Time to Pivot Investments Yet?

What a year!

In just the last 34 days the stock market has risen 12%. But the 56 days prior to that the market dropped 16%. And the 60 days prior to that the market rose 17%. For the entire year so far, the market, as measured by the S&P 500 stock index, is still down 16%. In previous dispatches, we have said that stock markets will probably not turn around – pivot – until the Federal Reserve or inflation shows signs of turning around. During the last month we have had such two small indications. The most recent Consumer Price Index report showed that inflation was slowing down – a hair. Today, the Producer Price Index, that is, the prices received by mostly manufactures, also showed an indication that inflation may have peaked. These two measurements have spurred market activity. Perhaps ironically, the recent midterm elections have had negligible impact.

In the face of this potential optimism, however, the chairman of the Federal Reserve, Jerome Powell, is relentlessly determined to slay the inflation dragon, which portends more slow-down in the economy – and more turmoil for investment markets. How did this dangerous dragon come to life? During Covid, our federal government officials – both republicans and democrats -- printed and spent about $5 trillion more than it normally would have, in addition to normal annual expenditures of about $4.5 trillion. All these extra dollars chasing the same products, and sometimes fewer products due to supply chain problems, have created inflation. A famous economist once said that inflation is not created by oil companies or from various foreign countries, but instead just one location: Washington, D.C.

It almost seems Powell is singlehandedly trying to neutralize what other branches of government have created.

Accordingly, Chairman Powell has asserted his continued fight against inflation with higher interest rates. Some experts are predicting another rate increase in December, probably 0.5%, and then perhaps a respite from increases for a while. This will be the seventh increase in just one year, a historic record in frequency and amount. If he continues his tough talk, the markets may take another dip. This dip may be exacerbated by stock traders doing year-end trading to report annual tax losses.

Low economic growth will continue. Indeed, the government report of the previous three months indicated that economic activity was at a negative growth rate, boosted out of the red only by large exports of natural gas to energy-starved Europe.

Despite continued low growth, stock prices act in anticipation of future trends, thus the recent jump. If the markets believe growth is on the horizon, stocks will rise sooner, not later. And that’s why we cannot leave the market if we’re in it, nor can we fall asleep at the wheel for leaving new cash on the sidelines – too long.

We welcome your feedback. Beginning in December, we will be issuing the Dougherty Dispatch regularly at the beginning of the month and halfway through. Please open and review, even if a cursory run-through. We include important updates that affect your investments. We will also include other topics that affect your financial life, such as tax, family planning, and identity theft.


John D.