The Fed Throws Stocks Under the Bus

  • The Fed’s rate-raising cycle: Too little, too late
  • Jay Powell’s new mantra…
  • … and everything’s fine, he says (It’s not)
  • What to do when life gets hard for retirees
  • Readers on DST: “I don’t mind the time switch twice a year”… The winter of 1974… A “simple” solution… And more!

The Federal Reserve has confirmed the thesis we put out there at the start of 2022: After nearly 35 years, America’s central bank no longer has the stock market’s back.

Yesterday, the Fed lifted its most recent state of monetary emergency. No longer is the benchmark fed funds rate pinned to the “zero bound.” The Fed pooh-bahs raised it to a little over 0.25%.

Going forward, the plan is for additional 0.25 percentage-point increases every six weeks for the rest of the year. In addition, the Fed will begin shrinking its bloated balance sheet — now a stupendous $8.9 trillion — sometime before spring turns to summer…


Chart source: Federal Reserve Board of Governors, Federal Reserve Bank of St. Louis

The objective of all these moves, as you’re surely aware, is to get inflation under control.

As if to remove all doubt on that score, Fed chair Jerome Powell invoked the words “price stability” over and over during his press conference.

He repeated it like a mantra. Maybe he practiced it in front of a mirror. By our count, he uttered the phrase four times in his opening statement and 19 more during the Q&A.

For example: “One of our most fundamental obligations is to maintain and restore, in this case, price stability. So we’re very committed to that. Of course, the plan is to restore price stability while also sustaining a strong labor market. That is our intention and we believe we can do that. But we have to restore price stability.”

Got that? Jay Powell’s priority right now is to get inflation under control. He doesn’t care about the stock market anymore — nor will he unless it goes into outright free fall. Even if the S&P 500 slides steadily into a bear market — a 20% decline from its most recent peak — he won’t reverse course.

➢ Just so you get your bearings: The index’s record close was 4,796 on Jan. 3. As we write this morning, it’s at 4,358. Plenty of room before we reach bear-market territory at 3,836.

Right now, Powell & co. are more concerned with the welfare of the 45% of Americans who don’t own stocks — the working class and poor who are getting squeezed by inflation the worst.

It wouldn’t surprise us at all if the words “civil unrest” came up during the Fed’s deliberations this week. Not that we’ll know until the transcripts are released. In 2028…

So now what? On the one hand, embarking on a rate-raising cycle now is the very definition of “too little, too late.”

Seriously, get a load of this chart…

Jan Tweet


But on the other hand… there’s the old saying about how whenever the Fed embarks on a rate-raising cycle, they keep raising rates until they break something. This time, the breaking point could be only weeks away.

Your editor’s jaw dropped at this sentence in The Wall Street Journal’s write-up on the Fed’s decision and Powell’s presser: “Mr. Powell pointed to strong household balance sheets and consumer demand in deflecting concerns about the possibility of a recession within the next year.” [Emphasis ours.]

He’s kidding, right? Please say he’s kidding.

Here’s the reality…

  • Only 41% of American adults say they have enough savings to cover an unexpected expense of $500 or more, per a recent Bankrate survey
  • Fully 64% of American families are living paycheck to paycheck, per a recent LendingClub survey. Even among those earning six figures, it’s 48%
  • And as mentioned here only yesterday, February retail sales as measured by the Census Bureau fell way short of expectations once you factor out vehicles and gasoline.

Worse, we’re on the cusp of an “inverted yield curve” — as sure a sign of recession as falling leaves signal the onset of winter.

Under normal circumstances, short-term interest rates are lower than longer-term rates. Makes sense, right? The longer the duration of a loan, the bigger risk the lender is taking on. A higher interest rate compensates for that higher level of risk.

So when short-term rates are higher than longer-term rates, that suggests something is haywire.

Sure enough, as soon as the Fed made its move yesterday… the rate on a 5-year Treasury note exceeded that of a 10-year note.

A more reliable recession indicator is the spread between 2-year and 10-year T-notes. Every time the spread goes negative, a recession follows. It even happened in late-summer 2019, suggesting we’d have had a recession in 2020 without a pandemic and lockdowns.

As we write this morning, the 2–year yield is 1.92% and the 10-year yield is 2.14%.

The 10-year is still higher — but only by an uncomfortable margin of 22 basis points, or 0.22%. We’ll be watching…

But if the bond market is worried, the stock market is Alfred E. Neuman.

The major U.S. indexes registered wild swings yesterday afternoon — typical on a Fed decision day — but ended solidly in the green. This morning, they’re holding onto those gains — the Dow a little above 34,000, the S&P 500 at 4,358 and the Nasdaq at 13,421.

The commodity complex is in rally mode — gold within a buck of $1,950 and silver at $25.51. But the big mover is crude, up more than $7 to $102.11. The only “news” we see to justify such a move is a warning from the International Energy Agency that energy markets face “the biggest supply crisis in decades.” As if we didn’t know that already?

Perhaps — and we can only speculate here — the jump reflects the stresses that war and sanctions are putting on commodity markets. We’ve alluded to these stresses several times in recent days.

Bloomberg columnist Javier Blas is taking it mainstream now: “In public, all commodity traders, small and large, say everything is fine. Talk to executives in private, however, and the anxiety is plain — that their industry is one accident away from trouble.”

Cryptos are perking up — Bitcoin over $41,000 and Ethereum over $2,800.

As irony would have it, the Fed’s rate-raising cycle is going to make life harder for retirees relying on investment income.

“When interest rates rise, the prices of bonds naturally sink,” our income investing pro Zach Scheidt reminds us. “After all, you should pay less for a bond today if you expect higher interest rates to give you a better return several years from now.

“Remember, bonds give you a fixed amount of money when they mature. So the only thing that can change when rates go higher is the current price for the bond, which must drop.

“So while you will soon be able to buy bonds at cheaper prices — and lock in better returns for the future — bonds that you currently hold will naturally drop in price.

“Unfortunately, too many retirees and those close to retiring are heavily invested in bonds right now.”

What to do? “Now that rates are set to rise and bonds are already falling, it’s better to have alternative income investments to fund your retirement expenses,” Zach says.

“The first area I would suggest is real estate investment trusts (or REITs). These companies buy properties and then generate profits from renting out the properties to tenants.”

Commercial REITs might be a risky proposition with the work-from-home trend leaving vast caverns of empty office space… but residential REITs are hot as they benefit from rising rents. Zach’s favorite name in the space is Invitation Homes (INVH).

“A second area to look at,” Zach says, “is master limited partnerships (or MLPs), which are associated with the oil and gas industry. These companies include pipelines, refineries and storage facilities for oil and natural gas.

“With the MLP structure, these companies aren’t required to pay corporate taxes. But they are required to pass the majority of operating profits on to shareholders like you and me.”

Here, Zach likes Enterprise Products Partners L.P. (EPD) — a major mover of natural gas through pipelines.

And in general, he says blue chip dividend-paying stocks are a better income source than bonds at this time. Just one caveat, though: “I would just recommend focusing on American dividend stocks as a surging dollar will make U.S.-centered companies your best bet for right now.”

“I don’t mind the time switch twice a year,” writes the first of many readers weighing in after the Senate voted unanimously to adopt year-round daylight saving time.

“The phones and computers do it automatically, so it takes very little effort anymore. Little chance of being an hour early or an hour late somewhere on the Sunday of the change.

“It’s nice to have the extra light in the summer and not having to wait until 9 a.m. in the winter for daylight!”

“I am old enough to remember the experiment with daylight saving time in the winter of 1974. Yes, children going to school in the dark.

“I also lived in Arizona for years with year-round standard time, which was great. I think the world has changed enough since 1974 that we can adapt to year-round DST. Schools can adapt. People like to sleep in and stay up later. Nobody likes clock changes.”

“Year-round standard time, yes — not daylight saving time,” a reader agrees with your editor.

“I’m 45 so I wasn’t around just yet at the time they tried it. But George W. Bush extending daylight time in 2005 past Halloween made things worse.

“In the summer the sun doesn’t go down till as late as 9:30 p.m. where I live. Idiocy.”

“No, I disagree. Yes it will be dark in the morning for a few months, but that’s what parents and school crossing guards are for.

“Also, if we stayed on year-round standard time, then in the late spring and early summer the sun would rise at 4:20 a.m.! What would that do to toddlers and their circadian rhythms?

“DST is the best… more sunlight later in the day is a GOOD thing.”

“Simple solution: Move school times an hour ahead,” a reader suggests.

Another elaborates: “The problem in the 1970s was that no one made adjustments to deal with the new situation. Schools and other entities that are affected by dark winter mornings can simply change their operating hours to something more reasonable.

“Over time (no pun intended) permanent DST would become ‘standard’ and everyone would be accustomed to the ‘new normal.’”

“OK, the first question I want answered is who the hell is American Academy of Sleep Medicine?” writes one of our acid-tongued regulars.

“Looks like they sell expensive courses for doctors who want to become ‘accredited’ sleep doctors. Founded in 1975. How are Americans sleeping now compared with 1975, after 47 years of their expertise? Not worth a ****!

“I couldn’t tell if Big Pharma has their hands all over this outfit or not. I am skeptical. You don’t think the CDC or the FDA wants you healthy, do you? Sick Americans are much more profitable than healthy ones. How’s that food pyramid working out?

“Everyone I know in southwest Oregon prefers DST. No one I know wants the sun rising at 4:30 a.m. June through July. I would lose one hour of sleep EVERY DAY for two months, and you thought one day a year was bad?”

The 5: We did this last fall, but it’s worth doing again now — sharing an infographic compiled some years ago by cartographer Andy Woodruff.

Takes a moment to sink in, but once it does you can see where you are on the map and examine 1) the current arrangement 2) what permanent standard time would look like and 3) what permanent daylight time would look like. Click to embiggen…


Basically there’d be more late sunrises on year-round DST than there would be early sunsets on year-round standard time.

Admittedly, your editor has a vested interest in year-round standard time — living on the western edge of the Eastern Time zone. Year-round DST would put sunrise past 9:30 a.m. in December. And come June, we’d still have a glimmer of daylight in the western sky at 11:00 p.m. as we do now!

I suppose the suggestion then would be to switch some counties to Central Time. I can’t begin to contemplate how I’d then rearrange my life to be in sync with the stock market in New York and my colleagues in Baltimore…

Best regards,

Dave Gonigam
The 5 Min. Forecast


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Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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