Another month, another Federal Reserve meeting
Economy and the Market:
The Fed funds rate was increased by 75 “basis points” or “bps” or 0.75%. For reference, 100 “basis points” = 1.00%. Until recently, the expectation of the Fed funds rate increase was 0.50% or 50 basis points. The recent CPI/inflation increase announced last week moved the expectations for the Fed funds increase to 0.75%. The rise in expectations for the increase was part of the reason for the stock market sell-off and increase in interest rates across the yield curve late last week and early this week.
In this case, conforming to “buy the rumor, sell the news,” interest rates declined both yesterday after the Fed announcement and then again the next day. After the Fed announcement, the stock market rallied also conforming to the sell the rumor and buy the news adage. That reversed Monday this week as the news conference and Powell’s response sat poorly with the markets overnight. Apparently, markets think Powell’s message was wishy-washy and a denial of inflation's risks to economic growth.
The yield curve is getting funky with small bumps and indications of small inversions with eyes on the two-year yield exceeding the ten-year yield that would indicate markets are concerned about inflation in the short term and economic growth rates for the longer term. Confidence that the Fed will find that challenging line to sustain economic growth while reducing inflation is not high at this point. The data will speak loudly according to Powell’s own words.
While there is some good news about the steep declines in the stock market that are broad-based. Of course, it is unclear how an economic slowdown will impact earnings. Individual investor bearish sentiment as indicated by the Association of American Individual Investors (AAII) climbed significantly last week with neutral and bullish investors declining.
The Crypto markets are also experiencing stress with Bitcoin value falling below $20,000. CoinBase, an SF-based company, is laying off 18% of its workforce. Other large companies such as Tesla, and real estate firms like Redfin and Compass announced layoffs as well.
Emotions and Research
The current dismal news needs to be put in perspective. Neuroscience research says the memories are affected by your current state of mind. Neuroscience and behavioral economics research demonstrate the pain of loss is twice as great as the satisfaction of gain. The negative news today seems like it will last forever. Let me assure you it will not! Even though it feels like it. Remember March 2020 or March 2009. Of course, not our memories are short. Stick to the plan!
And by the way, in the market for homes in Alamo? Steph Curry’s former home is on the market for $9.4M. And the Golden State Warriors are NBA champs again. That’s 4 out of the last 8 years and quite an accomplishment. Something to feel good about in some dark times. I know how I felt two years ago immersed in Covid, spectators removed from sports arenas, and the Golden State Warriors achieving the worst record in basketball. Remember that as you look at markets today with the Warriors winning a championship two years later.
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