by Jason Bodner

March 14, 2023

“There are three kinds of lies: lies, damned lies, and statistics.”

Mark Twain said that, crediting a British Prime Minister, although the origin is mired in London fog.

While true, like any useful tool out there, stats can be weapons with the wrong wielder. They can be used in many ways to suit many purposes. For instance, movie buffs may know that 2009’s “Avatar” is the highest grossing movie of all-time. But that’s only in nominal terms. Adjusted for inflation, the uber-tall CGI blue humanoid-aliens didn’t win. No, the winner is still 1939’s “Gone with the Wind.”

Surprising, right?

Inflation erodes buying power in terms of an ever-eroding U.S. dollar’s value. And that’s what market anxiety is all about: What will or won’t the Fed do to win an unwinnable war against inflation?

Who likes higher prices? Naturally, consumers don’t, but some sellers do (if their other costs aren’t also rising). Inflation’s force has won a lopsided battle that – over time, like casinos – always favors the house.

The long-term “target” rate of inflation (for the Fed) is 2%. The latest Consumer Price Index (CPI), the “all-eyes-on-it” yardstick for inflation, released on Valentine’s Day, said their “all items” index rose in price 6.4% year over year. The good news is that figure is down from a peak of 9.1% in June 2022. The bad news is that 6.4% is still more than 3 times the Fed’s target rate.

Eggs have been in the news lately. Over the last 88 years that egg prices have been measured, from 1935 to 2022, eggs experienced an average gain of 2.75% per year – faster than the Fed’s target rate. By the rule of 70, egg prices doubled every 25 years or so, and they grew 10-fold in those 87 years. Lately, eggs soared, rising from $1.72 a dozen in November 2021 to $5.59 in November 2022, more than tripling.

FRED Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Eggs ain’t cheap, man… but in 1950, a dozen eggs was 60 cents, or roughly $7.28 in today’s dollars!

Everything is relative. Rome wasn’t built in a day – and that’s what all this is really about. Powell sat in the hot seat for a few days last week as the House grilled him on the tools he used to fight inflation. The Republicans cited the harm to American businesses, while the Democrats cited housing affordability and the impact on average Americans. Neither Party likes what’s happening… which means no one likes it.

How the Fed Will Impact Markets, Short- and Long-Term

I was recently asked how I think the Fed will impact markets near- and long-term. Here were my answers:

While my emotions say, “Be bullish for 2023,” (I was right from October until now), I now see more volatility, ultimately resulting in just a slight uptrend. Previous gains are now discounted, pricing in impacts of aggressive interest rate policy. I believe it will continue to be a stock picker’s market.

This is great for people like us. The dartboard approach doesn’t work, because we are not in the “mega bull” trend of the prior 13 years. Individual companies will exhibit significant alpha as markets chop along. There will be leading sectors and themes. Since October, tech and discretionary quietly led, while the media continues to bash them. I think it’s a great environment for systematic quant research. The feel-good magic of crypto and SPAC unicorns sold good vibes when everyone was making money, but when profit is scarce, we need unemotional guidance on which pockets of the market will show us return.

As for the Fed, it has a tough row to hoe. Their job is price stability – curbing inflation and maintaining a long-term healthy economy. Powell had no problem telling the world they are committed to “whatever is necessary” to ensure survival of the American family during COVID, hence the unleashing of unprecedented liquidity, but he also knew that people get addicted to the “high” of injected easy money.

We are still trying to put the genie back in the bottle after the housing crisis. Rates were effectively zero for years, and in 2019, pre-COVID we only made it back to 2.25% or so. Inflation has peaked, but they can’t over-tighten and can’t loosen too quickly. Still, they must save face knowing they were off-sides. Tightening should have been slow and steady out of COVID instead of the fastest hikes in our history.

Our national debt was over $31 trillion last I checked, so every 100 basis point increase costs $310 billion to service that debt, but I believe high rates – despite threats from the Fed – are not permanent, like the news may tout. The Fed is not looking to bankrupt our nation. I think rates are close to the peak.

The bears are coming out again, but from a data perspective, markets could swing either way. From my data, the Big Money Index rose from being “oversold” in October to being “overbought” in February.

A market pullback was written in the chart:

Big Money Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The question is: Do we enter a new downtrend or bounce from the bottom of the uptrend since October? No one knows for sure, but the Fed’s latest “bummer talk” is doing its best to dampen the mood.

From a sector perspective, Industrials, Discretionary, and Technology have been pockets of strength:

Industrials vs XLI Discretionary vs XLY

Technology vs XLK Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

That’s encouraging, as they are growth fuel for a strong economy. In terms of weakness, Communications, Utilities, and Real Estate are laggards:

Communications vs XLC Utilities vs XLU

Real Estate vs XLRE Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This makes sense as fear of rates being higher-for-longer affects rate-sensitive sectors. They pay above average dividends. As profitability erodes with higher borrowing costs, dividend reliability comes under question. Bonds might offer better returns. Who thought we would ever say that again?

I believe we are closer to the end than the beginning. Didn’t Voltaire say something like that?

End of it All Pix

All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
The Fed is on the Cusp of a Gargantuan Mistake

Sector Spotlight by Jason Bodner
“Numbers Don’t Lie” – Or Do They?

View Full Archive
Read Past Issues Here

About The Author

Jason Bodner

Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner

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