The Fed is still angry and quite vocal, while DC is in chill-mode

Stocks traded higher yesterday as investors scrambled to make heads or tails of… well, everything. Existing Home Sales continued to fall after a brief jump earlier in the year.

Whack-a-mole. You may remember playing that arcade game with your kids or grandkids? You get a mallet and mechanical moles pop in and out of holes in random and increasing speeds. The whacker must whack as many moles as possible before they return to their holes. It seemed impossible to get all of them and there was never time to rest… the moles just kept coming. The game’s concept is a great one… for the arcade… not so much your portfolios.

Since the pandemic, which was a story for the investment history books on its own, investing has been quite tricky. The overall theme was gloom, brought on by first, a spot of inflation, and then ultimately by the most painful inflation the US has seen since the early 1980s. The Fed, which has been the benevolent custodian of our stock portfolio wealth for the past decade or so turned into an evil angel. Not only did the Fed raise rates aggressively, but it has made a mission out of seeking unemployment and depressing the stock market. Ok, there is a solid reason for that. When unemployment is high, folks spend less money. Spending less money means less demand, which ultimately… SHOULD… help inflation to return to normal. Similarly, when the stock market is booming, folks spend more money. There are two reasons for that. The first and most obvious one is when people make big profits, they have more money to spend. The second, and less obvious one, is that consumers, in general, are more confident when they hear that the markets are rallying. Trust me on this – it’s real. So, naturally, those former-friend-now-foe policymakers get upset when things are going our way.

So, we took our bitter medicine last year with hopes that inflation would get better. Inflation did, indeed get better, but it has not gotten back to normal just yet. Being on the right path would seem enough to get Fed members to take a break and wait for their policies to take effect. The US economy is large and complex and, as you would expect, manipulating it requires draconian measure, and response times are not as fast as we have grown to respect in this high-speed, AI driven, fast-electric car, same-day-delivery online purchased world we live in today. It seemed like the Fed was, indeed, ready to rest on its laurels for a bit.

The mini-banking crisis came (but not necessarily went yet) in March, upping the ante on the Fed. The shuttering of 3 major regional banks would put a strain on the financial system, and the surviving banks, having found religion, would tighten up the purse strings to avoid a similar fate to its fallen siblings. Now that was a few moles to whack. If you follow the sector that has become a game in and of itself… and it continues.

Then there is Washington DC and the game of chicken being played out before our very eyes. That game of chicken is being played with very high stakes… the largest economy in the world. I won’t get into any of the details about what a default would look like but suffice it to say that it would not be… er, positive. Now, there are some really important policies that must be debated and dealt with. Unfortunately, both sides are using a potential pending default to raise the stakes. I suppose that is business as usual for the beltway crowd, but the Wall Street crowd is not fond of it… and it has cost YOU money in your portfolio. Over the last few days however, it seems that both sides have gotten closer, and maybe, just maybe Congress will be able to pass some sort of resolution – JUST IN TIME – to avoid ruining our summer holidays.

Whew, that was a lot of moles whacked. Now, can we finally relax and focus on investing again? It would seem not. That pause we have all been hoping for is starting to look… unwell. The word “pause” is now being referred to by some as a “skip”. In other words, the possibility of more hikes in the future is back on the table. Indeed, many FOMC members have left the door open (some wider than others) that a hike may occur in June. Just when you thought it was safe to put some of that sidelined cash back to work in the market. The Fed sees the economy being strong enough to withstand more hikes, employment remaining strong, and inflation continuing to persist. Any or all of those is enough to cause a lively debate at the Fed’s June 14th policy meeting. That means, anything STILL goes, and that moles have not yet stopped their popping. Proceed cautiously and definitely don’t put down that mallet just yet.

YESTERDAY’S MARKETS

Stocks rallied yesterday as investors piled into comfort stocks that would do well in a recession and benefit from lower interest rates (hmm, did they read my note yesterday). The S&P500 gained +0.94%, the Dow Jones Industrial Average gained +0.34%, the Nasdaq Composite Index jumped by +1.51%, and the Russell 2000 Index advanced by +0.58%. Bonds fell and 10-Year Treasury Note yields climbed by +8 basis points to 3.64% in response to hawkish Fed talk. Cryptos declined and Bitcoin fell by -2.24%.

NEXT UP

  • No economic numbers today.
  • Next week: Still some important earning releases. Also, more regional Fed reports, more housing numbers, GDP, Flash PMIs, GDP, PCE Deflator, Durable Goods Orders, and FOMC Meeting Minutes. That should make for plenty of moles to be whacked, so check back on Monday for calendars and details.