Another wild week is in the books as the uncertainty surrounding our economic fragility remains in high gear. Even “Wall Street” is now applying pressure on the Federal Reserve to get moving on raising rates as an uptick in volatility has resurfaced. With a ½ point increase essentially “baked” into the May meeting, could we potentially see a ¾ point increase instead? Anything is possible, but as we have learned, the Federal Reserve likely will remain measured and steady. Corporate earnings reports gained steam throughout the week in what was generally a better-than-expected showing, but the warnings of a coming slow down have the markets rattled. The question I pose to myself is, “Is the slowdown here already in certain parts of the economy and we just don’t know it yet?”. In the simplest of terms, fighting inflation will inflict some level of pain on all of us and the pressure is on the Federal Reserve to act accordingly. Next week will be further telling as many of the world’s best run companies will be reporting their 1st quarter earnings (Microsoft, Alphabet/Google, Apple, and Amazon to name a few) and should provide additional color. Continued earnings momentum and the forward-looking statements provided will be a very important part of the near-term outlook in our opinion. We will be interested to see if we can find a broader support level in the markets and put in a “floor”, like we saw in early March.
From a technical standpoint, it is normal to “re-test” the near-term lows in the markets, as momentum and economic trends find their footing. I think we can all agree and assume, that interest rates are going higher, and that inflation is here for the foreseeable future. If we know these things to be true, then why don’t we rip off the Band-Aid, take the pain, and let the healing begin? Corporate America has begun to ask the same question in earnest via the earnings reports issued thus far. There is no simple or easy approach to ease these pains. The monetary tools at the Federal Reserve’s disposal must be deliberate and thought-out. In the early days of Covid and the financial crisis, the appropriate and timely action was to cut rates swiftly and aggressively. The problem is, we (ourselves and the greater world) love easy flowing money. Taking our proverbial credit cards away and lowering our “allowance” while telling us everything will be ok is hard to stomach. We love to spend. It’s as simple as that. This is the hard part of any recovery. Tempering our expectations and resetting our outlook is never easy. But it must be done. Our new reality is upon us and while upsetting as it may be, this too shall pass. History has shown us on many occasions that through patience and careful planning we will be successful.
Enjoy your Sunday!