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Fight Club

Updated: Jul 20, 2023

I posted a new profile picture on my personal Facebook page a couple of weeks ago. It’s a photo of Ed Norton’s character, The Narrator, from the movie Fight Club, battered and bruised. Apparently, I look like Ed Norton because people started calling me and asking what happened.


I just explained that this is what it felt like to be a financial advisor the last few weeks. …Even investors who are winning the fight have taken some lumps recently.

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Last week, the Federal Reserve raised interest rates and outlined a plan to hike six more times this year. Even so, it doesn't expect inflation to decelerate toward 2% for at least a couple of years. And remember all the bonds that it bought over the last couple of years? It plans to reduce its balance sheet containing all those assets. (They don’t know how they’re going to do that yet, but like any other government agency, they have a plan to have a plan.)


A part of the Treasury yield curve spent most of last week inverting, which is not exactly a positive development. The 7-year Treasury rate traded above the 10-year yield on Tuesday before the Fed meeting-- the 7-year rate went to 2.13% Tuesday afternoon and the 10-year rate to 2.1%-- and they stayed like that after the meeting. Inversions tend to eventually spread out to more widely followed parts of the curve like the gap between 2-year and 10-year rates; an inversion of the 2s:10s spread is typically seen as a harbinger of U.S. recession, something for which we called well over a month ago in one of our most widely read Insights columns ever.


It’s important to note that a yield curve inversion rarely happens in a vacuum. There is normally a more encompassing story surrounding the situation, and at the present time that story includes tepid consumption, crushed consumer sentiment, a global slowdown (Italy, Argentina, Turkey and now Russia in recessions), diminishing fiscal stimulus, and concerns over trade with China.


On average the lag between the curve inverting and a recession starting has been about a year, although it has been as long as six quarters and as short as two quarters. An inversion is a sign that the Federal Reserve has already raised interest rates too far, and Fed interest rate hikes (or cuts) normally take a full year to work through the economy.

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Markets saw some silver linings last week, though, and given that we’ve been so dang bearish all year, I want to really shout about them. Will these silver linings be enough to get stocks to new highs anytime soon? Probably not, but in the short-term they might be enough to stave off a break below the late February invasion lows, and Lord knows a lot of the froth has already left the market this year.


First of all, oil plummeted last week to way off its high. Same with wheat. It is possible that we have seen the worst of the Russia-driven commodity price spike in gas and wheat (although I doubt it).


Another positive development was China indicating on Wednesday that they want to resolve their differences with US regulators, almost certainly due to their need to somehow establish a bottom for their giant tech stocks, which were getting vaporized until the press release. The CCP must have seen too much bleeding of foreign capital from their own local markets and Hong Kong and just said that enough is enough. Whatever the reason, it’s a good sign.


Another shot in the arm for markets last week was that Jerome Powell didn’t deviate from the script. Wall Street likes that, so even though we got a quarter point rate hike, we also got some shorts to cover on the lack of a shock, we got some cash to come back from the sidelines as extremely negative sentiment unwound a bit, and we saw growth stocks that have lost more than half their value catch a bid.

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History shows that while a 5-10% drawdown happens approximately every 13 months in a “fat and flat” market, investors recover 100%+ of the pullback within six months. Ergo we continue to advocate sticking through this more turbulent market regime with the same things we have emphasized for months-- income solutions, alternatives and tax management.




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