The fact that the Fed misread inflation last year is widely accepted. Fed Chair Powell has repeatedly confessed in subsequent meetings “We have to be humble about our ability to understand the data”. Last week, Treasury Secretary Janet Yellen said “I was wrong about the path that inflation would take.” Earlier this week, while being grilled by Congress, she stated “I expect inflation to be high, although I very much hope that it will be coming down now”. Did she really say “Hope”? Well, her hope for lower inflation didn’t happen. Latest inflation report released on Friday shows inflation actually rose to 8.6% in May from 8.3% in April.

We’ve all heard it a thousand times before: “Hope is not a strategy.” To hear the two key individuals who have been directly responsible for pumping trillions of dollars into the economy but failing to see the impact of that infusion is shocking. To quote Ted Kennedy’s famous question to Donald Rumsfeld after the botched Iraq war – “The American people expect competence and you have not provided that. How many more mistakes do you have to make before it is time for you to resign”?

Future Wealth’s View

When the people at the helm are floundering, it is time for investors to do the hard work. Last week, we had posed the question – do you stay safe if the Fed gets it wrong again or do you start taking advantage of the sell off in the stock market and start buying under the premise that the Fed will get it right and avoid a recession? To help make that decision, we would recommend investors take the time to look at five key indicators among the 10 indicators that we track at Future Wealth LLC on a regular basis, to provide direction on whether to invest or not.

  1. Buffett Indicator: This ratio of market capitalization to GDP. A reading of 1.0 or higher is a sign of markets being overvalued. Current reading is 1.45.

  2. Price to book: This is a ratio of S&P 500 to per share book value. A value of 1.0 or below is a good indicator to invest. Current reading is 1.95.

  3. Q ratio – This ratio determines the value of a company. If it is greater than 1.0, the company is overvalued. Current reading of S&P 500 companies is 1.42.

  4. Dividend yield – Ratio of dividends per share to S&P 500’s level. Reading of 2% – 4% is a sign to buy the stock. Current reading is 1.21%.

  5. P/E ratio – The most popular metric calculated by dividing the S&P 500 by trailing 12 month earnings per share. Historical P/E for the S&P is between 15 – 16. Current reading is 17.5. 

These indicators are important to the extent that they are all signaling that the markets are still expensive, largely driven by growth stocks i.e. the technology companies. The same indicators provide very different reading when we strip out the expensive mega cap technology companies – Microsoft, Nvidia, Facebook, Alphabet etc. And that is where the value of the analysis pays off. There are lots of good companies that are trading at a massive discount to the market and present investors, with a long term investment horizon, the opportunity to buy and hold for the future. The hard part is finding those sectors or companies. That is what we do at Future Wealth LLC. One could get lucky by investing randomly in companies but could also lose their savings in the blink of an eye.