Interest Rates are on the rise

Stocks traded higher yesterday in a volatile session with stocks flipping in and out of the green in response to a hawkish Powell speech. The ECB dusted off its rate hiking mechanism for a +75 basis-point hike upping the ante for a similar Fed move later this month.

The longest game. I have been writing an awful lot about the Fed and interest rate hikes lately. There are two primary reasons for my sharp focus. The first and most obvious reason is that it is important- very important- and because of that, the topic has a very direct impact on all capital markets and your wealth. The second reason is that the narrative has been changing almost on a daily basis warranting a blow-by-blow analysis. What was once a month-to-month focus is now becoming a day-to-day concentration. On some days it can be hour-to-hour. Yesterday was one of those days as not only did the ECB raise its key lending rate (ECB Main Refinancing Rate) by an oversized +75 basis points, but Powell doubled down on his hawkish comments from Jackson Hole. Markets reacted with wild swings in both directions, ultimately closing higher… but that was surely difficult to handicap earlier in the session. Things could be classified as… well, fluid. That brings me to the topic I want to touch on today. Long-term focus. I use it a lot if you haven’t noticed.

Earlier this week I was speaking with a client who astutely asked me “what is long term, actually?” It was a good question. My answer was “it depends.” Foremost, it is different for each investor. It is dependent on your age, what you intend to use your investments for, what type of assets you invest in, your appetite for risk, etc. It is also dependent on the market regime. When markets are trending with lower volatility, long-term tends to be… well, longer. In times when there are many unknowns, lots of tension, high systematic risk, and high volatility, “long term” tends to be shorter. If you were to attempt to forecast where a stock would be in five years, it would have been a far easier task in 2016 than it was in, say 2020… or 2021… or 2022, wouldn’t you agree? In fact, you would probably struggle to project where a stock would be in 12 months in this current market regime.

Speaking of regimes, yesterday’s already news-full, volatile session was marked by the sad news of the death of Queen Elizabeth II. That would not normally be a bit of breaking market news, but those who watch the markets closely would have certainly noticed that the news did, in fact, have a dampening effect on trading activity. Whether you are a fan or not, you cannot ignore the fact that the Queen presided as a figure head of the 6^th largest economy on the planet for 70 years. Making her the longest ruling British monarch. Noteworthy and noted. So where were you on June 2^nd, 1953, when she was coronated at the age of 25. By age 25 you should already by contributing to your retirement investment account. Imagine if she was a regular reader of my daily market note. Imagination is necessary because I had not been borne quite yet when she ascended to the throne. You could, I am sure, easily imagine that I would write about long-term focus… and interest rates… and inflation… and consumer confidence. You know, all my favorites. What would my Yesterday’s Market section look like on coronation day?

Yesterday, June 1^st, 1953, the Dow Jones Industrial Average lost -1.43%, or -3.88 points to close at 268.39. Inflation in the US, as measured by the Consumer Confidence Index / CPI was at +1.1%, below today’s Fed target level of +2%... good news on that front. The US Unemployment Rate was at an impressive 2.5%, below today’s 3.7%. US GDP was growing at a rate of +6.8%, which is extremely growthy! At the time the Dow had some names you might recognize today, like AT&T, General Electric, Goodyear Tire and Rubber Company, Procter & Gamble, and US Steel. Had young Elizabeth Windsor (her name on June 1^st, 1953) invested in those stocks, along with the others in the Dow Jones Average, she would have earned a whopping +11,646% return (not including dividends)! Of course, she would have had to swap stocks in and out when the index changed members from time to time, but you could hardly refer to that as active trading. Her portfolio would have witnessed 11 recessions, countless military conflicts, an “unprecedented” pandemic, the invention of the microchip, and the self-flushing toilet, to name just a few high and lowlights. Now THAT is an impressive long game! Know your long-term… and stick to it.

YESTERDAY’S MARKETS (September 8^th, 2022)

Stocks gained yesterday in a rocky session in which the ECB raised rates and Powell made threatening overtures about rates in the US. The S&P500 rose by +0.66%, the Dow Jones Industrial Average climbed by +0.61%, the Nasdaq Composite traded higher by +0.61%, and the Russell 2000 Index advanced by +0.83%. Bonds declined and 10-year Treasury Note yields added +5 basis points to 3.31%. Cryptos gained +3.08% and Bitcoin slipped by -0.04%.

NXT UP

• Today’s Fed Speakers: Evans, Waller, and George.
• The week ahead: CPI, PPI, Retail Sales, Industrial Production, and University of Michigan Sentiment. Check in on Monday for times and details.