As expected, last week the Federal Reserve announced that they are raising rates. We had several questions around how the market reacts to tighter policy, so we wanted to address that today. As you can see, in a chart shown in this episode, stocks have done quite well in previous periods of tightening. On the right side of the chart, it shows how a year after the first tightening, we have seen stocks higher the past six times. Investors need to remember that the first rate hike is normally a sign that we’re in more of a mid-cycle and there could be years left for stock and economic gains. For instance, as you can see in the second chart shown, there were seventeen total rate hikes in 2004-2006. The S&P 500 was higher each of those years so even with the Fed expecting multiple hikes this same year, we have seen multiple hikes in the same year many times before. The bottom line is that rate hikes usually are not bearish events, and we don’t expect this cycle to be any different. The big picture items like long term gas prices are what we are more worried about when it comes to negative economic impacts. We are watching things carefully, but our history says not to overreact to the Fed tightening.
The Yield Curve
The Fed raising rates on its own is not a negative indicator. It’s often a positive indicator that the economy is strong and can work without Fed stimulus. However, at some point, typically the Fed over does it and causes the economy to roll over. So, where is that tipping point? Chartist and research data often points to the yield curve, which is the difference between interest paid on short-term borrowing versus long-term borrowing. You want to see interest paid on long-term borrowing much higher so that you’re being rewarded for investing for the long-term. It is when that flips that we get concerned. A chart shown in this episode shows that since 1978 there have been six recessions dated by the National Bureau of Economic Research and in all six instances, the yield curve inverted. That means the two-year treasury yield was higher than the ten-year treasury yield. That shows that the Fed was raising rates on the short end and the economy was saying things are slowing down on the long end. You have the market saying one thing the Fed saying the other. While the Fed can raise rates, we must watch this very closely to see what the market is telling us. We really want to see market rates start to rise because right now that is very tight. You’ll notice that the chart doesn’t say when the yield curve nearly inverts it causes recession because that’s not the case. The yield curve actually has to flip, and we have to have long term rates lower than short term rates. Right now, it’s sitting at 0.20% or 20 basis points, so the Fed is walking on a very tight rope right between raising rates to help inflation and not pushing the economy into recession. You can see that the average time between when the yield curve inverts and when we go into recession varies. It has historically been between 22 months in the long run and six months in the short run. On average, it is around 12 months. This is something we’re watching very closely, though. We can stay this close to an inverted yield curve for a very long time. We did that for nearly a decade back in the 90s so this is something we can do very easily and is something we’re watching closely.
State budgets are in the best shape they have been in in 40 years. In a mid-term election year where people are focused highly on inflation and states actually have the power to do something, they are starting to take the initiative and cut back starting with tax cuts on gasoline. We have been feeling it at the pump, but spring break is coming up and people want to be traveling. A lot of states, such as Florida, Georgia, Tennessee, and more, are proposing to temporarily eliminate their state gas taxes. That would be a big development if approved and maybe Alabama will follow suit. Nothing has been mentioned from the state of Alabama yet but for our nearby travel states, that would be great news. If you want the full list of states proposing the tax relief, feel free to email us and we will get this list to you.
We saw a rally last week with the S&P 500 coming in at its highest close price since February 17th. The S&P closed Friday at a price of 4,463. That gives us a new short-term resistance level of 4,500 and a new support level of 4,420. We also saw a unique event where the S&P 500 closed above the 50-day moving average, which is currently sitting at a price of 4,432. It is important to keep in mind that while getting all of the economic and fundamental data, we like to correlate it back to the technical analysis to see the trends and see if the momentum can continue to the spring. We will follow the economics and the fundamentals of these companies and economy and simultaneously watch the trading ranges and what is taking place out there. This strategy has really helped us navigate through 2020, 2021 and now into 2022.
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.
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