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Yesterday felt like it could be the start of a bullish rebound in the major market averages when stocks rallied following the release of minutes from the Fed’s meeting earlier this month. Granted, the information was dated, but investors seemed reassured by the fact that policy makers were no more hawkish than they had been before. There was a consensus that two half-point rate increases at the next two meetings in June and July would be needed, after which the committee would assess incoming data to determine the degree of future rate hikes. A data-dependent Fed was music to the market’s ears.
The data since the last meeting suggests that a lot has changed, and all of it has taken a large step towards achieving the Fed’s goals without crushing the economy. Inflation expectations are as important to the Fed as the current rate, because if they do not remain anchored close to the Fed’s target it becomes exceedingly difficult to bring down the current rate. On that front, long-term expectations have returned to levels we saw before Russia invaded Ukraine and Covid overwhelmed China’s economy, disrupting global supply chains. This is excellent news for investors, because it should result in a less hawkish tone from Fed officials as the year progresses.
As inflation expectations have declined, so have long-term interest rates. The increase in 10-year Treasury yields above 3% was a death knell for growth stocks in general and technology stocks in particular. The recent decline is an indication that investors expect the rate of inflation to come down on its own with some combination of higher rates and a slowing in the rate of economic growth without causing a recession in corporate profits or the economy.
The latest survey of purchasing managers in the manufacturing and service sectors from S&P Global confirms that the slowdown is underway but still not falling below trend. The mid-month FLASH survey resulted in a decline in the index from a very strong 56.0 in April to 53.8 in May, which was a four-month low. Readings above 50.0 indicate expansion, and this one was still indicative of a healthy level of growth. Chris Williamson, the Chief Business Economist at S&P Global, said that survey results “remain indicative of the economy growing at an annualized rate of 2%, which is also supporting stronger payroll growth.”
This is exactly what we I have wanted to see. Additionally, this year’s market sell off has taken a tremendous amount of froth and speculation out of the market, laying the foundation for a sustainable recovery in quality, value, and growth at a reasonable price. I expect to see the current rate of inflation come down much more rapidly than the consensus expects this summer and fall, which will give the Fed room to become less restrictive with monetary policy and further support risk asset valuations.
Why then is investor sentiment so abysmal? I think this is because retail investors were overconcentrated in the most expensive growth and momentum names used to construct the likes of Cathie Wood’s ARK Innovation ETF (ARKK). Retail investors have also been wiped out in everything crypto, which I warned was coming last October when the first exchange-traded fund for Bitcoin was launched at a record high of $66,000. As the consensus has grown increasingly bearish, I have tilted progressively more bullish and the criticism I have taken from peers and readers in recent weeks is palpable. That’s just the way I like it!
Meanwhile, corporate insiders, who know a thing or two about the economy and their businesses, are scooping up shares of their own stocks like there is a fire sale. The data in the chart below comes from The Washington Service, and it shows insiders have not been this aggressive since the pandemic lows of 2020 and December of 2018.
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Lawrence is the publisher of The Portfolio Architect. He has more than 25 years of experience managing portfolios for individual investors. He began his career as a Financial Consultant in 1993 with Merrill Lynch and worked in the same capacity for several other Wall Street firms before realizing his long-term goal of complete independence when he founded Fuller Asset Management. He graduated from the University of North Carolina at Chapel Hill with a B.A. in Political Science in 1992.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Lawrence Fuller is the Managing Director of Fuller Asset Management, a Registered Investment Adviser. This post is for informational purposes only. There are risks involved with investing including loss of principal. Lawrence Fuller makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by him or Fuller Asset Management. There is no guarantee that the goals of the strategies discussed by will be met. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any particular security.