Market Moving Event
The market-moving event of the week will be the Federal Reserve’s last meeting of the year on Wednesday. Strong economic growth, labor market recovery, and inflation have all clearly moved the Fed towards an accelerated focus on shifting its policy. The Fed matters when it comes to markets, and we saw that a few weeks ago when Chairman Powell’s testimony before the Senate Banking Committee kind of spooked the markets. This happened due to his hawkish comments on the Fed being more aggressive in tapering their support for the economy. Instead of slowly reducing bond purchases, they’re going to speed up the tapering. After inflation surged 6.8% in November, which is the highest in almost 40 years, expectations of the Fed to have to act more swiftly increased and could cause more volatility as we saw a few weeks ago. The important thing is to watch the pace of increase in interest rates. The stock market historically performs better in a slower, tightening cycle, and the Fed’s verbiage this week will hopefully clear up a lot of the uncertainty that Chairman Powell has been talking about. Right now, our consensus would be that the most likely scenario could be inflation peaking in the first quarter, the Fed bond purchases to end in March or April, and for the Fed to possibly raise rates in September. Obviously, this consensus could change based on the Fed’s actions this week, so we will be watching the Fed on Wednesday very carefully.
Inflation History
The Fed tapering and potential rate hikes are going to be a popular topic as mentioned previously. All the news stations will tell you that this is this bad news for stocks but let’s take a look back at the last tapering and rate hikes cycle we had. In the chart shown in this vlog, you will see that in 2014 when there was some tapering, the market did well. There was one rate hike in 2015 and 2016, three rate hikes in 2017, and four in 2018. In 2014, the market was up 11% during that tapering and flat in 2015. In 2016, the market was up 9.5%, up almost 20% in 2017, and strong in 2018 until the last quarter when the Fed took one step too far. In 2019 they reversed track, and you will see on the chart that the market rallied again, up almost 30%. The market goes through different cycles with different leadership groups. We will watch as the market goes along, and as rate hikes and tapering continue.
Consumer Behavior
Inflation has become the focus of most consumers as well as the Fed. That’s why there is a risk that the Fed may move things along quicker than expected. What’s driving this inflation outside of the Federal Reserve? It’s the consumer. The chart shown in the video for this episode shows that consumer spending on goods has spiked. Another chart shown in this video shows how it spikes relative to services. Goods are things like home purchases, buying a new smartphone, or buying a new car. Services are getting your haircut, staying in a hotel, or going out to dinner. Over the last few years, we’ve seen an enormous spike in goods versus services, which is extremely inflationary. Another chart shown in the video shows you how the price of goods or input commodities, excluding energy and food, over the last five years were flat or slightly down, until recently where you can see an enormous spike. That’s the spike we’re feeling. There’s a limit on how much you can spend on goods, how much goods can be produced then shipped and, on the shelf, to purchase. While services, such as a haircut, you can get every week and most of the time you know your Barber won’t raise your price. However, if the world goes out and tries about 20 million cars and there’s only a 13 million car production capacity, you’re going to have prices spiked like we’re seeing right now. That’s really what’s happening. An economy can absorb a lot more service inflation and service buying than it can on goods buying. As the Fed shifts and as we see changes in interest rates, something else that will be important to watch is how the average person is spending. Are they already starting to shift back towards a more normal service lead spending as opposed to good spending?
Technical Analysis
Last week, we saw the market not make a knee-jerk reaction, but quite the opposite and close strong for the week coming in at a price of 4,712. That gives us a new resistance level of 4,740 and a new support level of 4,681. Another trend we’re looking at is the 100-day moving average of the S&P 500. A couple of months ago, we gave a support level that we were looking for as the end of the year got closed. The 100-day moving average is currently sitting above 4,500. That’s the number that we are looking for heading into the end of the year. If we can keep that support level and maintain above it, that’s a good sign for the overall markets.
Greg Powell, CIMA®
President and CEO
Wealth Consultant
Email Greg Powell here
Bobby Norman, CFP®, AIF®, CEPA®
Managing Director
Wealth Consultant
Email Bobby Norman here
Trey Booth, CFA®, AIF®
Chief Investment Officer
Wealth Consultant
Email Trey Booth here
Adam Vansant, AIF®, BFA™
Vice President
Wealth Consultant
Email Adam Vansant here
Ty Miller
Associate Vice President
Email Ty Miller here
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
No strategy can ensure success or protect against a loss.
Stock investing involves risk including potential loss of principal.
Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor.
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