Transcript

 

Hello, and welcome to our market alert video for today, which is July 29, 2022. And we’re going to talk today about why the market went through the roof when the Fed announced that inflation is so bad that they’ve got to raise interest rates three fourths of 1% to combat it. So, what kind of insanity are we seeing? Inflation is bad, the consumer’s strapped, the economy’s slowing, we’ve had two quarters of the economy shrinking, and yet the market is going crazy and going up? Why is that all happening? Well, interestingly enough, it all boils down to one sentence, in our view, that the Federal Reserve Chairman Jerome Powell said in his speech that he gave to tell us what he’s going to do with interest rates. And that one sentence, I’ll read it to you, “We are now at levels and broadly in line with our estimates of neutral interest rates, and after front loading our fighting cycle until now, we will be much more data dependent going forward.” Well, what does that mean? Well, it means that they’re going to be data dependent going forward.

The fear in the market was that the Federal Reserve had this open ended, we’re going to raise interest rates until we kill inflation. Now, they’ve said it’s going to be data dependent. So, they’ve kind of put parameters around the decision making that they’re going to make. So, why did the market like that? Well, investors like a degree of certainty, you know, if you’re going to invest, you want to have some confidence, that what you’re investing in is going to happen the way you think it is. So, by the Fed telling us that these are the rails within which they’re going to work, then now we can look at what are the expectations of inflation. And the market according to Bloomberg, the bond market, which is the watcher of inflation, if you will, is saying that by July of next year, inflation will only be 2% again. This is it’s not temporary, but it’s short lived, it’s going to be gone by a year from now, July of 2023, will be down to 2%. So, if that’s the case, the Fed probably start lowering interest rates early next year. And if that’s the case, boy, we better invest now. So, all of that is why the market went nuts, in our view.

Well, let’s back the truck up a little bit here. And let’s examine what are the assumptions behind all this are. First of all, is the Fed any good at predicting what’s going to happen? Well, we all saw how good they were at predicting that inflation, they said it would be transitory and in fact, it turned out not to be anything like transitory it’s become kind of stuck. So, first of all, we have that, but the other thing also is that if we look at other periods in history, and this comes from MarketWatch, that the Fed has begun a tightening cycle, meaning they’ve started raising interest rates. They’ve broken something every time since 2000. In Y2K, they were raising interest rates, and the tech bubble burst in the stock market, the S&P went down 49%. They did it again, in 2008, just before with the credit crisis, they were raising interest rates, and they broke it again, and look what happened, then we had a 57% drop in the stock market. In 2014, they started raising interest rates or changing their policy, And what happened then we had what’s now known as the “taper tantrum” where the stock market sold off dramatically. So, the first assumption here is that the Fed is actually going to be good at seeing these data points and making them happen.

The other assumption, of course, is that in our view, the stock market stock prices are a function of profits. And profits are when companies sell stuff, and who do they sell it to? Well, 70% of our economy is the consumer. And right now, that consumer is faced with high inflation, and rising interest rates, and we think the Fed’s going to raise interest rates way more than what they’re talking about. We think now it’s going to be far more difficult to beat this inflation than right now what people are thinking. So, you have the consumer that we think is going to be clobbered by high interest rates and high cost of living, and they’re not going to buy as much stuff profits will fall, and if that happens, in our opinion, stock prices will fall along with that. And so, we don’t think it’s any time now to start getting aggressive or start buying into this rally.

Now of course, we could be wrong, but that’s our view. And we work with people who are over 50 who are retired or retiring soon, and our view is that growth is important, yes, but protection of principle is even more important. And so that’s why right now, we are still very defensive. We are out of the market. As you know, we’ve said this for several weeks now, we’ve been out for months, and we’re going to protect our clients, we want your money to last as long as you do, we want you to have peace of mind. And if the markets falling as we think it’ll go from here, we think there’s new lows to be had. That’s not going to give peace of mind or having money lasting as long as you do.

So, I encourage you, if you’re not a client to visit with one of our retirement planners. You can find them at rpoa.com, which is our website. And you can click on “Meet with an Advisor.” We’ll visit with you. There’s no charge or obligation. Hopefully we can help you to navigate through all of this stuff. And by the way, just so you know, our strategy also did tell us to get out for all of 2008 during the credit crisis. So, we have a track record of our strategy having helped to protect our clients from major losses. In fact, the day before the pandemic was officially declared a national emergency in the U.S., our strategy said to get out of all equities and so we did. So, our strategy once again did tell us to do that now. So, we want to share our strategy with you, our thinking we want your money to last as long as you do as I said, and you can find it all on our website rpoa.com. So, thank you for watching this video and we will talk soon.