by Bryan Perry
March 7, 2023
There is a raging appetite to buy the market well before the Fed pauses and pivots, because, quite simply, most investors are not very good at individual stock selection, so they just want to buy “the market,” and with the major averages holding their 200-day moving averages as rates tick higher, the investing world is in disarray as to whether the Fed will overtighten, resulting in another “head fake” bear market rally.
For most of February, the data that crossed the tape was generally negative. Inflation wasn’t only sticky, it roared back with a vengeance, putting a halt to the market’s strong start in 2023. The Fed’s most watched inflation indicator, the Personal Consumption Expenditures (PCE) index, was especially sour in that it showed an increase in many service sectors. This is likely why bond yields surged higher, figuring that it would convince the Fed to extend their string of raising rates as far out as September.
Against this backdrop, not only were the January gains at risk of vanishing, but the technical progress made with all four of the major stock market indexes trading above their respective 200-day moving averages (MA) was being tested. The benchmark S&P 500 index retraced back to its 200-day MA twice at 3,940 and held. As of Friday’s close, the S&P traded at 4,045 and, for the moment, is out of trouble. But again, some market-moving reports lie ahead that will most definitely define the short-term trend.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
There is plenty of empirical and anecdotal evidence to argue strongly for any one of three views – a “no landing” or “soft landing” or “hard landing” scenario. In this kind of market, stock and asset selection are at an extreme premium. I will add, however, that the technical picture, while challenged this past week, did not break down, since we saw some genuine eagerness by investors to support the successful test of the 200-day moving averages. This shows that investor optimism still rules the emotional pendulum on a historical basis, which gives the market the benefit of the doubt, sometimes seemingly against all odds.
To be sure, it is important to note that higher interest rates aren’t just a domestic problem. Rates are moving higher around the world – in many cases, up over 2% in the last year. The largest central banks around the globe need to work in concert with each other so as to provide for stability and avoid fissures that are easily triggered by the some-$632 trillion dollars (not a typo) in financial derivatives markets as of the midpoint of 2022. The heavy hand of risk aversion on this scale can cause severe imbalances.
The old Wall Street maxim is: “The bond market trades on fear, and the stock market trades on greed,” and that applies (both ways) more now than at any time in recent memory. There are smart people with a strong history of analyzing inflation that believe the terminal rate is going to be above 6%. There are some large bets in the bond futures market that confirm this, and they will pay off huge if they are right.
One of the main dangers of the Fed raising rates too rapidly is that it puts huge stress on financing the $31.5 trillion in government debt at 5% interest rates, which so happens to be the return of 6-month T-Bills. If rates remain at this level, it threatens to dramatically deplete government spending on vital programs. Merely “raising the debt ceiling” to accommodate this situation puts the dollar at risk.
Rapidly Rising Debt Service is the Gigantic Problem Nobody in Power Discusses
Last Friday, March 3, my third grandson, Rhett Perry, was born. It was a glorious day but, sad to say, he came into this world already owing the Federal government over $73,000 on day #1. Poor little guy.
I’m pretty certain that every reader of this column tries to be a conscious steward of their finances, but if your bank gave you an unlimited line of credit with payback extended 50 or 75 years, you might use it. That would mean your grandchildren (like Rhett) would be responsible to pay for your mismanagement.
Who would do that to their children and future generations? Congress, that’s who. The Fed is only an observer. I believe this rapidly rising cost of servicing out-of-control debt is the elephant in the room that few are discussing. The Federal Reserve employs over 400 PhD economists, and I have to believe that this is the biggest water cooler topic that permeates that institution – but few discuss this debt in public.
There is a tipping point where the math (debt-to-GDP ratio) in an economy that accounts for 24% of the world’s GDP will gain the attention currency traders calling into question the “king dollar” syndrome that has dominated the markets for so long. It is imperative the Fed maintain the world’s confidence in its nation’s currency and debt obligations, but it can only do so with a more-thrifty spending program by Congress, which is not in the Fed’s control. Still, part of the puzzle must include some sort of leadership by the Fed, instructing or counseling Congress that continuing to raise the debt ceiling is a very bad idea.
This issue is now on the minds of many more millions of Americans than most politicians may believe. When most Americans are trying to save and manage their tight budgets to fight high inflation in their lives – but are paying taxes to a profligate Congress, they fear for the future of our country.
The federal government has run a budget deficit every year since 2000, forcing it to borrow money and add to a national debt that now sits at $31.5 trillion. The Committee for a Responsible Federal Budget recently estimated that it would require $14.6 trillion in deficit reduction to balance the budget over the next decade. Fat chance with this gang of high rollers in Congress, and the numbers only skyrocket from here, if not harnessed. Even if the current and future Presidents have big spending plans, such as what we will see this week from President Biden, it is incumbent upon Congress to draft more responsible budgets.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Are our elected officials that far out-of-touch with reality that they can’t start working on slashing debt instead of spending more? When our leaders live in a delusional state and refuse face the obvious truth, history has a habit of repeating itself in a bad way. If you can, write your Congressman and/or Senator and tell them you don’t want your grandkids to pay for the unforgiveable financial mismanagement of today. There will be a breaking point, but it doesn’t have to be. Spread the word. Let’s balance the books.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Reviewing “Our Big Energy Bet” (As Spring Approaches)
Income Mail by Bryan Perry
The Market Defies Inflation’s Revival (and Runaway Deficit Spending)
Growth Mail by Gary Alexander
Which Nation Will Prevail – China or the U.S.?
Global Mail by Ivan Martchev
M2 Money Supply Shrinkage Accelerates
Sector Spotlight by Jason Bodner
A Short Course in Market Timing and Sector Selection
View Full Archive
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Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
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