June Federal Reserve Meeting Minutes Released: Market Commentary from Cabana’s CEO – July 7 2022

2 years ago

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Yesterday, the Federal Reserve released the minutes from its June meeting, which concluded with the members raising the Fed Funds Rate 75 basis points. This was the largest increase at a meeting since 1994. Investors want to know more details about the Fed’s thinking as we approach the July meeting in a couple of weeks. Well, the minutes reveal a determined and hawkish posture, with terms like “restrictive policy” being used. What this means to me is that as of the middle of June, the Central Bank was dead set on slowing the economy in a big way. There was also a lot of talk about the public’s perception that the Fed was putting fighting inflation at the forefront of everything else. The everything else is of course the economy. My guess is that means an already weakening environment is about to get a lot weaker.  

We have seen the energy sector (XLE) fall almost 25% this month. Materials (XLB) are down 18% during the same time. Oil is back below 100 dollars a barrel and the 10-year treasury yield has dropped from 3.5% down to 2.9%. We talked last week about all this being a necessary part of getting through what has been a historically bad six months for stocks and bonds. Unfortunately, the pullback in commodities and bond yields evidences reduced demand at the same time the Fed has made it clear that they are going to reduce it even more. This suggests that companies’ earnings will likely fall, and the price paid for those earnings will likely have to fall as well. The question now is how far they will need to fall before the Fed backs off and reverses course. Ongoing inflation is right in the middle of this analysis and makes for anything but a clean window to look through. 

I read this week that Jeremy Siegel (renowned Wharton Professor and economist) believes we are already in a recession and the Fed will have to back off now. Otherwise, we run the risk of a big time bear market and prolonged downturn. That may be true, but it sure doesn’t appear the Fed feels the same way, or at a minimum that this risk is a priority. 

Investors seem equally unsure as the major indices churn in a range just above this year’s bear market lows. The next few weeks could remain volatile as we wait to get the Feds next verdict. In my view, risk management is at a premium right now. 

Terms to know:  

  • XLE (or Energy Select Sector SPDR Fund) is an ETF that tracks a market-cap-weighted index of US energy companies in the S&P 500.  
  • XLB (or Financial Sector SPDR Fund) is an ETF that tracks a market-cap-weighted index of US basic materials companies. 

January 17, 2024

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