The markets have been rocky as the next Fed meeting
looms. The bad news is that economy remains strong. Job openings
grew by 700,000 to about 9.6 million unfilled jobs, and most other indicators
of economic growth are coming in either stronger than expected or stronger than
the last reading. The latest GDP growth reading is coming out on Thursday
and the median forecast is 4.5%, nearly double the previous reading.
Probably the most anticipated number will be the PCE reading (the Fed’s
preferred measure of inflation) which comes out on Friday. All of this
leads up to the policy meeting next week where the Fed will decide whether to
raise interest rates or not. Unfortunately, the stronger the economy, the
more likely they will raise rates.
The good news is that the economy remains strong. If
you recall back about a year and a half, there was much speculation that
aggressive rate hikes would trigger a recession. So far that has
definitely not been the case. While in the short term, rates hikes are
not what the market wants, in the long term, the health of the economy is far
more important. The current market reactions are still the equivalent of,
“Are we there yet?” We may be, we may not be. However, we do know
that even if the war on hyperinflation is not over, we are in the “mop up
stage” as opposed to the thick of the fighting. That is to say, we are
very likely near the highest level that we will see short term rates.
Inflation today is a stubborn 3-4%, but about a year ago it was in the double
digits if you extended out the monthly readings. So it is hopefully just
a short time until we see peak rates and then the likely reduction in rates
that the market awaits.
All of the above should sound like a broken record as the economy has been stubbornly strong all year. The market has really just hovered around the same level for much of the year as we await that fundamental policy shift to less aggressive monetary policy. So far we have shifted allocations as the markets hit new highs or retouched lows and we will continue to do that until we see a breakout in either direction. Hopefully we are near an end to this rangebound market and we can realize the higher levels that the PE ratios have been suggesting for the last year.
