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Will The Fed Doctors Administer More Medicine to Cool the Economy?

It appears that the Fed Doctors are leaning in the direction that more medicine is needed to keep the economy cool and inflation more tame.

We have maintained for many months now that this would be the Federal Reserve stance until the signs of inflation have shown a pattern of consistent decline. They failed miserably in quantifying the impact of their actions, inundating the economy in a sunami of close to zero interest funds and trillions of stimulus and now they cannot be seen to fail in bringing down "the inflation monster" they contributed in large part to create.

We expect the Federal Reserve to maintain a hawkish stance through this year and into the first half of the next year with the possibility of cutting the size of interest rate hikes as economic signs dictate. We then anticipate the Federal Reserve holding rates steady until a demonstrable period of time has passed indicating that inflation is more tame.

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Earnings, Markets & The Economy

A recent research report released by Absolute Strategy Research revealed that 37% of money managers (who collectively oversee $5.2 trillion in assets) expect earnings to be higher a year from now. 63% expect earnings to be lower. That’s the lowest reading since late 2015.

The economic outlook is fraught with issues that we have discussed at length in prior articles.

a) Consumer sentiment has hit a 10 year low. This is correlated with more cautious consumer behaviour and a decline in spending which will impact earnings.

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The Fight to Bring Down Inflation Will Continue to Shape the Market Narrative

Inflation numbers continue to be the central issue shaping the market narrative. Last week’s market rally is based on the "not yet substantiated" narrative that inflation numbers will come down sooner and will necessitate less drastic action on the part of the Federal Reserve. In the short term, it's a speculative narrative.

The markets are forward looking so speculation is inevitably a component of how markets operate. However, the real determining factor will be the hard inflation numbers. Is inflation trending downwards? To answer this question will take several consecutive months of declining data to validate. Until such time, the Federal Reserve has no incentive - after miscalculating this issue through 2021 - to operate less hawkishly. Its credibility is on the line. As a result, they will look to declining inflation numbers over several consecutive months until they lighten their rhetoric and along with it, rate hikes. Until then, the Federal Reserve has no reason to veer off its already communicated path of more aggressive interest rate hikes.

The daily question and commentary that is in the news headlines - whether we will see a recession or not - is largely dependent on the still "unknown" question of "how long" it will take to bring inflation down and "how high do rates need to go for that to occurr"?

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When Markets Fall, Who do you Listen to?

When markets fall, who do you listen to? This may seem like an odd title for a blog post, but it is an important one from a pyschological, health and financial well being standpoint. When markets fall and the economy experiences a down turn, the mainstream media highlights worst case scenarios and how bad everything can get. It can make your stomach churn if you have money in the markets, even if you have gone through such events in the past. The media is highly trained on how to illicit response with headlines that make you want to read them. That is how they make their money. It is also built into human pyschology that any danger signals trigger the pre-historic or primordial functions of the brain that are about survival. Add a terrible war in Ukraine and ongoing economic cold-war with China and you have a recipe for doom and gloom.

Reading the daily media headlines can be bad for your health. As Baron Rothchild once said "Buy when there is blood in the streets". That is of course much harder to do for the very reasons we are just referencing. Our brains and bodies are trained to "flee" danger, and not walk into it for good reason!

Who do you listen to or turn to when markets are falling is an important question. When you have a professional seasoned financial advisor, you have an objective party to speak with who can share their perspectives about bear and bull markets over decades of experience. When you are in the midst of a bear market, it seems like it will never end. Likewise when you are in a bull market it seems like it will never end. Both statements are false however. No Bull or Bear market is permanent.

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Recession or Not? That is the Question

The speed at which the economy has nose-dived from optimism to pessimism has taken a lot of people by surprise. That's the impact the Federal Reserve can have on the markets. Consumer confidence is fickle so when the daily news is filled with fears of recession and declining markets it impacts people in a way that causes people to spend less: The Nasdaq is down over 31% from it's highs and this along with all the media headlines of "recession" is generating a more fearful and less optimistic mood.

SNAP just anounced a significant revision in its profit forecasts due to macro economic conditions. Advertising revenue is down.

The mood on the street is somber and consumers are concerned. The critical question is what impact will this decline in consumer confidence and demand have on inflation? Will inflation numbers trend down? If they do, the current economic news may provide sufficient impetus for the Federal Reserve that they need to walk and talk a softer line and send some easening signals, such as for example, that rate increases may be sufficient.

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Walnut Creek, CA 94596
Phone: 925-906-9800
Fax: 925-906-9884
info@hawleyadvisors.com

 

 

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