In response to the continued hawkish position of the Fed and their desire to slow down the economy, the first signs of material cracks in the economy started to show as a series of companies began to trim their workforce – JP Morgan to lay off 1000 workers, Compass to cut 450 works, Redfin to cut 6% and list goes on – Docusign (9%), Snapchat (20%), Coinbase (18%), Carvana (2500 employees), Better (4000 employees). While most of these layoffs have been in the risky sectors – Tech, Financials and Housing, the next shoe to drop will be in Consumer Discretionary. Some of the companies in that sector have already begun to feel the impact – Wayfair and Gap, both announcing that they are eliminating 5% of their workforce.
On Wednesday, the Bank of England, fearing a breakdown in market stability, promised to buy long-dated bonds, sending the yield on the 30-year gilt down by a full percentage point in the span of just a few hours. That buoyed the US stock market hoping for some similar moves by the US Fed. The U.S. central bank, however, has remained steadfast in its mission to stamp out inflation. It has shown a disregard to the stock crash of 2022, soaring yields and a skyrocketing dollar, especially since it wants prices and consumer spending power to come down. The markets began to slide back down on Friday marking the worst month since early 2020.
When will the bear market end is a question that everyone on Wall Street is asking?
Future Wealth’s View
With the Fed getting what they wanted and destroying trillions of dollars of savings, it is now incumbent upon us consumers to curtail spending and lower inflation. It is not unlike a drought where consumers are asked to use water wisely and not water their lawns everyday or wash their cars for hours every week. The only metric that will prompt the Fed to pause raising interest rates will be CPI/PCE data. Unfortunately, on Friday, the PCE (Personal Consumption Expenditures) for August came in at 6.2%, down from 6.4% in July, but not enough to deter the Fed from raising rates by another 75 basis points in October. The September inflation report is due on Oct 13, 2022. If the CPI number does not drop materially from 8.1% in August, prepare to see your stock portfolio to be butchered once again. On the bright side, if you are feeling bad about your portfolio being down, you can take solace in knowing that Facebook CEO – Mark Zukerberg’s net worth has dropped by $71 billion year to date.
The first thing that higher interest rates break is the financial markets, next is housing and finally it is unemployment leading to a painful recession. The only real investment strategy left is capital preservation. Keeping cash may prevent succumbing to market drops but it will still lose value due to inflation. Value stocks are the only choice in equities and if you haven’t sold or trimmed your Technology, Housing, Financials and Consumer Discretionary stocks, be prepared for further downside. Holding onto stocks that are down since purchase hoping to sell when they come back to the purchase price is a rookie mistake. In a book written by Anne Duke titled “Quit”, the professional poker player states that quitting at the right time is the primary factor separating amateurs and professionals – “Amateurs hold them, professionals fold the -m”. Which brings us to bonds as a viable alternative. As interest rates peak – treasury, municipal and corporate bonds yielding 4-5% are increasingly becoming attractive.
In last week’s report, we had stated that Fed Chair Powell should consider resigning given the catastrophic mistakes by the Fed. Link is here –
Earlier this week, reports indicate that the White House is getting ready to fire Treasury Secretary Janet Yellen – Fed Chair Powell’s partner in the ineptness that became the inflation blunder. We say “Good Riddance!”.