Wall Street on Friday managed to snap a four week losing streak, with the S&P 500 just about making it into positive territory after ending in correction territory last week.The Federal Reserve played a big role in helping the S&P’s weekly advance. The central bank held interest rates steady, but lowered GDP projections and raised inflation expectations. However, it was Jerome Powell’s comments that got the most attention when he said that any inflation caused by President Donald Trump’s tariffs would only be “transitory.”
A trio of heavyweight companies also grabbed some of the spotlight this week with their quarterly results: FedEx, Micron Technology, and Nike. The parcel delivery giant cut its annual revenue guidance for a third consecutive quarter. Meanwhile, memory chipmaker Micron forecast a decline in the current quarter’s adjusted gross margin. Finally, the world’s largest shoe company issued soft guidance.
The stock market continues to look for direction while uncertainty looms large.
Future Wealth’s View
The real takeaway from the Fed meeting is that slowing nominal growth, paired with higher prices, simply translates to lower real growth or stagflation. Stagflation occurs when consumer prices rise rapidly and unemployment increases, leading to slow economic growth. This scenario also puts the Fed in somewhat of a bind because cutting interest rates risks reigniting inflation while raising interest rates could lead to higher unemployment.
The U.S. economy and stock market dealt with stagflation in the 1970s due to a combination of several factors, including a rising fiscal deficit and the Arab oil embargo, which led to a spike in oil prices. It turned into a lost decade for the stock market, with the S&P 500 only rising 17% during the period, which is well below its long term historical average and the rate of inflation at the time.
The last time the Fed used the word “transitory” was during rising inflation post pandemic period. It turned out to be a complete disaster with inflation reaching 9% levels before the Fed recognized its error and began to raise interest rates to drive down inflation to current levels.
At Future Wealth LLC, we believe the time to add more risk to our clients’ portfolios will come, but for now, we remain defensive and patient.