Looking Smart vs. Being Smart

With the market being pulled the last two weeks between hopes for a “soft landing” in the economy, and fears that the Fed will keep hiking rates until the economy collapses, we discuss the need to keep your true goals in mind as you make your plan of attack.

With the market being pulled the last two weeks between hopes for a “soft landing” in the economy, and fears that the Fed will keep hiking rates until the economy collapses, we discuss the need to keep your true goals in mind as you make your plan of attack.

FIVE THINGS YOU SHOULD KNOW

Equity Markets – were lower this week with U.S. stocks (S&P 500) down -1.04% while international stocks (EAFE) fell -1.05%.
Fixed Income Markets – were lower with investment grade bonds (AGG) down -1.40% while high yield bonds (JNK) fell -2.07%.
Powell Speaks – in his first public comments following the strong January jobs report Fed Chairman Powell reiterated his stance that cooling prices takes time and that if the labor market remains strong the Fed may “have to do more” in regard to further interest rate hikes. These comments suggest that the forecasted 5.1% interest-rate peak by Fed officials from their December meeting may be a soft ceiling.
State of the Union – in his State of the Union address earlier this week President Biden predominantly stuck to economic themes and critiqued China’s current situation stating that autocracies around the world continue to grow weaker. Some of the key takeaways were Biden’s call for higher taxes on billionaires and buybacks, new consumer protections and antitrust efforts, and urging congress to work through partisan gridlock and pass new measures.
Key Insight – [VIDEO] With the market being pulled the last two weeks between hopes for a “soft landing” in the economy, and fears that the Fed will keep hiking rates until the economy collapses, we discuss the need to keep your true goals in mind as you make your plan of attack. [ARTICLE] Hard or soft landing? Peak hawkishness or Fed head fake? Only time will tell, but we look at some data and commentators’ thoughts to set some expectations.

INSIGHTS for INVESTORS

It’s not that I’m so smart, it’s just that I stay with problems longer. – Albert Einstein

Investors should keep the above quote in mind when trying to time markets or feeling the need to make a big call. The key is not to “outsmart” the market, but rather to “stay with it” a little longer.

This week brought the “worst” week for the S&P 500 year to date. Not that it was all bad, but in today’s environment it doesn’t take much to get the bears excited. After Tuesday’s rally, sparked by further comments from Fed Chairman Powell that he believed disinflation was underway, the market weakened over the rest of the week as people questioned if the persistent strength in the economy may be too strong and lead to more rate hikes than hoped based on his comments.

The question of whether the Fed is in fact at “peak hawkishness” was addressed in a thoughtful way by commentator Tom Essaye who weighed in with the following. “Has Peak Hawkishness Finally Been Achieved? That’s the logical question I asked myself when I sat down this weekend to produce this analysis. Peak hawkishness has been one of our “Three Keys to a Bottom” since I introduced them back in May, and I’ve consistently said it’s the most important key to a bottom. And, if we take Powell’s press conference on its face, the answer is “Yes,” peak hawkishness has been achieved.”

As other rates, most notably the 10-year Treasury, have moved up in the couple of weeks the confidence in such a view has been called into some doubt, and many have wondered how the market has stayed as resilient as it has in the face of higher rates.

There appears to be two key reasons for this a) markets move based on expectations more than a singular arbitrary absolute so the fact the market is willing to “accept” an extra rate hike is a positive, and b) recent economic data’s strength would appear to indicate the economy is also able to withstand that extra rate hike and still manage the much hoped for “soft landing.”

Alpine Macro’s take on the current situation and Fed future path was also noteworthy. In response to the stock market bears out there they stated, “It is tough to know what goes through Powell’s mind, but we don’t buy the story of Powell wanting to be viewed as “Volcker 2.0”. Last week, the Fed raised rates by 25 basis points and indicated that more hikes are possible, but Powell is also acknowledging the obvious: disinflation has begun. Powell has shown some renewed flexibility towards monetary policy. He admitted that the current inflation cycle could be very different from previous ones, with many dynamics not yet fully understood. When pressed on what the Fed would do if inflation fell faster and more sharply than expected, Powell was open to the idea of an early end to the tightening cycle, ergo, Fed policy has become data dependent. Will the Fed pivot, as has been projected by the market? We think so … a simple arithmetic extrapolation suggests that the pace of disinflation will quicken after April.”

Overall, the response to all of the above has been generally positive with bulls finally beginning to awaken as noted by Bespoke looking at the most recent investor sentiment data from AAII. They stated, “Although the S&P 500 has been essentially trading sideways since the FOMC's latest rate decision, investors have taken a far more optimistic tone. The latest data from the weekly AAII sentiment survey showed a surge in the percentage of respondents reporting as bulls. At 37.5%, it is the highest reading since the final week of 2021. Additionally, that is only a tenth of one percentage point below the historical average in bullish sentiment. That puts what has been the longest streak of below-average bullish sentiment readings in the history of the survey on the ropes as well. The bull-bear spread (bullish minus bearish sentiment) is 12.5%. This is the first positive reading in 45 weeks and the first above-average reading in 58 weeks.” (See accompanying chart)

While it’s important to understand the tensions and questions facing the market, ultimately your financial success does not have to rest on any one given outcome. As Wesbury cautions below in the article we’ve included, while sentiment is improving, and data is resilient investors need to stay disciplined as we aren’t out of the woods yet.

Most pundits are “paid” to try to look/sound smart, as investors, we only get paid by “being smart” which means keeping a healthy and historical perspective and seizing opportunities when we see them. One such opportunity is getting the $1.7 trillion dollars investors have sitting in cash to work for them to avoid the negative real returns they are currently locking in everyday in checking and savings accounts (See chart below).

How can you do this safely and within the timeframes of the goals you and your family have? Call us anytime.

Have a wonderful weekend,

Tim and the team at TEN Capital

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The Game Isn't Over

To view this article, Click Here.

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 2/6/2023

At the beginning of the season, not many predicted that the Philadelphia Eagles would be in the Super Bowl this year. But, they had a fantastic season and are favored over the Kansas City Chiefs. Predicting this economy is equally hard. Anyone who thinks they know exactly how things will turn out is fooling themselves. COVID policies – lockdowns, massive borrowing, and money printing to pay people not to work – have never been tried before. So, what happens is still up in the air.

It seems like just yesterday that ZeroHedge – with help from the Philadelphia Fed – was trying to convince people that job growth was non-existent in the second quarter of 2022. Never mind the fact that they purposefully conflated two different measures of jobs…it just wasn’t true.

So, it must have come as a shock to those who believed that nonsense that in January, after the equivalent of 17 quarter-point Fed rate hikes, jobs data and hours worked exploded to the upside. Nonfarm payrolls rose 517,000 jobs, while revisions to prior months added an additional 71,000.

Not one economics group came even remotely close to getting this number right. And the print was especially surprising after seeing retail sales fall 4.3% and industrial production fall 5.2%, at three-month annualized rates, through December.

The difficulty of forecasting in this environment is absolutely astounding. On the one hand, the M2 measure of money has contracted in the most recent twelve months (the first time in more than sixty years), after growing over 40% in a two-year timespan. On the other hand, even with the Federal Reserve’s sharp rate hikes, the federal funds rate is still below inflation.

Using M2 growth, alone, and Milton Friedman’s lag of 6-9 months, we should be seeing the economy begin to slow, which is what retail sales, industrial production, housing, and retail auto sales have been pointing to. And so far with 256 out of the S&P 500 companies having reported, profits are down 3.1% from a year ago.

But it’s not just M2…the rebound from COVID lockdowns is over. Stores are back open, airplanes packed, and hotels filled. Now that we are back to “normal”, how much further can things go? We aren’t going to have two packed-stadium Super Bowls this year, just one. And pandemic unemployment checks and PPP loans have run their course. Yes, some state and local governments, and school districts, have money left, but not much. To our way of thinking, we should see a slump now that the drugs of all the borrowing wear off.

So, how then did jobs provide such a large upside surprise!?! Do employers really know what they are doing? Do they see something that is not showing up in the data? Or is this a delayed reaction (after all, employment is a lagging indicator) to issues with hiring during and after the pandemic.

If you couldn’t hire workers, but now they want to work, and you expect a soft landing (or even no recession at all) then you grab all the workers you can, when you can. But if there is a “hard landing” profits could be squeezed even more.

Taking all this into consideration, we don’t think the boom in nonfarm payrolls is a signal worth following. Many companies…Peloton, Bed, Bath & Beyond, Hasbro, and lots of tech stalwarts were winners when services were locked down and people with fresh stimulus funds needed tech. But now they are all in either financial trouble or are laying off workers. The losers during the lockdowns (services) have all reopened, but people aren’t going to double their use of services, especially with interest rates up and money supply down.

So, while one number from one month seemed to change a lot of people’s minds about the economy, we think we’re far from the final whistle of the game. This one isn’t over yet.

Unprecedented actions on the scale that we experienced in 2020-2022 will bring unexpected results in 2023. So, while we never want to ignore a number like the January jobs report, we have to question how much is signal and how much is noise.

The economy is still absorbing the money printed during the pandemic. Inflation has not been eradicated, the Fed is highly unlikely to loosen policy anytime soon, and earnings are likely to fall as all the stimulus wears off. That’s not a recipe for a simple forecast or a soft landing. Like the Super Bowl, until the game is played no one knows exactly what will happen. Count us less bullish than conventional wisdom.

DATA, JUST THE DATA

Data points this week included:

U.S. Jobless Claims – rose by 13K to a reading of 196K for the week ending February 14^th and was above expectations of 190K. The four-week moving average declined to 189.25K, the lowest level since April.

U.S. Balance of Trade – the trade deficit grew to ($67.4B) in December after a reading of ($61B) in November, which was the lowest reading since September 2020. Exports fell (0.9%) to $250.2B thanks to crude oil. Imports rose 1.3% to ($317.6B) led by purchases phones and passenger cars. Now having a final picture for 2022, the deficit rose a record high of $(948.1B) thanks to rising inflation, high energy costs, and high demand of imports. The trade deficit with China expanded to ($382.9B).

U.K. Monthly GDP – contracted (0.5%) on a MoM basis, marking the first decline in 3 months and slightly worse than forecasts of a (0.3%) decline. The service sector moved down (0.8%) led by education, arts, and transport and storage. Production grew by 0.3% thanks to electricity and gas. The construction sector was flat.

Eurozone Retail Sales – declined by (2.7%) MoM for the month of December, marking the biggest decline since April 2021 and furthers the seesaw readings we’ve seen the last four months (up 1.2% last month). Food, drink, and consumer spending sales saw the largest decline of (2.9%). Sales of non-food products contracted (2.6%). YoY, sales fell by (2.8%), but after a full 2022, sales slightly rose 0.7%.