The Federal Reserve’s Ice Bucket Challenge…
Remember a few years ago when people raised money for charity by challenging others to pour buckets of icy water over their heads? Last week, the Federal Reserve poured a bucket of ice water over the United States stock market. Randall W. Forsyth of Barron’s explained:
“In the past week, Fed officials stepped up their rhetorical anti-inflation campaign, with Jerome Powell all but promising a half-point increase in the federal-funds target range at the next Federal Open Market Committee meeting, on May 3-4. And other Fed district presidents raised the possibility of more forceful action, including rate hikes of as much as three-quarters of a percentage point, something the Fed hasn’t done since 1994.”
The Fed’s goal is to slow high inflation, which has been exacerbated by the war in Ukraine and China’s coronavirus lockdowns, without pushing the American economy into a recession. The question is whether the economy is strong enough to continue to grow as the Fed tightens monetary policy – and opinions about that vary.
One participant in Barron’s Big Money Poll, which surveys institutional investors across the U.S., wrote, “It’s not as bad as people think…Yes, interest rates will rise, but earnings will also rise along with that. Profit margins continue to be very high, and employment is strong. It’s growth slowing down, not ending.”
Another participant disagreed, reported Nicholas Jasinski of Barron’s. “[The Fed] should have started the process of raising rates sooner so they could be more patient with the pace of increases…Now, they are going to be overly aggressive trying to play catch-up, and will probably go too far and slow demand down too much.”
Last week, major U.S. stock indices declined, reported William Watts and Barbara Kollmeyer of MarketWatch, and the real yield* for 10-year U.S. Treasuries was briefly in positive territory for the first time since the pandemic began in 2020, reported Jacob Sonenshine of Barron’s.
*When the term “real” is used with interest rates, it means the rate has been adjusted for inflation (the bond yield minus inflation). So, the real return is what investors would have after inflation.
https://www.barrons.com/articles/here-come-the-interest-rate-hikes-they-could-be-even-worse-than-you-expected-51650675298?mod=Searchresults (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2022/04-25-22_Barrons_Here%20Come%20the%20Interest-Rate%20Hikes_2.pdf)
https://www.bloomberg.com/news/articles/2022-04-22/fed-dashes-cold-water-on-shock-and-awe-hike-of-75-basis-points (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2022/04-25-22_Bloomberg_Fed%20Dashes%20Cold%20Water%20on%20Shock_3.pdf)
https://www.barrons.com/articles/stock-market-economy-investing-outlook-big-money-poll-51650659809?mod=hp_LEAD_1 (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2022/04-25-22_Barrons_Bearish%20Now%2c%20Bullish%20Later_4.pdf)
https://www.barrons.com/articles/treasuries-real-yield-stocks-inflation-51650404673 (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2022/04-25-22_Barrons_The%2010-Year%20Treasurys%20Real%20Yield%20Briefly%20Turned%20Positive_6.pdf)
https://www.bls.gov/news.release/pdf/empsit.pdf [Summary Table A]
https://navigatorresearch.org/wp-content/uploads/2022/02/Navigator-Toplines-02.23.2022.pdf [page 23]
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Securities and advisory services offered through EWA LLC dba Equilibrium Wealth Advisors (a SEC Registered Investment Advisor).
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
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