Rate Hikes and The Fed
Last week we seemed to be having a bit of a rally. Even through mid-day on Thursday, the market was up, but then chairperson, Jerome Powell spoke in public comments and came out a little more aggressive than the market’s anticipated. The expectations for rate hikes went up considerably. You can see on the chart shown in the video that the market is now expecting 10 rate hikes this year. That would take the federal funds rate from zero to effectively 2.5%. A little back-of-the-envelope math will tell you that there’s only six Federal Reserve funds meetings remaining this year. That means the Fed must raise rates by more than 25 basis points if it’s going to match market expectations. That doesn’t sound like a big deal, moving from 25 basis points to maybe 50 basis points, but the Fed hasn’t raised rates by 50 basis points in over 20 years. We don’t really have a lot of recent history of how the market will react to that. You can look at another chart shown in the video to see the number of times the Fed raised rates by more than 25 basis points. If you go back in time, it looks like it’s much more common. It’s really the last 20 years when it’s uncommon, where the Fed moves in 25 basis points increments. On the close of the week last week and to start this week, the market definitely got concerned about a potential 50 or 75 basis point rate. Looking at the same chart, going back to March of 1980, you will see where the Federal Reserve raised rates by 5% in one meeting. There’s definitely been precedent in the market with fighting inflation and the Fed coming out much stronger than anticipated. So, while it may be higher than expectations, initially, it’s not nearly as bad as it’s been in the past and something that we all were able to absorb. This is something to watch closely as we go into the Fed’s meeting the first week of May.
While the world is still focused on the situation in Ukraine, our focus has turned to China. China is one of the biggest risks to the global economy that probably isn’t getting the attention that it needs. You can see in the chart shown in the video that COVID cases have jumped significantly. Nearly 400 million people across 45 cities in China are currently under a full or partial lockdown which is due to China’s zero COVID policy. That represents 40% of GDP for the world’s second largest economy. It also significantly impacts over 600 companies in China with many of those being manufacturing companies. Our concern is that the supply chain will be severely impacted by this new shut down. In fact, the world’s busiest port, port of Shanghai, is being severely impacted. We’re seeing reports that the number of vessels waiting to load or discharge has skyrocketed to a record high. We’re also seeing reports that more than 90% of trucks supporting the import and export deliveries are at a complete standstill. This is a big deal as the global economy is already on shaky ground with the conflict in Ukraine and high inflation. That’s something that we’re focusing more and more on because it’s a big deal.
The Consumer Impact
The consumer makes up 70% of GDP here in the US. Reports show that our consumer is still strong. With 11 million job openings, it’s going to be hard to get too bearish on consumer spending or corporate profits. It’s a matter of when, not if, these jobs get filled. At the same time, in a chart shown in the video, you can see that the consumer is making more money. Even though energy prices are up, it’s making a lesser percentage of disposable income for the consumer here in the US. Also, revolving credit is back to pre-pandemic levels. The percentage of credit cards compared to disposable income is 4.7% which is down below its historic average of 5%. It’s going to be hard to get too bearish if the US consumer stays like this.
Greg Powell, CIMA®
President and CEO
Email Greg Powell here
Bobby Norman, CFP®, AIF®, CEPA®
Email Bobby Norman here
Trey Booth, CFA®, AIF®
Chief Investment Officer
Email Trey Booth here
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.
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