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Tomorrow’s Fed Announcement May be a Turning Point (For Better or Worse): Market Commentary from Cabana’s CEO – March 15, 2022

2 years ago

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As atrocities continue in Ukraine, the world of finance will momentarily turn its attention to the U.S. Federal Reserve tomorrow. It is widely expected that the Fed will announce its long anticipated decision on raising interest rates in an effort to normalize monetary policy after years (actual years) of stimulus. It began with the financial crisis in 2008 and continued right up until the pandemic in 2020. There have been intermittent attempts to withdraw liquidity and raise rates, but each attempt was met with an immediate and sharp drop in stocks and a concurrent selloff in bonds. Policymakers backed off and the spigot of easy money continued to flow, all with the stated goal of helping a battered economy regain its footing and preventing a recession.  

It appears tomorrow will mark a turning point. There are no more second chances. The excesses of the past must be paid for. Inflation is here and it is real. We avoided the collapse of the world economy twice in the past 15 years through extraordinary financial manipulation, but like everything in life, the truth eventually must be acknowledged. The truth is (in my opinion) that we are now going to pay for the illusion of financial health, which has been promoted for a long time. Tomorrow, we write the first check. 

Chairman Powell and his colleagues have an incredibly difficult job ahead of them and the fallout from Russia’s war in Ukraine only makes it more so. The Central Bank will attempt to thread a needle in a dark room with gloves on. Any perceived misstep will likely cause a recession and further declines in stocks. If they signal a desire to raise rates and tighten more quickly to combat commodity inflation, investors might assume corporate earnings will collapse. If they indicate a willingness to pull back, investors may infer that things are worse than we know and that the economy is too weak to confront what is already historic inflationary pressures. It is a tough spot and the whole world is watching.  

The good news is that stock and bond markets have already priced in and endured very significant declines over the past two months. The much-loved Nasdaq and its FANG stocks are already in a bear market and down more than 20%. The benchmark S&P 500 has declined almost 14%. These indices represent the biggest and arguably the best. Many other stocks are down 50% or more. Bonds, including U.S. Treasuries, are down double digits. Other than energy and commodities, all major asset classes are in technical corrections or bear markets, and for those investors who think buying oil and gas is the simple solution, those assets are up and down as much as 6% a day. I don’t know many people (professionals included) who can survive that volatility over the long term. So, the good news is that things are already bad – and that gives me hope for tomorrow. Hope that we finally begin the treatment that we have avoided for so long. Hope that it is darkest before dawn, because it damn sure seems dark right now. 

Disclaimers

January 17, 2024

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This material may only be distributed in its original format and may not be altered or reproduced without the prior written consent of Cabana. The opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.  

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Commonly used index/benchmark definitions:  

All indices and categories are unmanaged and an individual cannot invest directly in an index or category. Index returns do not include fees or expenses. Benchmark indices will likely materially differ from Cabana’s portfolio strategies. Detailed information as to how the returns are calculated can be obtained online from the following link: https://thecabanagroup.com/disclaimers/performance-reporting-methodology/. 

Morningstar’s Moderate Target Risk index  follows a moderate equity risk preference and is based on well-established asset allocation methodology from Ibbotson Associates, a Morningstar company.  

Morningstar’s Tactical Allocation category includes portfolios that seek to provide capital appreciation and income by actively shifting allocations across investments. These portfolios have material shifts across equity regions, and bond sectors on a frequent basis. 

The S&P 500 Index is a market-capitalization weighted stock market index of 500 widely held large-cap stocks often used as a proxy for the U.S. stock market.  

The Russell 2000 and 3000 indices are market-capitalization weighted stock market indices that include, respectively, 2000 and 3000 of the most widely-held stocks and are often used as proxies for the U.S. stock market. 

The Nasdaq Composite Index is a market-weight capitalization index that covers more than 3,000 stocks listed on the Nasdaq Stock Market. What is the Nasdaq Composite, and What Companies are in It? | Nasdaq