THE NEW ERA FOR INVESTORS

After a crucial week, we learned that the #US economy is technically in recession, although some economists including the Fed and the US government don’t accept this term yet, and the Fed raised another 0.75bps and promised to do so in the coming meetings if the data worsens. Now the world’s investors are asking — what comes next?

Despite the #inflation eating up all the #income, American Consumers spent their #money vigorously in June. Real spending rose and even spendings on durable goods, as opposed to the expectation of the spending, should shift from durable goods to services. I believe this behavior is driven by the idea of consumers expecting even higher inflation in the coming days so that they think buy now if you can. Well, they can because the unemployment rate is at a record low, #stock/crypto gains, record home #equity, savings, and pensions. Poor people get welfare, free/subsidized health care, subsidized rent, and food stamps. High wage growth is contributing to high inflation. And the #Fed has explicitly said it was targeting wage growth as it works to bring inflation down.

However, the market’s expectation is that Fed Chairman Jerome #Powell will soon be forced into another pivot because the #financial system is under severe stress. Therefore, we have seen some sort of a small rally last week.

The market’s current enthusiasm for something that may come months from now is the exact opposite of what the Fed needs right now, and it may force the central bank to react aggressively. The Fed first needs to break this enthusiasm in order to bring inflation down to its knees before year-end. Otherwise, the cost will be much higher and the Fed will be forced to act even more hawkish in the coming months.

“We are highly attentive to inflation risks and determined to take the measures necessary to return inflation to our 2% longer-run goal. This process is likely to involve a period of below-trend economic growth and some softening in labor market conditions, but such outcomes are likely necessary to restore price stability and to set the stage for achieving maximum employment and stable prices over the longer run.”

This shows the level of hawkishness of the Fed and leaves an open door to be even more aggressive with rate hikes in September unless the inflation shows cooling down data.

The core PCE price index — the Fed’s preferred measure of inflation — climbed 4.8% in June from a year ago, which was a bit hotter than the 4.7% print in May. Though it’s also down from the 5.3% peak rate in February.

What caused the market to cheer for such enthusiasm is that the Fed didn’t provide a clear path for rates and the course is still somewhat the same for the year-end expectation and 2023. At some point, the Fed will have to pivot and stop hiking or even bring the rates lower than the current levels. The market is clearly interpreting Powell’s ‘meeting-to-meeting attitude’ as a sign that a peak in rate is near,” But this only proves that Powell has also no idea. It is also essential to remember what Powell was saying back in September 2021 and look at where we are now.

So we have to prepare ourselves for a new era in the world. This era will mostly resemble the times before the tech stocks had this much interest and share of the index moves. Today, Apple and Tesla are around 9% of the S&P 500. In 1980, the energy and materials sectors together were close to 28% of the S&P 500. Today, it’s less than 7%. We are heading into a similar era with all these indicators and the current situation in Ukraine-EU-Russia and China-Taiwan-USA. Just check this article posted on Bloomberg:

Exxon’s free cash overtakes Alphabet for the first time since 2015

With the current tightening path, the Fed has almost no option but to stop hiking at some point. They can’t go much higher with the interest rates as they will break the market and the financial system which is far more fragile than ever. Eventually, they will accept this reality and change their inflation target to 3%-5% while interest rates stay at around 2%-3%. Remember, much of this inflation is also triggered by the world’s tension getting higher because of the conflict in Ukraine and also supply chain disruptions after Covid lockdowns. Obviously, we might even see further escalations in the region as the winter approaches because Russia has no intention to step back from its plans in the region, and looks like the sanctions imposed on Russia are just harming the EU more than Russia.

All of what I just wrote should indicate that we are entering new market conditions for the investors. Investors shouldn’t be really enthusiastic to declare the current moves as the market rallies because with every up move the probability that you’re selling in the stock market is extremely high. It’s important to be aware that the baby boomers in the US have about $56 trillion of wealth, ten times what the millennials have. And, the baby boomers use such rallies to cash out.

If no real interest rates and the interest rates stay around 2%-3% for a longer time then we should really consider Gold, Silver, and other industrial commodities as good options. The energy sector will continue to be hot and will obviously draw some new investments both from investors and governments. Reshoring the manufacturers will be the priority for many developed countries. This will add some additional costs and entrench inflation even further at these elevated levels. However, as we all see, you can’t really rely on one country to produce such key ingredients for your economy. So, the semiconductor sector is already in the spotlight and it seems we need chips pretty much for everything we use these days.