Tag Archives: Inflation

As Fed Rates Peak, Are Markets Ready to Take Off?

January 5, 2023 tremendousblog 4 Comments

In 2022, the Fed tightened its vice grip until we squealed. But as interest rates peak this year, markets are in a position for serious growth.

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It stands to reason: if someone is hitting you with a stick, the pain diminishes when they stop hitting you. To confirm this, I looked at four periods of peak interest rates from 1981 to today.

In most cases, markets jumped significantly within a year after the federal funds rate peaked.

Let’s dig into some examples….

Paul Volcker’s Hammer

Federal Reserve Chairman Paul Volcker took interest rates to eyewatering levels in 1981. They peaked at 19% that summer, a far cry from today’s 4.5%.

Markets continued to fall for about a year.

But then, something amazing happened. Volcker crushed inflation and stocks rocketed upward for almost 20 years.

A Stake Through Inflation’s Heart

Like the undead, inflation rose again in 1989. Volcker pushed rates back up to 10% by April, ramming a stake through its cold, black heart.

Markets jumped shortly after, rising about 16% in the next year.

The Go-Go 90’s

After falling to a low of 3% in 1993, the Fed hiked rates to a peak of 6% in the spring of 1995. Chairman Alan Greenspan aimed to cool a red-hot economy and prevent inflation.

Markets ignored him. Stocks went vertical, more than doubling in 4 years.

The Financial Crisis

By the mid-2000’s, the real estate market was out of control. The Federal Reserve took rates from a rock-bottom 1% to 5% by the summer of 2007.

This time, it really was different.

There was no quick rebound even as the Fed took rates to zero. In fact, it took over 5 years for stocks to recover from the financial crisis.

The financial crisis stands out as the worst since the Great Depression. Last year’s S&P 500 return of -18% doesn’t compare to the Great Recession’s -48% bloodbath.

In all, once rates peak, we usually see markets begin to climb in 12 months or less.

As companies look at a future of stable or declining rates, they’re more comfortable borrowing money and making investments. If rates peak mid-year as analysts project, I expect to see markets jump by the end of 2023.

What do you think 2023 holds for markets? Leave a comment at the bottom and let me know!

Can Bitcoin Protect You From Inflation?

May 14, 2021 tremendousblog Leave a comment

Bitcoin is often referred to as digital gold. Unlike fiat money such as the US dollar, its supply expands at a slow, steady rate.

The Federal Reserve has printed so much money during the COVID crisis that money supply is up over 25%. This has led to fears of inflation. The consumer price index (CPI) jumped by 4.2% in the first quarter of this year, the highest since 2008.

So can bitcoin, with its steady supply, provide protection from inflation? Bitcoin hasn’t existed long enough to provide a good test, but the evidence we have indicates that it doesn’t really correlate with the price index and thus is unlikely to provide a good inflation hedge.

Take a look at the Fed’s preferred measure of inflation, the personal consumption expenditures (PCE) index excluding volatile food and energy prices. It’s been pretty consistent in the last decade, bouncing around the 2% level:

At the end of 2020, prices plummeted, pushing the US economy into deflation for the first time since this data series began in the 1950’s. If bitcoin is to provide an inflation hedge, it would need to drop when prices do and increase when prices rise. But we saw the opposite behavior, with bitcoin going vertical:

If you look at CPI as an inflation measure, you see the same pattern, with a noticeable decline in 2020 that wasn’t reflected in bitcoin:

Bitcoin doesn’t seem to perform well as an inflation hedge, although it could be useful for other purposes. If you’re worried about inflation, I’d suggest Treasury Inflation Protected Securities, which pay you a fixed rate plus the rate of inflation, protecting your interest payments from erosion by rising prices.

Dig into these posts for more on Bitcoin:

Photo: “Bitcoin, bitcoin coin, physical bitcoin, bitcoin photo” by antanacoins is licensed under CC BY-SA 2.0

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Forget GameStop, Treasury Yields Are The Thing to Watch

February 25, 2021 tremendousblog Leave a comment

Treasury bonds have been falling hard lately. Their interest rates are up significantly as a result:

The yield on the 10-year note, a bellwether for borrowing costs on everything from mortgages to corporate loans, has jumped to near 1.5% from around 1% in a matter of weeks, lifted by increased expectations that vaccines and government stimulus efforts will accelerate growth and inflation.

And the sell-off is making its way into the stock market today:

The sell-off in the bond market ricocheted into equities, pushing the broad S&P 500 down 2.3 per cent and the tech-heavy Nasdaq Composite down 3.3 per cent by afternoon on Wall Street.

A lot of this is the side effect of something good: people are getting vaccinated, new vaccines are coming, and economic stimulus could boost the economy further. That picture is leading investors to expect greater economic growth in the future, along with greater inflation (see the Feb 22 post):

Signs of a renewed economic boom, in tandem with pockets of price pressure, color that move in rates. Bianco Research notes today that Wall Street economists now expect U.S. real GDP growth of nearly 5% this year

But higher rates on Treasury bonds could affect other markets negatively in several ways:

Higher Treasury yields tend to mean higher rates in other areas. This could make it more expensive for companies to borrow to fund expansion, etc. That would hurt their shares.
If Treasuries offer more interest, that makes stocks less attractive by comparison.
Treasury yields, especially the 10 year note, tend to drive mortgage rates. Higher mortgage rates mean a weaker real estate market.

Nonetheless, the Fed remains committed to low interest rates and a loose monetary policy:

In his remarks to the House Financial Services Committee, [Federal Reserve Chairman Jerome] Powell said it could take more than three years before inflation reached the Fed’s target of 2%. That helped to reiterate the message that the central bank was in no rush to pare back on stimulus anytime soon, Deutsche’s Reid said.

I think that if rates spike too high, Powell will probably get the Fed in there buying lots of bonds (with printed money, if necessary) to get the rates back down. He doesn’t want to see higher rates derailing the economic recovery.

A slower rate rise may be less problematic:

“If it is stable and steady, it is easier for equities to digest,” O’Rourke said in an interview. “A quick spike has the potential to create a shock.”

Overall, this situation concerns me and it’s one I’m going to watch. But I am pretty confident that Powell will put a stop to extreme increases in Treasury yields.

For more on recent developments in financial markets, check out these posts:

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Photo: “Jerome H. Powell, governor of the Federal Reserve Board, discusses how markets currently function” by BrookingsInst is licensed under CC BY-NC-ND 2.0

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Tag Archives: Inflation

As Fed Rates Peak, Are Markets Ready to Take Off?

Can Bitcoin Protect You From Inflation?

Forget GameStop, Treasury Yields Are The Thing to Watch

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