Market Pulse: This and that
For years I wrote that the market advance was aided by TINA (There Is No Alternative). TINA has turned into TIA (There Is an Alternative).
Higher interest rates hurt almost everyone, but savers benefit. Money market rates were zero, but now cash accounts pay about 2.5% and rising. Yields on Certificates of Deposit (CDs) range from 3.4 to 4.1%. If you have a significant amount of money at a bank or a brokerage that isn’t earning interest then make a change.
We all knew interest rates were going to rise, but not to this degree. Last week Fed Chairman Powell said that the median outlook has rates peaking at 4.6% next year and that he’ll raise rates in November and again in December. Being “data dependent” has taken a backseat.
That is bad news for stocks. Stock valuations are about earnings and interest rates. Rising rates have already hurt the market and in October we’ll hear about the earnings side. No doubt CEOs will temper their outlook and maybe use the “R” word.
Some are beginning to question how an unelected official, or an unelected committee, can decide to throw the economy into recession? The Fed’s independence is fine when they do their job well, like in the 1980s under Paul Volker. But what about when they are wrong? Expanding the money supply by 40% in 2020-21 and thinking inflation was “transitory” was a colossal error. Are they now overdoing it in the other direction? I think so, and I’m not alone. Wharton Professor Jeremy Siegel thinks Powell owes Americans an apology.
The sooner rates rise to wherever they are going and peak (called the terminal rate) the sooner investors will be able to look forward to falling rates. Income vehicles will give a little more ground as rates rise, then recover when rates fall, as they will. We’ve been through several such cycles. When rates were rising it was always a mistake to believe they’d never fall. Conversely, when rates were falling it was always a mistake to think they’d never rise. I have seen it again and again. In the final analysis, as a bond investor all you will receive is the coupon.
As for equities, earnings will be falling in a slowdown and rates rising. Not a good environment for investors. But the market can’t keep falling for the same reason. Prices will rise when investors look past the negative earnings and rate picture to better days. Soon would be nice.
David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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