticipation correct with their first pause in interest rate hikes in 16 months. However, it is crucial to recognize that the Fed also stated that the possibility of (2) future rate hikes remain on the table. This cautious approach reflects the Fed's concerns about the potential for a re-acceleration of inflation. Core inflation levels remain above 5%, well above the desired 2% target. In order to achieve its inflation target, the Fed may be compelled to take actions that could lead to a recession. This highlights the delicate balance it must strike between managing inflationary pressures and avoiding an economic downturn.
3. Respect the Market Rallies, but Not Blindly:
Despite the troublesome macroeconomic indicators, it’s important to acknowledge the remarkable market resiliency and the rallies we’ve witnessed since March--particularly in technology stocks. These rallies have expanded into other sectors, indicating a broader market recovery. However, we continue to remain cautious because bear market rallies are 1) not uncommon and 2) historically end in swift and steep decline. You only have to reflect on the ten bear market rallies between April 2000 and October 2002 to observe this happening. Despite this, we can still protect and grow our client’s wealth during these bear market rallies. We’ll do so by investing in small caps, energy, and other lagging sectors this summer on dips in the market.
4. We’re Not Out of The Wood Yet:
Our opinion is that the Treasury’s backstop for failing banks has served as a stimulus, temporarily propping up the economy and delaying the inevitable downturn. While precise timing remains uncertain, the fundamental data continues to point to the opportunity for a recession, albeit later this year. As we move into July, key economic indicators--GDP, inflation, consumer numbers, earnings reports, and potential earnings revisions will play a vital role in shaping market sentiment.
5. Moving Forward, Adopting a Balanced Approach:
Given the fundamental challenges and conflicting signals in the current market conditions, we need to adopt a balanced approach as investors. While fundamentals suggest caution, technical indicators may encourage active participation. Striking a balance between these approaches, we believe, is KEY. We’ll begin to put our cash to work, but cash and cash derivatives will remain our strongest position. We began reducing risk in November 2021, so we are still ahead of the game, and that is why we have the luxury of being patient.
In conclusion, it’s essential to acknowledge the deteriorating macro data and the fact that the market seems to be turning a blind eye to it. As investors, we find ourselves in a challenging position. Fundamentals warn us to stay cautious, while technical indicators suggest it’s time to dive. While the allure of a new bull market is tempting, let’s keep our wits about us. The market’s dynamics are in flux, and it’s crucial to remain vigilant. By Q1 of next year, we'll know whether we’ve weathered the storm or if the fundamentals were too strong for the market optimism. We can confidently navigate these uncertain times by staying informed and adapting our strategies accordingly.
I hope you and your family have a winning week!