If you follow the financial press, the conventional wisdom has come to the simple conclusion that the way to fight inflation is raising interest rates. Unfortunately, this is just not true. Yes, raising rates may slow the economy, but that alone won’t fix inflation.
Read MoreHow many times have you heard that the US dollar will collapse because of Fed and fiscal policy? According to the pessimists, this will bring the loss of reserve currency status, and possibly the rise of China.
Read MoreAs we celebrate 246 years of national independence, our country is now more than two years into an economic recovery from the two-month COVID Lockdown Depression. Although the economy has improved dramatically from the complete lockdown bottom in April 2020, it’s still feeling lingering pain from policy mistakes made to address the pandemic.
Read MoreAt the end of 2021, we set out our projections for the stock market in 2022: 5,250 for the S&P 500 and 40,000 for the Dow Jones Industrial Average. Those projections were based on our expectations for both profit growth in 2022 and the yield on the 10-year Treasury note. At that time, given interest rates, the US stock market was still under our estimate of fair value.
Read MoreUltimately, inflation is always and everywhere a monetary phenomenon, as the late great economist Milton Friedman used to say. And so the key to reducing the inflation we're experiencing today – the highest inflation in forty years – is the Federal Reserve raising short-term interest rates, like it will do on Wednesday, as well as pursuing an aggressive course of Quantitative Tightening.
Read MoreWhen interest rates go up, many analysts start to worry about recessions. That's not wrong to do, after all Federal Reserve rate cycles are important. Lately, the market has settled on expectations for a total of about 2.25% or more of interest rate hikes this year. The result is a jump in many longer-term yields. The 10-year Treasury yield is 2.77%, while the typical 30-year mortgage has climbed from 3.2% in December, according to Bankrate.com, to 5.1% recently.
Intellectuals and politicians often try to verbally summarize or justify conventional thinking in pithy ways. Milton Friedman (in 1965) and Richard Nixon (in 1971) both said different versions of the phrase "we are all Keynesians now."
Read MoreAs expected, the Federal Reserve raised short-term rates by one quarter of a percentage point (25 basis points) earlier today, the first rate hike since the end of 2018. Even more important, the Fed signaled a new level of hawkishness in terms of future rate hikes as well as Quantitative Tightening.
Read MoreLate last year we unveiled our stock market forecast for 2022, projecting the S&P 500 would rise to 5,250 and the Dow Jones Industrials average would climb to 40,000. Since then, however, equities have dropped, with (now realized) fears about Russia invading Ukraine and the recognition that inflation is a more persistent problem than the Federal Reserve had previously let on, which means some combination of faster rate hikes or a higher ultimate peak for short-term interest rates, or both.
Read MoreUsing the most recent report of the Consumer Price Index monthly change, the inflation rate in the US is now over 7%. Some commentary calls this “running hot.” Bloomberg notes that among the major economies of the world (G7 plus China), the US’s inflation rate is the highest. Japan’s is the lowest. All eight countries have a rising inflation rate, regardless of the differences in how they calculate it.
Read MoreThe financial markets have been on tenterhooks lately for two main reasons: Russia and rate hikes.
By the time you read this, Russian tanks may already be rolling across the Ukrainian border. If not, we think an invasion of eastern Ukraine will probably start soon after the Olympics, to avoid embarrassing China, which is a Russian ally (for now). Not invading at all after a big build-up of troops, arms, and equipment, would make it tough for Russia to bluff in the future. By contrast, re-incorporating more of Ukraine into Russia would seal for Vladimir Putin an esteemed place in Russian history.
Many analysts were disappointed by last Friday's job report for December, but we think the headline masks an overall report that shows continued improvement in the labor market and a possible surge in small-business start-ups and entrepreneurship.
Read MoreA renominated Powell is a different Powell. The Federal Reserve didn't raise interest rates today, a policy move we think is overdue, but it made major changes that set the stage for multiple rate hikes in 2022 and beyond.
Read MoreWe were bullish in 2021 and bullishness obviously paid off. As of the Friday close, the S&P 500 is up more than 25% so far this year. Meanwhile, a 10-year Treasury Note purchased at the end of 2020 has generated a negative total return, as interest earnings have been more than offset by capital losses.
Read MoreWe have a lot to celebrate this Thanksgiving, from the ongoing reopening to the near miraculous rollout of vaccines by the free markets.
But at the same time, we must not become complacent.
Read MoreInvestors will be focused on the Federal Reserve this week and our expectation is that it will finally announce an overdue tapering of quantitative easing. In addition, we expect Chairman Jerome Powell to make it clear in the press conference that he expects tapering to be completed by mid-2022.
Read MorePolitics today is in large part about pitting one group against another and convincing one side they've been treated unfairly. One of those groups is the younger generation of workers known as Millennials, who are supposedly up to their eyeballs in debt and lagging well behind prior generations.
Read MoreIf you've read our two most recent Monday Morning Outlooks, you know we raised our forecast for the S&P 500, but lowered our forecast for real GDP growth. How can that be?
Read MoreIn early 2020, when COVID hit, the unemployment rate in the United States was 3.5%, wages for low-income earners were rising faster than wages for high-income earners, living standards were rising...the economy was on a roll.
Then, because scientists said lockdowns would stop COVID, they turned the light switch off. Real GDP fell at a 5.1% annual rate in the first quarter of 2020 and then an annualized 31.2% in the second quarter.
Read MoreWe have been bullish on the markets for more than twelve years. But we aren't just perma-bulls. We trust the math.
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