To view the rest of this article, sign in to Market Edge.
Since the spring of 2022, we have been consistently advised that the ability to reduce inflation needed to be through interest rate increases. Up until last March interest rates were at a rock bottom level of near-zero. The US economy has not experienced such aggressive rate hikes since the 1980s. Since mid-March the Federal Reserve has increased rates 9 separate times.
Given all the noise concerning interest rates, what effect does it really have on your life? Probably the most important is the ability to borrow money. Mortgage rates are over double than a year ago. This has caused many to delay, or even make impossible, a move to a new or another, home. Home Equity Lines of Credit (HELOCs) have experienced an appreciable spike in rates. Auto loans are more expensive as well. This current situation is, we believe, destined for an unpleasant outcome.
Since 1950 EVERY increase in the cycle of rate increases has ended in either a recession or a financial crises! In our opinion one or the other is on the near-term horizon. Although this is an unpleasant prospect (and one we regret to pass along) there are ways to prepare for, and take advantage of, such an event. Please keep reading……
As readers will recall, we have referred to the conundrum that seemingly good news can turn out not to be. Another one of these examples is the through the actions taken by the Fed this week – the increase in interest rates. Given the upheaval in the banking sector there were many analysists that considered a possible suspension of a rate hike this week. These folks’ opinion was that a hold on rates could add to a calming effect in this sector. Frankly our take was one of wait and see. It was just a few weeks prior that Fed Chairman Jerome Powell, when speaking to the Senate Banking Committee, seemed to signal that a more aggressive approach (can that be possible??) was needed given the stubbornness of the inflation rate. Most felt that a rate increase of ½ % was likely on 3/22. In fact, the Federal Reserve raised the rate by ¼ %. This modest hike may have a been carrying a subtle message.
There is a growing sense of concern that things (at least on the surface that the public can observe) are not what they seem. Investors seem to be worried that because of the vibes being sent out by the Fed that interest rate hikes may begin to ease, they are reasoning that something ominous may be ahead. Perhaps even that whatever danger could appear would be enough to wipe away inflation concerns.
The government has been quick to reassure depositors that their accounts are safe HOWEVER it is becoming clear – through the Treasury Department – that the days of covering any account in excess of $250,000 may be coming to an end. Indeed, Treasury Secretary Janet Yellen was grilled on March 16th, 2023, by Senator James Langford (D, Okla.) in front of a subcommittee meeting regarding the preponderance of evidence that the government seems to be encouraging a significant realignment in the banking industry. I strongly encourage you to watch for yourself: www.youtube.com/watch?v=T0g3HAmXJuA. It is enlightening (if not discouraging) to say the least.
Although the markets reacted negatively during the week the numbers still were enough to push the major indexes into positive territory. The Dow closed Friday at 32,237, up 1.2% for the week. The S&P 500 stood at 3,971, up 1.4% for the week and the Nasdaq closed the week at 11,824, up 1.7%
Our readers are familiar with the yield curve; however, we are now experiencing an inverted yield curve. This another ill-winded omen. When short-term Treasury Bonds are yielding higher that the long-term rates, what’s known as an inverted yield curve takes place. This is commonly a harbinger of a looming recession. The current yield of a 2-year Treasury is at 3.76%. The 10-year Treasury stands at 3.38%
For many years, Small Cap stocks, those stocks traded on companies with a market capitalization of less than $2 billion, have been what is known as ‘bell-weathers’ of the market. In perspective, many shares exchanged on Wall Street are typically traded through computerized programs. Small cap stocks typically are not, but instead are traded by individual investors. Small cap stocks are currently nearing new lows and coupled with the growing angst of investor sentiment, as monitored by the Volatility Index (VIX) which reached the number 30 this week before retreating back to the low 20sby week’s end, we may be on the verge of a down-trend in the market. That downturn could be significant.
As a subscriber you are aware that we have been of the opinion that in order for this Bear Market to be over, a Panic Bottom of around 3,300+/- in the S&P 500 would need to occur. In January and then deep into February the stock market saw a strong rally which surprised even us. Given the strength and breadth of this upturn we began to question if the Bear Market was coming to an end at that point. We, through our analysis, encouraged subscribers to transfer back into the market (Post dated 1/9/23). Doing so they realized a small gain. At that point many indicators started to show a turn-around. Many, but not all. We issued a return to Cash on 2/23/23 (Post dated 2/23/23). Now we must say again – we are sailing in uncharted waters once more.
In closing, there is a real concern that the ongoing trouble and turbulence in the banking sector may spill onto other sectors. The global banking situation, as illustrated by the problems at Deutsche Bank - which caught many by surprise this week – is far from solved and investors seem to just now becoming aware that they may not know the whole story. Not only with the nation’s banks but with the economy as a whole. There is just too many indicators that are not on solid footing which, given our method of analysis, cannot be ignored.
Last week we spoke about the somewhat puzzling strength in tech stocks but given the current environment we can not suggest transferring into that sector due to a possible quick turnaround. Otherwise known as a whipsaw. Therefore our recommended course of action is:
Transfer into or remain in Cash (Money Markets). Mid-Week Alerts will be posted as needed.
We are issuing a BUY signal for those whose portfolios include an S&P 500 Index Fund. Money should be transferred by the close of business on 3/30/23.
As is the case with any investment use your discretion and judgement before purchasing and/or transferring. Diversification is always prudent; therefore our suggestion is using a modest portion of your portfolio and not the total.
We are issuing a BUY signal for those whose portfolios include an International Growth Fund Money should be transferred by the close of business on 3/31/23.
As is the case with any investment use your discretion and judgement before purchasing and/or transferring. Diversification is always prudent; therefore our suggestion is using a modest portion of your portfolio and not the total.
