It was economics 101 around the Tatro dinner table Wednesday night as my kids seemed more interested than ever before to discuss the recent market selloff. I’m not proud of the fact that, initially, I was in no mood to talk about markets after another difficult day, however, I realized very quickly how important it is to educate the next generation about just what’s happening in the world of finance. The conversation went something like this.
Dad – “The markets sold off after Jerome Powell, the head of our national bank (Fed) raised the cost to borrow money”
Son 1 (By age not favor) “Why would that make stocks go down?”
Dad – “Well, let’s say someone is buying a house and they need to borrow money from the bank to do so. If the interest rate the bank charges them goes up, they may hold off on buying the house.”
Son 1 – “But why does that make stocks go down?”
Dad – “Well, let’s connect the dots a bit here. If a person doesn’t buy a house, maybe it was supposed to be a new house that was built for them. They don’t buy that house which means that the house doesn’t get built, which means the company that was going to build and sell the house doesn’t get paid and therefore they make less money. If they make less money that isn’t good for their business and therefore the value of their business goes down.”
Here’s where it got interesting.
Son 2 – “Hmmm, well if the company doesn’t sell any houses won’t they fire their workers?”
Dad – “Yes”
Son 2 – “Isn’t that a bad thing?”
Dad – “Yes, however it will help bring down inflation errrr…the prices of stuff we buy every day.”
Son 1 – “Why will it bring down inflation?”
Dad – “Well, if there are people who have lost their jobs, they will stop spending on extra things and will only buy the essentials. They may even reduce that. So if there are less people buying things then the prices of those things should go down.”
Son 2 – “So the national bank (They meant the Fed) wants inflation to go down?”
Son 1- “Exactly”
Son 2 – “And to do so they are going to have people fired?”
Dad – “Well, ya, that’s exactly right”
Son 1 – “And if people lose their jobs, they have less money, they spend less, companies make less money so their stock prices go down and by spending less the company lowers prices to sell their stuff”
Dad – “Exactly”
We moved on to UK Football.
Markets continue to be in turmoil after the Fed’s press conference where Jerome Powell’s tenor remained extremely tough regarding monetary policy and their attempt to fight inflation. Stocks ended Wednesday lower and continued that slide the remainder of the week.
While the 75basis point hike was of no surprise, the continued positioning surrounding their determination seemed to take investors by surprise resulting in what looks to be a trip back towards June lows.
What I continue to find the most fascinating is the Fed’s stance regarding what is, in my opinion, clearly lagging data. Just about every single inflationary input impacting the Consumer Price Index (CPI) has come tumbling lower. This has resulted in month-over-month inflationary reports to be 0.0% and 0.1% respectively the last two months. The year-over-year average however continues to factor in the trailing 10 months of data which will take considerable time to work off. Metaphorically speaking, imagine taking Tylenol to lower a fever. When you hit 98.6 degrees odds favor you would stop taking medicine and monitor the situation. Now imagine that you determined your Tylenol based on a rolling 5-day temperature check. Despite being 98.6 degrees, the 5-day average would still put you over 100 degrees, so you continue to take medicine. Does that make much sense? I believe this is precisely what is happening with our Fed and both equity and bonds are predicting they’re going to go way too far. While the jury is still out, I’m not so sure it’s wise to kill the patient just to reduce the fever.
On Friday famed Wharton finance professor Jeremy Seigel took to CNBC to voice the very same opinion. It’s worth a watch HERE.
Not a day goes by we don’t field questions regarding simply ‘cashing out’. To which I respond that unlike previous bear markets, which were primarily due to outside influences, such as a housing and financial crisis, a tech bubble pop or the most recent, Covid crash, this decline is Fed inflicted and there isn’t a soul on earth who knows when any piece of news will arrive to change the market’s tune. In fact, it has been my experience that it may not even be an event but rather a price point where stocks and bonds become so attractive that investors collectively decide selling here is imprudent and valuations are attractive. Like a shifting of the wind, market sentiment can change quickly and with such negativity on the rise, any oversold bounce or rally from here could, in my opinion, be of epic proportion.
Despite the frustrating market woes, I feel comfortable with our positioning. We are reviewing portfolios, checking and rechecking positions daily. We analyze reports, follow data and make educated decisions as to our next move. Despite the unpopularity of the view, I continue to be more interested in being a buyer at these prices than a seller. It’s never easy to buy when others are selling but historically that has been the best move.
Until next time,
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