The advice is sound, very sound. Move part (at least of your portfolio to cash and sit out the worst of this bear market on the sidelines. And since you have that cash in hand, you’ll be ready to snap up bargains when the market has put in a bottom (or near the bottom, or on the way up from the bottom…or something.) But right now that’s easier said than done.
My one-hundred-and-forty-eighth YouTube video “Ouch! The Fed Gets Honest About Inflation” went up today. In front of the Senate Finance Committee today, Fed chair Jerome Powell said that the Fed has all the tools it needs to fight inflation–except, he admitted, that nothing it does to raise interest rates will lower the price of gasoline or food. Those prices don’t figure into the core inflation rate the Fed watches, but they are very real to consumers. More money spent on food and fuel means less money available for everything else.
It is different this time: Part 1 and Part 2 of my Special Report: Your Best Investment Strategy for the Next 5 Years. And the first 12 months of strategies and picks for Part 3. And it’s likely to “be different this time” for the next five years or so. And you need an investment strategy for that period.
The latest Consumer Expectations survey (that is for May) from the New York Federal Reserve shows U.S. households’ anticipate inflation will rise at a 6.6% annual rate over the next year. That’s up from April expectations for a 6.3% rate. The May anticipated rate matches March results in the survey for the highest inflation anticipation on record.
At its March 16 meeting the Federal Reserve’s Dot Plot showed Fed officials forecasting that the Fed’s short-term interest rate, now set at 0.75% to 1.00%, would end 2022 at 1.9%. Things have changed since then with the Federal Reserve due to meet on Wednesday, June 15. There’s currently a fairly large divergence on interest rate expectations for the end of 2022.The June meeting and the new Federal Reserve Dot Plot showing the consensus forecast by Fed officials will go a long way to narrowing that divergence. But I don’t expect all disagreement to vanish from the markets on Wednesday. And I do expect that resolving this disagreement will present a bumpy road to the financial markets.
After Friday’s gut punch to stocks, the Wednesday, June 15, the meeting of the Federal Reserve’s interest-rate will be even more important for stock market direction. I argued back on June 2 in my video “Beware the Fed’s Dot Plot” that the June 15 meeting was likely to create big waves in the financial markets. Investors and traders would be ready to buy or sell big time depending on what the Fed said in its Dot Plot about its expectations for future interest rates, inflation, and economic growth. The Fed had already lowered its projections for economic growth, raised its projections for inflation, and increased its projections for interest rates at the end of 2022 and in 2023 at its March 16 meeting and the release of a Dot Plot on future expectations.Now, though, after inflation rose aggressively to an annual 8.6% rate in the May Consumer Price Index report on Friday, the stakes are even higher.
Headline Consumer Price Index inflation in May rose to a new annual high rate of 8.6% in May, the Bureau of Labor Statistics reported today, June 10. Headline prices rose 1% from April. The big drivers were, as expected, food (with prices up at a 10.1% annual rate) and energy. The core CPI, which strips out food and energy prices, rose 0.6% in May from April and at a 6% annual rate.
My one-hundred-and-forty-secondYouTube video “The Treasury Yield Tide Is Rising” went up today. Yields are up for 2-, 5-, and 10-year Treasuries. I’m also seeing higher expectations for more rate increases in the coming Fed meetings with the odds rising for a 75 basis point increase in July and/or September. I think these extreme bets on a 75 basis point increase have more to do with attitudes toward inflation than with actual belief in a 75-basis-point interest rate increase in those two months–that is that it will be tougher to bring it under control than the Federal Reserve now thinks. But these extreme positions are something to watch going forward. To one way of thinking they represent the chance for a rally in stocks if traders retreat from the 75-basis-point camp.
Today, Wednesday, June 8, the Organization for Economic Cooperation and Development warned that Russia’s invasion of Ukraine is fueling rapid inflation and slowing global growth. “We are not projecting a recession ” at this time, said Mathias Cormann, the organization’s secretary general, but the organization lowered its estimate of global growth to 3% in 2022 from the 4.% percent it predicted at the end of last year. It estimated that average inflation among the organization’s member nations was likely to run close to 9% this year, double its previous forecast.
Logic says that demand for fertilizer should be soaring as North American farmers look to increase production at a time when grain prices are near record highs thanks to the severe reduction in exports from the Ukraine and Russia. Logic, however, looks to be wrong. An article in the Financial Times on June 4 reports that demand for fertilizer is falling in response to record prices–for fertilizer. Farmers faced with higher costs for everything from fertilizer to diesel fuel are feeling themselves squeezed in spite of higher grain prices. So they’re buying less fertilizer and shifting away from crops such as corn that require heavy fertilizer use and toward crops such as soybeans, that require less fertilizer. U.S. farmers, the Financial Times reports, have told the U.S. Department of Agriculture that they intend to plant 4% fewer acres with corn n this spring and boost the number of acres dedicated to soybeans.
Inflation isn’t solely a U.S. phenomenon. Which makes the Federal Reserve’s efforts to control inflation even harder. Inflation in the European Union hit a record 8.1% in May. The spread in the nineteen country group between the country with the lowest rate of inflation (Malta at 5.6%) and the highest (Estonia at 20.1%) also rose to the widest since . The gap between the highest and lowest inflation rates among the currency bloc’s 19 members has also jumped to its widest ever since the start of the euro in 1999. Meanwhile, inflation in Turkey hit a 23-year high of an annual 73.5% in May
Another Federal Reserve official talked the interest rate increase talk today. Federal Reserve Vice Chair Lael Brainard told CNBC that expectations for half-percentage-point increases in interest rates this month and next were reasonable, and saw no case for pausing the central bank’s tightening campaign afterward. “From where I sit today, market pricing for 50 basis points, potentially in June and July, from the data we have in hand today, seems like a reasonable path.”
