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Iron Capital Insights

  • Iron Capital Insights
  • March 14, 2024
  • Chuck Osborne

Those Last Ten Pounds

Have you ever been on a diet? It doesn’t seem to matter which diet it is, they all go great to start. You start telling your friends about it and they get excited as they see the pounds melting off of you. Next thing you know, you have only 10 more pounds to lose…and then it all slows down.

So it goes with the Fed’s fight against inflation. We have seen inflation just melt away from the super highs of last year, but now that we are down to the 3 percent range, everything is slowing down. Unlike last month’s inflation surprise, the market this time has thus far shrugged it off.

© MicroStockHub

The Consumer Price Index (CPI), which measures retail inflation, came in at 3.2 percent earlier this week, slightly higher than the 3.1 percent last month. The Produce Price Index (PPI), which measures wholesale prices, came in at 1.6 percent, up from 1 percent last month. Does this mean the battle is lost?

No, it does not. Many of our clients have heard me say this all along, but it is not a surprise that the last 1 percent or so of the drop back to the Fed’s target rate of 2 percent would be the most stubborn. This does not mean that the Fed needs to go back to raising interest rates; they simply need to be patient.

The current talk of the Fed is when to begin cutting. The pundits are obsessed with this, and they talk as if the market simply cannot keep rising without a rate cut. They have been wrong this whole cycle and they remain wrong. We do not need a rate cut. The economy is still chugging along; the Atlanta Fed’s GDPNow tracker has growth this quarter at 2.5 percent. Stocks prices, contrary to what many traders will tell you, track earnings growth, not interest rates. If earning are growing, stocks will rise.

I know what you are thinking, “But we are at all-time highs.” That is one way to describe it; another is that we are back to where we were three years ago. Meanwhile the economy and corporate earnings have grown. Besides, only the favored few that skew the S&P 500 index are back; all the other areas of the market are still making their way and have room to run.

The Fed may cut rates anyway, and if they do, the short-term traders will like it. They may decide to be more patient, and if they do, the short-term traders will not like it. Investors, however, make decisions from the bottom-up. We are looking at what is actually happening at the companies we own. For the vast majority Fed policy is low on their priority list.

Starting in the last three months of 2023, the market has finally been acting the way it should. Nothing goes in straight lines and there will be down days. We will eventually see a correction in 2024 – we hardly ever go a year without one – but the overall direction should remain up, and it should be driven by all those areas of the market that are not deemed “Magnificent” by the pundits who just keep getting it wrong.

Warm regards,

Chuck Osborne, CFA
Managing Director