I heard a good statement on CNBC this week from one of the daily commentators; “Who is in charge of the markets right now, the BULLS or the BEARS?”. This is a fair question indeed and one that I have been thinking about for the last week or so. With the second quarter quickly coming to a close, it’s always prudent to take stock and see where we are. As summer kicks into full gear, the lull in activity has picked up. Our friendly fear indicator, the VIX (Volatility Index), is sitting around 13 right now. This is far below the levels of 2022 which averaged around 25.6. Keep in mind that the normal range is 12-20. Essentially this tells us that even with the prospects of a mild recession and higher rates on the table, the fear in the market is minimal, at least for today that is! There is no doubt that this year has been a bit of a surprise given the strength we have seen, but we need to exercise some caution moving forward. Most of the real strength has been centered around the A.I. craze with a handful of mega-cap tech stocks leading the way (AAPL, MSFT, AMZN, NVDA, GOOG, META, TSLA). There has not been a broad market recovery to this point. This is something we need to be keenly aware of as we move into the second half of the year.
Federal Reserve Chairman Powell was back in the spotlight this week as he presented comments to Congress via the “Semiannual Monetary Policy Report”. As expected, all eyes and ears were glued to his comments and indications as to where the Fed sees the U.S. economy today and over the next several months. Once again, Chairman Powell made it clear that the need for potential rate hikes in the coming months is still evident and needed to further reign in the inflationary environment. What is puzzling to many economists, however, is that the Fed target range of a 2-3% annual inflation metric might seem dated and unrealistic in today’s environment. From 1960 through 2021, inflation averaged 3.69% annually. Over the past 10 years, however, inflation has averaged only 1.88%. Perhaps our Federal Reserve is suffering from that ever present behavioral finance term we like to call “recency bias”! It’s a devil of an issue for sure and one that we all cave into from time to time.
Recency bias is a cognitive bias that favors recent events over historic ones.
This is in no way implying that the Fed doesn’t have a tough job or know what they are doing, it’s just simply pointing out a fact. Low inflation and easy money were a direct fallout from the Fed pulling the economy out of the financial crisis of 2008/2009. A longer, historic measure of inflation might be a better guidepost for them to consider in the long run while avoiding a near-term mistake. I can say with certainty that I wouldn’t want the responsibility they bear in landing the economy to a soft and easy resting place. No easy task to be had there.
As the summer weeks pass and more economic data emerges, the story will continue to unfold. For now, the likelihood of an interest rate increase in July is looking more and more probable. While that will seem like overkill to many, the reality is that specific economic events happening in the manner we want just doesn’t exist. Pausing or raising rates is far from a perfect science and with the global stage watching, the room for error is exceedingly high. I remain steadfast in my belief that we are much closer to the end than the beginning. Will the Fed have pushed the envelope too far? It’s probably a near certainty that they won’t get it right, at least not to the pundits screaming from the rooftops that they know better. After all, it is the American way to break them down before we prop them up again. We just can’t seem to help ourselves and this scenario is no different. So back to the question, “Is it a BEAR or BULL market?”. Hard to say, but for once I’ll take the break from the volatility and breathe easy.
Have a great weekend!
https://www.slickcharts.com/sp500
https://en.wikipedia.org/wiki/Recency_bias
Christopher E. Wasson, CFP®
President
Mosaic Asset Partners, LLC
1122 Kenilworth Drive, Suite 310
Towson, MD 21204
410.821.0089 fax 410.821.5993
MosaicAssetPartners.com
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