Poof, just like that the market seems to have shaken off the recent woes and stepped back from the abyss. In the last week, the S&P has bounced over 8% while the tech-heavy NASDAQ has moved 13% off the bottom. The initial move last Monday was sparked by peace talks, however as the week wore on was given fuel by our very own Jay Powell.
Last Wednesday, the Federal Reserve raised the fed funds target rate by 25 basis points and signaled an extremely hawkish, 8 additional rate hikes throughout 2022. This immediately hampered the market, however moments later, during the press conference, Powell basically walked back this hawkish view making it quite clear that the Fed was as clueless about the future as we all are, and would allow the data to dictate their actions.
Since most participants are firmly in the camp that upcoming data will be less than rosy and therefore spark a much more dovish Fed, stocks took flight and so far haven’t looked back. While the recent gains in March are welcome, I am not yet donning the bullish cap or throwing out the ‘all clear’ signal. As always, proof will be in the pudding.
You may think my primary market concern is war in Ukraine, and while this will certainly spark bouts of increased volatility, I am much more focused on our domestic economic challenges and just how our country grapples with the inflationary pressures, which so far have shown no signs of slowing down.
Basic economics tells us that as input costs rise, higher wages are demanded in order for employees to meet the rising cost pressures of daily living. As companies raise these wages, they subsequently raise prices in order to make up for increased payroll expenses, not to mention their own input costs pressures. The cycle repeats until prices get so high that consumers back away, demand slows, employees are let go and prices drop.
As I’ve mentioned numerous times, the Fed has a job to ‘see’ these pressures in advance and adjust monetary supply, i.e., interest rates, to increase or curb demand accordingly. The irony however is that current inflationary pressures have little to do with monetary policy and therefore will likely have little impact on prices. Ask yourself just what the Fed has to do with oil prices as we hinder oil production in our own country while no longer buying from Russia? Do you think raising interest rates will impact oil? Or how about auto prices, lumber prices, grain or wheat? If the Fed raises rates, will semiconductors all of the sudden become prevalent, allowing auto manufacturers to produce more cars?
Wall Street knows the predicament the Fed faces at this juncture as they have little to do with the supply side and everything to do with the demand side. Can they suppress demand and derail our economy? You bet they can. Can they ease supply constraints? Not a chance.
What I continue to believe is that supply chain, manufacturing and input prices will soon be easing, and prices will naturally come down. More than likely the Fed will continue to hike, albeit very slowly, and eventually be given credit for slowing inflation, which ironically will have nothing to do with their policy.
Businesses that are raising prices will eventually see those input prices decline, will NOT decrease their prices to consumers and therefore will see profits soar. This will be excellent for stocks, especially in those businesses that have the ability to maintain their customer base during these difficult times.
While I remain in the concerned camp for the current state of affairs, I like what I see going out into the future. Putin can derail this plan but that is impossible to handicap at this point, so our yellow caution flag continues to fly with this in mind.
Over time, I believe many companies will prevail, specifically companies in the technology space that help businesses control costs or increase efficiencies. This is where our focus will be going forward, and I believe where we will see the most opportunity.
The year remains young and the opportunities on the horizon are plentiful.
On a personal note, I would be remiss not to share that Abby in our office is expecting twins due in late July or August. We’re excited to see the Joule family growing with the addition of these new small-caps. Keep her family in your thoughts and prayers.