The Federal Reserve minutes of the May meeting, released earlier this week, gave investors a pretty clear roadmap for the summer. The minutes highlighted the Fed’s focus on inflation and with rate hikes of 50 basis points in the June and July meetings. The stock market interpreted this to mean that the policy path after July will depend upon the trajectory of inflation and progress toward correcting the supply/demand imbalances in the labor market.

After a 8 week sell off in the market, the markets began to rebound posting gains across the board with energy and value stocks gaining momentum and even growth stocks seeing some positive appreciation.

But, the trillion dollar question is “As the economy cools down, will the Fed successfully engineer a soft landing and avoid a recession?”

Future Wealth’s View

Just last week, we had stated in our report that “We may be close to hitting bottom in the equity markets in terms of valuation if only the Fed would continue to be the backstop”. Link is here:

The Fed gave exactly what the stock market wanted by turning slightly dovish. But, the Fed has the market to thank for the sell off over the past 5 months and creating an anti-wealth effect that has already begun to cool the economy. Housing, retail, hiring and spending have all slowed down due to the wealth destruction caused by the stock market. Apple, Amazon, Facebook are seeing employees suddenly looking for stability amid signs of trouble. Walmart has begun to stock more half gallons of milk for shoppers who are hesitant to buy a full gallon of milk. More and more retailers are bringing back discounts, cheaper store brands and rewards programs for shoppers. In essence, the Fed’s work has been done by the stock market. In the coming months, if the Fed sees data to convince themselves that further interest rate hikes beyond July will not be necessary, the stock market will continue its celebration.

Over a year ago on April 17, 2021, before the Fed even considered raising interest rates, we had cautioned investors that “Inflation is here”. Link to the article – We would now caution investors that “slowdown in the US economy is here”. 

But, in the meantime, the bear market is not over. The next important economic data to watch is  May’s inflation report to be released in mid-June. If that report shows inflation reading below April’s inflation number of 8.3%, it will mark two consecutive months of decline. With energy and food prices primarily driving inflation, let’s all collectively say a prayer for the next inflation report to be lower than 8% – the consequences of seeing higher reading from last month will be devastating on all our stock portfolios.