Very few Fed meetings have been as important as one on Wednesday this week. After Fed Chair Jay Powell’s prepared comments, the perfect question from the CNBC reporter during the Q&A session that turned the markets around was “Will there be a 75 basis point increase in interest rates in the coming months?”. Jay Powell answered “No” and markets began to rally soon after that. But by Friday, that enthusiasm faded away and was replaced by the concern that the Fed had been wrong last year about inflation being transitory and could likely be wrong again, elevating the chance of a recession in the next 12-18 months.
Certainly a global recession is possible. Europe is probably already in one, China with its lockdown could enter one shortly and that leaves the US to hold things stable. What does the next 12 months hold for the US economy?
Future Wealth’s View
Bear markets are tough. It grinds you down with good days that get one excited that things are turning around and then we hit bottom again the next day. In these times, it is important to look at economic data – job openings are at a record, unemployment is low but consumers are hesitating to pay prevailing prices – a sign of the negative impact of inflation. Job creation is expected to slow down, and as vacancies come down, wage inflation should drop. The question is whether the economy is strong enough to handle tighter economic policy?
Inflation data will be key – something that we need to keep an eye on all year long. If CPI (Consumer Price Index) data on May 11 signals a drop from April and if June is lower than May, we may see an easing in interest rates from the Fed and we could be on pace to successfully avert a recession. Else…all bets are off.
For investors, it is time to evaluate where you want to be on the risk curve? Market clearly does not favor being on the riskiest part of the curve i.e. growth stocks and neither does it pay to be on the other end keeping money in the bank with inflation running high. Given these conditions, at Future Wealth LLC, what we strive for in our client portfolios is capital preservation when neither stocks or bonds are working well.
Bottom line is that investors need a new playbook. If you don’t have one yet, it may be too late.