Buyer Beware – July 28, 2023

Wealth Management • Jul 29 2023
Buyer Beware – July 28, 2023
Morgan Lewis Posted on July 29, 2023

Buyer Beware

This author has been attending a natural resource conference all week and was traveling Friday. As a result, this week’s HAI will just be prices along with a few very brief comments. HAI recommends readers visit Doug Noland’s Credit Bubble Bulletin for full and always excellent coverage of the week’s events.

Fed Chairman Powell raised the fed funds rate another 25 basis points at Wednesday’s FOMC meeting, as expected. Also as expected, the Chairman made it clear that the Fed may continue with further rate hikes in the future if the data warrants. Time will tell. As at the June FOMC, Powell again said the Fed would watch incoming data and study the impact of its rate hikes on the economy “in determining the extent of additional policy firming that may be appropriate” to reach its 2% inflation target. Powell cited elevated levels of inflation still above the Fed’s target as a rationale for what is now the highest U.S. central bank policy rate in 16 years. The vote to hike was unanimous. The 25-basis point hike, the Fed’s 11th in its last 12 meetings, set the benchmark overnight interest rate in the 5.25%-5.50% range. That’s a shocking increase from the Covid 0% regime.

While the stock market remains fully euphoric, we’ve seen this resurgent optimism before. Newspaper headlines celebrating successful soft landings are common to every pre-recessionary period before the hard part hits. Similarly, soft landing narratives have prevailed before major market tops end in drops. Recessions surprise investors every time. It always looks like a soft landing—until it doesn’t. 

The Fed is still hiking interest rates over a year into a deeply inverted yield curve. At the same time, credit is already slowing. For the first time ever, the Fed continues to hike while forward earnings per share growth in the market is negative. Even if “this time is different”—something we’ll examine in more depth next week, there will still undoubtedly be a nasty impact from the lag effect of what the Fed has already done. We are only starting to get into the historical timing lag where a Fed tightening cycle starts to have an effect. The lags are “long and variable,” but they are intense and mechanical.

The freight markets are a great leading indicator. This week, the freight space spoke in terms that gave off decidedly recessionary vibes. On a conference call, Knight-Swift CEO Dave Jackson stated, “I don’t know that we’ve ever seen freight demand fall this far so fast and for so long without an accompanying economic recession.”

Commodity prices have started to move higher. That will complicate future inflation readings. The longer the Fed stays high on rates, the more economic trouble we are likely to encounter in the future. As the corporate refinancing cycle kicks in more forcefully, the negative impacts will be unavoidable. Goldilocks looks very transitory. The risks to markets are very real. Buyer beware.

Weekly performance: The S&P 500 gained 1.01%. Gold was off 0.41%, silver lost 1.41%, platinum was down 2.93%, and palladium was lower by 3.65%. The HUI gold miners index was off 2.73%. The IFRA iShares US Infrastructure ETF was down 0.32%. Energy commodities were volatile and mixed on the week. WTI crude oil was up 4.55%. Natural gas lost 2.76%. The CRB Commodity Index was up another 1.45%%, and copper gained 2.88%. The Dow Jones US Specialty Real Estate Investment Trust Index was off 1.11%. The Vanguard Utilities ETF was down 2.12%. The dollar gained 0.60% to close at 101.4. The yield on the 10-yr Treasury was up 9 bps, ending the week at 3.93%.

Have a wonderful weekend!

Best Regards,

Morgan Lewis
Investment Strategist & Co-Portfolio Manager

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