Hope you are all doing well. Markets did not have a great week, a modest weekly decline of 1.1% on the S&P 500 after two weekly gains in a row. The NASDAQ which has been flying to start the year posted a steeper decline of 2.4%; the Dow slipped about 0.1%. As today is the Super Bowl I have broken down this week’s update using famous post game press conference meltdowns.
Overwhelming negativity can sometimes be a harbinger that better days are just around the corner. Edwards’ meltdown came after his Jets fell to 2-5. Edward’s rant sparked a 7-2 finish, and the Jets won the AFC East division title. The yield curve currently paints a bleak picture about the present but that doesn’t mean we have more pain ahead. The inversion of the yield curve grew to its widest margin since 1982. The negative spread between the yields of 2- and 10-year U.S. Treasury bonds swelled to 86 basis points at one point on Thursday. A steeper inversion of the curve suggests we could be closer to the end of this bear market. That’s because it tells you investors expect better market conditions to prevail over the longer term, hence the widening difference between short-term and long-term yields. If you had invested in stocks in 1982, the last time the yield curve was this inverted then you would have done pretty well. At the time things looked bleak but 1982 started a run of 8 positive years in a row of gains for the S&P 500.
Green’s famous meltdown came after blowing a 20 point lead against the Bears. The market seems ready to let inflation off the hook. Markets are looking at headline CPI inflation in the U.S which has come down for six straight months and are being lulled into a false sense of security. U.S. Federal Reserve Chair Jerome Powell is not going to let inflation off the hook. He said on Tuesday that the process of lowering inflation to the central bank’s goal of 2% “is likely to take quite a bit of time” and will probably be “bumpy.” Powell’s message continues to be largely ignored by markets who believe the Fed will pause and eventually cut rates. Market forecasts now call for headline inflation to fall to under 4.0% by year-end and closer to 2.5% by 2024. The disconnect is markets are fine with getting to 2 percent inflation by 2025, the Fed is not. That is why I continue to believe the Fed will stay on its aggressive path of rate hikes as it does not want to lose the progress it has made against inflation.
If you’d like to speak about your investments or your plan, my calendar link is below and you can schedule a phone or zoom appointment. Enjoy your Super Bowl Sunday.
