They say the shortest distance between two points is a straight line. I wouldn’t know because, for some strange reason, I chose a profession and hobbies in which there is no such thing. I’m not sure what this says about my personality…although I did take one of those personality tests in college and it labeled me a wanderer.
I was never sure what that actually meant, although the description that came with it made me sound awesome. (Isn’t funny how every one of those personality descriptions sounds awesome?) I am not sure if “wanderer” really sums me up, but I have been an avid golfer for most of my life, and wanderer would summarize my golf game perfectly. I am not sure if it is possible for the golf ball to travel in a straight line, but I can assure you that none I hit ever did.
Later in life I picked up sailing as a hobby. I was inspired by one of my favorite uncles, who was also the reason I am a Wake Forest Demon Deacon. One thing that frustrates non-sailors about sailing is that the use of the wind for propulsion means it will be a rare day when the boat heads straight to its destination.
I have spent my professional career investing other people’s money. Over that 30-year span, the direction has been primarily up, but I can assure you it has not been a straight line. Straight lines just do not happen in my life. So it was of little surprise, after seeing inflation drop for the last several months with each month’s reading lower than the month before, that the January numbers came in a little higher. Previous months were revised upwards as well.
That brings us to Fed Chairman Jerome Powell’s testimony to Congress yesterday and the market reaction. Powell’s remarks were as expected, and really, little changed. He did say that rates may have to be “higher than previously anticipated,” but what else was he going to say? The Fed will react to the data when they meet, which will be March 21-22. The focus right now is that January’s data, which came out after their February meeting, showed inflation was higher than expected. So, Powell says they will raise rates higher. February’s data, which comes out next week, could change his tune, or not.
The big question I have is: Who expected inflation to just drop in a straight line? In truth, I doubt anyone did, but that doesn’t stop short-term traders from playing their games. Inflation has long stopped being the story for the market; The story is that the Fed raising rates will cause a recession. We believe that story is just wrong. The Wall Street Journal got in the act this week with a story suggesting much the same. However, the traders still believe that higher rates equal recession.
The problem with the rates-recession view is that it makes good news seem like bad news: When the recession doesn’t come, instead of saying, “Guess we were wrong,” the punditry just pushes off the onset. Meanwhile, one important thing Powell said yesterday – which was conveniently ignored – was, “We are not close to having a recession.” It is not a coincidence that market rallies keep occurring when companies are actually reporting results. The real world is doing okay.
If the Fed going from 0 to 4.5 percent on the Fed funds rate did not cause a recession, then a few basis points higher this year is not likely to have an impact. The pundits then say, “Yes, but how long will these high rates last?” My answer is five years, and yes, I am still bullish.
We have had two recessions in the last three years. We are not in the late stages of the business cycle; we are at the beginning, and the normal cycle is five years. Until then, the Fed’s focus will be on fighting inflation, not on fighting a recession.
Too many on Wall Street can’t remember a normal business environment. Their entire careers have been spent with the Fed in what was supposed to be emergency mode. They believe everything is about what the Fed does. They are wrong. Sometimes (I would argue most of the time), the price of a stock is not determined by Fed action, but by the actual value of the company, a portion of which the stock investor owns.
That idea might be old-fashioned, but then again so are 4 percent bond yields.
Warm regards,
Chuck Osborne, CFA
Managing Director