(Please enjoy this updated version of my weekly commentary from the Reitmeister Total Return newsletter).
The Fed has entered its two day window of meetings followed by an announcement Wednesday afternoon. The only thing investors care about this time around is their statements on inflation.
Is it just “transitory” as the Fed has stated in the recent past. Or is there enough persistence to the inflation with gauges hitting 4 to 5% of late to have them consider changing course. Most important of which would be a signal to lessen their $120 billion per month bond buying perversion to keep rates lower than market forces would naturally allow. (Also known as Quantitative Easing (QE).
First the facts as laid bare in economic reports this past week:
CPI year over year = 5.0% inflation
PPI year over year = 6.6% inflation
And yes gold stars go out to those of you that know that PPI is the leading indicator of where CPI goes next. Thus, this is a signal of even higher inflation readings on the way.
Next up comes interpretation.
Yes, much of this is likely transitory because we are comparing the Covid ridden deflationary environment of a year ago versus the rebounding economy of today. Not a fair comparison and inflation numbers should look better as we head out to the Fall of this year.
The part that may not be so transitory is that the Fed is BEYOND accommodative at the same time the US Government is greenlighting trillion dollar spending package after trillion dollar spending package. This much money rushing through the economy often creates inflationary pressures.
Next up is that even though the unemployment rate is still at 5.8% that business owners are complaining that it is really hard to hire skilled labor. This leads to having to lure them away with ever higher compensation packages. This type of wage inflation is one of the most persistent kinds.
Then you have real estate where home values and rents are spiking around the country. Not a surprise as this is a natural outcome from having artificially low rates (remember 2008?).
No…that is not happening now. But perhaps now is like 2005 or 2006. And so maybe we don’t want to keep repeating history too much longer with these low rates creating equity bubbles and outsized borrowing.
Back to the point. Higher real estate living expenses are another persistent type of inflation. And thus, as we look at the full picture, this may not be as transitory as the Fed has previously stated. And that may come to the surface at this week’s Fed meetings. And that may show up in the first step of lowering the bond spending program which would be a VERY clear signal to investors that more steps to tamp down inflation are on the way.
What is an investor to do?
Look for trades that benefit from higher rates. We actually have 4 in the Reitmeister Total Return portfolio at this moment (tickers reserved for Reitmeister Total Return members…learn more here)
Reity, is now a time to get more defensive on stocks?
That’s a hard NO.
Treasury rates would need to get much closer to 4% to put a real cramp into the valuation picture for stocks. But high dividend stocks would have the toughest time in this environment as they become less attractive as rates go higher. So do consider rotating out of those picks.
But Reity, if all this is true, then why did Treasury rates actually head lower over the past couple weeks?
John Thomas of the Mad Hedge Fund Trader said it best. When everyone is on one side of the trade, then in a round of profit taking the other side is going to win. Meaning this move lower on rates will be short lived with the fundamental logic of higher rates unfolding in the weeks and months ahead.
You will note that over the past few sessions rates have started to move higher again. Still a bit off from the recent highs around 1.7%. And well off the 2%+ rate if the Fed was not overly manipulating the bond market with $120 billion a month in bond buying.
(Wednesday Update After Fed Meeting: They did not change rates, but the movement of the “dot plot” with 3 more Fed officials looking to start rate hikes earlier was a loud and clear signal to investors that inflation may not be as transitory as previously stated. As such bond rates bolted higher on the news yet still well below where true market equilibrium would have them if not for extraordinary Fed interference. Long story short, expect rates to keep moving higher from here).
Now a quick word on the overall market. The thesis of a melt up in stock prices continues to look on target as the S&P creeps bit by bit further above 4,200. So I am glad that we got back to fully invested when we did even though there is still ample sector rotation making price action BEYOND volatile.
When the smoke clears from this period stocks will have clearly broken above 4,200 and making their way to 4,400 or maybe 4,500 before the next resting period. Growth at a Reasonable price stocks are the way forward as the market’s appetite for overpriced growth stocks seems over after the latest washout for the group.
Gladly our focus on the POWR Ratings is a natural choice for finding these GAARP stocks packed with strong odds for future outperformance.
What To Do Next?
The Reitmeister Total Return portfolio has outperformed the market by a wide margin this year. In fact, through the end of May the portfolio has powered ahead by +25.17% on the year which is more than double the S&P 500’s return.
Why such a strong outperformance?
Because I hand-pick the very best stocks from across the POWR Ratings universe—whether it’s a growth, value or momentum play—to bring you winning picks like JCOM, which bought subscribers of Reitmeister Total Return a +75.52% gain in just 5 months!
If you would like to see my latest advice on JCOM and unlock the current portfolio of 12 stocks and 2 ETFs, then consider starting a 30 day trial by clicking the link below.
Wishing you a world of investment success!
…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
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SPY shares were trading at $423.70 per share on Wednesday afternoon, down $0.78 (-0.18%). Year-to-date, SPY has gained 13.70%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...
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