Color me more bullish now...for the right stocks
Musings: This FOMC meeting was key for investors' 2022 returns
I believe this week's FOMC meeting was one of the most important 2022 events for an investor's plan and projected annual returns. And it is imperative for us to understand what they decided and what they said could happen in the US economy over the next 12-18 months.
Yesterday, the Fed raised interest rates by 0.75%. They could tack on another raise of 0.5 to 0.75% in the July meeting...indicating possible total additional raises of 1.75% by end-2022. This would leave year-end 2022 rates at a 3 to 3.5% range. No change was made to their QT plan at this time.
The FOMC's challenge is four-fold
Maintain healthy employment (unemployment less than 5%)
Keep inflation in check (target is 2%, however 3-4% is more realistic)
Support economic growth (GDP growth norm of 2-3%)
Calm the markets with clear communication and fact-based decision-making
Key messages today
At the afternoon presser, Chair Powell hit the mark on #4 above.
He sees unemployment rising from the current 3.6% to 3.9% in 2023 and 4.1% in 2024.
He believes that inflation will come back down to the 2% range in 2024. P.S. I think the US consumer will get used to higher inflation and will start becoming more accepting of a 3-4% inflation rate. And markets will price this in going forward.
They were paying close attention to the May CPI report as well as the recent UofMich’s consumer sentiment negative reading. These two data points had a strong influence on their decision to raise rates by 0.75% (versus the previously indicated 0.5% raise).
Consumer demand is still strong.
The US economy is healthy, will grow by 1.7% this year and will be able to deal with higher interest rates.
Labor demand is still much higher than supply.
The Ukraine war is worsening food and energy prices, while lingering China COVID lockdowns are lengthening supply chain disruptions.
Amongst all this, Chair Powell said the committee believes that they can deliver a soft landing - slowing down inflation, while not causing a recession. And the markets seemed to somewhat agree with him, albeit it could be a slightly bumpy, “soft” landing.
Stocks ran higher during the press conference and towards a positive close. I am seeing a lot more commentary that the Fed has "caught up" with the market and is now more in sync in terms of expectations and the necessary rate hike schedule…that the Fed will not be shy about staying aggressive in July and Sept with rate increases if needed.
Beachman is getting more bullish
I am more bullish as of yesterday afternoon for several reasons:
Investor sentiment is very low and more stocks are hitting their 52-week lows. Multiple anecdotes of investor capitulation over the last few days, including one of the most savvy, optimistic investors I know.
FOMC actions and messages yesterday gave me additional clarity on how the next 12 months could play out in the US economy. I am updating my comeback forecast and will be posting this for my paid subscribers shortly.
It is quickly becoming apparent which companies will do well or even survive in this new monetary regime and which will not. I have been making steady headway on which companies I want to own in my comeback portfolio and these posts will also start flowing out to my paid subscribers.
The FOMC monetary policy is now better known and the US fiscal policy is stagnant…aka, more knowns than unknowns on both fronts. This allows me to depend more on upcoming Q2 earnings reports, and especially on forward guidance.
Clarity is an investor’s best friend - macro, monetary, fiscal, earnings, guidance, sentiment etc. The past six months were a chaotic mix of confusion, misplaced expectations, frustration and despair. I believe we are crossing over into the land of less fog.
I can now start getting more bullish in the right places and at the right time.