OmniDivitia Wealth Management, Inc. - ODWM Blog #federal reserveOmniDivitia Wealth Management, Inc. - ODWM Blog #federal reservehttps://www.omnidivitia.com/blogs/tag/federal-reserveSun, 12 Apr 2026 16:01:07 -0700http://zoho.com/sites/<![CDATA[Fed Rate Cuts Start]]>https://www.omnidivitia.com/blogs/post/fed-rate-cuts-start

The FOMC Outlook Details Reflect Some of our Concerns

Earlier this week, the Federal Reserve cut the target Fed Funds rate by 0.25%, to a range of 4.00-4.25%.   The clear concerns from the September 17th preliminary comments & press release were more focused on the labor market rather than inflation.  Chairman Powell stated "The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment have risen."  This makes perfect sense, especially given much of the recent brouhaha over downside jobs revisions.  


The Fed is walking a very fine line.  Remember that inflation hasn't been been under 2% since February 2021.  With the awkward rollout of the tariffs, their full impact is just starting to be felt.  At some point, the consumer's ability and willingness may break under the weight of a weakening labor market.  While cutting interest rates may support demand in the short term, if it weakens, companies may accelerate efforts to increase efficiency, especially through the growth of AI and the subsequent capital expenditures of supporting data centers.


My quarterly commentary from 4Q24 stated "...the FOMC data for 2025 projects slowing GDP, higher inflation, rising unemployment, and potential Fed Funds cuts to support the economy.  However, several major banks/brokerage firms have placed targets on the S&P 500 reflecting high single-digit to low double-digit percentage growth. Given the gap in fundamental valuations and current levels, coupled with the above FOMC projections, it seems logical that both could occur, but a correction may be needed in the interim to provide more attractive entry points in the short term. "    I still feel the same way.  Valuations are exceptionally high, but there had been no catalyst to make them head lower.  The impact of the trade war may be the catalyst for a reversion to the long-term trend, and if so, could create an even more attractive opportunity.


Aa a disciplined investor, I want to have a sense that what I'm paying for something is a fair price for the risk I'm taking.  If an investment has more risk, I want to be compensated through a lower purchase price, which gives me a better chance at a return that makes that risk worth taking.  Instead, this market has been what I would consider an "irrational" risk-on market.  In other words, people acknowledge that prices are probably too high in the short-term, but choose to chase returns anyway and ignore economic concerns and the long-term valuation comparisons.  This is a practical example of something I've said before and will say again:  CONTROL WHAT YOU CAN AND PLAN FOR WHAT YOU CAN'T.


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]]>Fri, 19 Sep 2025 12:48:07 -0500<![CDATA[Navigating the Markets & Economy Through the PEST Lens]]>https://www.omnidivitia.com/blogs/post/navigating-the-noise-with-a-pest 1. Political Escala ]]>

A Thank You to Richard Bernstein

I recently decided to break out my copy of "Navigate the Noise" by Richard Bernstein, a book he wrote in 2001.  The first thing that struck me was the full title, and how it seems so appropriate today.  The full title is: "Navigate the Noise: Investing in the New Age of Media and Hype", which 


For context, Richard Bernstein is the CEO & Chief Investment Officer of Richard Bernstein Advisors.  He was formerly the Chief Investment Strategist at Merrill Lynch, where I became familiar with his work, as he would often be heard on the daily market calls, providing insight and guidance for advisors.  What stands out in my memory is that there were some people in our office who were not his biggest fans. Perhaps it was because he wasn't always an equity market "cheerleader", as some are, or because he suggested caution in an approach rather than to "back the truck up and buy as much as you can." (That's another actual quote that I heard from a different analyst - WOW!).  However, I liked his style, and always appreciated the independent, well-thought out logic as well as how he articulated his opinion.  


With that in mind, in this era of seemingly overvalued markets and an uncertain economy, I think it could be helpful to step back, take a breath, and evaluate what is going on with a well-known framework, the PEST Analysis.  PEST stands for "Political; Economic; Social; Technological".  (Some choose to use PESTLE, adding "Legal & Environmental" as additional factors to consider.

1. Political

  • Escalating Tariff Tensions & Trade Policy Shockwaves

    The U.S. has imposed sweeping tariffs—the highest since the 1930s—averaging almost 20%, impacting imports from more than 60 countries and pressuring trade flows, inflation, and consumer costs (The Tax Foundation).

  • Temporary Relief via Trade Truce

    A fresh 90-day truce between the U.S. and China offers short-term calm, though significant diplomatic and trade hurdles remain unresolved (AP News).

  • Federal Reserve Policy Amid Uncertainty

    Amid persistent inflation and slowing growth, Kansas City Fed President Schmid supports holding rates steady around 4.25–4.50%, calling the policy “modestly restrictive” (Reuters). In contrast, economist Jeremy Siegel argues that a rate cut is “inevitable,” forecasting up to a 50-basis-point cut in September and further easing into 2026 (MarketWatch).

2. Economic

  • Mixed Growth Signals
    The U.S. economy rebounded in Q2 2025 with annualized GDP growth of +3.0%, after a Q1 contraction of –0.5% (Bureau of Economic Analysis, Gallagher).

  • Global Growth Outlook—Tempered but Steady
    The IMF raised its global growth forecast to 3.0% for 2025, buoyed by pre-tariff spending and easing effective U.S. tariffs. Still, downside risks remain high (Reuters). The OECD paints a bleaker picture, warning of the weakest global expansion since the pandemic, citing trade barriers and policy uncertainty as key drags (Financial Times).

  • Inflation Pressures Persist
    U.S. headline CPI held at 2.7% while core CPI rose to 3.1%—indicating stickier inflation driven in part by tariffs (New York Post, The Guardian). The re-emergence of stagflation—a troubling combo of slowed growth and high inflation—is increasingly discussed by economists (Financial Times).

3. Social

  • Softening Labor Market & Job Data Shifts
    Job growth slowed markedly—July added just 73,000 jobs, the weakest performance since the COVID-19 downturn. Revisions also showed May and June estimates were overstated by 258,000 jobs collectively (The Times of India).

  • Shifting Investor Sentiment
    Markets are rapidly digesting inflation trends, Fed signals, and tariff impacts. Record highs in some indices reflect optimism, but stagflation concerns are sowing caution (Business Insider, The Times).

  • Skepticism in Real Estate Investments
    Ray Dalio calls real estate a risky bet in the current environment—pointing to its rate sensitivity, tax burden, and illiquidity—and recommends hedging via gold or Bitcoin instead (Business Insider).

4. Technological

  • Market Preferences Favoring Tech & AI
    Technology and AI-related sectors continue to outperform, reflecting investors’ preference for scalable, less tariff-sensitive businesses (Quotient Wealth, Schroders).

  • AI as a Growth Engine
    AI and cloud services delivered strong earnings from major firms like Microsoft and Alphabet, reinforcing optimism about AI’s long-term profitability (Schroders).

  • Supply Chain Resilience & Reconfiguration
    Global supply chains are recalibrating amid layered crises—geopolitical fragmentation, pandemic remnants, and Russia-Ukraine fallout. While China remains deeply embedded upstream, importers are increasingly diversifying toward ASEAN partners (arXiv).


Summary Table: PEST Snapshot

PEST FactorKey Developments
PoliticalTariff turbulence; Temporary U.S.–China truce; Diverging Fed outlook
EconomicU.S. GDP rebounds; Inflation resilient; Global growth modest
SocialLabor market cooling; Real estate skepticism; Market sentiment mixed
TechnologicalTech/AI outperforming; Supply chain realignment in progress


Concluding Thoughts

The emerging economic narrative for mid-2025 is one of fragile resilience amid growing uncertainty. Markets are balancing optimism—rooted in tech gains and a potential Fed pivot—with geopolitical risks, inflation pressures, and softening fundamentals. A rate cut could provide relief, but reliance on policy lightening is fraught amid stagflation fears.  From a PEST standpoint, navigating this period requires vigilance across domains: watch tariff developments, inflation and labor indicators, investor confidence shifts, and the adaptive power of tech and supply chains.


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Disclaimer: This content has been generated with AI assistance and is for informational purposes only. It should not be considered professional, legal, or financial advice. Please consult a qualified expert for specific guidance.

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]]>Tue, 12 Aug 2025 13:50:10 -0500<![CDATA[Crazy Ivan!]]>https://www.omnidivitia.com/blogs/post/crazy-ivan

Data Signals Potential Slowing Growth

In a post dated 4/5/24 titled "The Stubborn Soft Landing", I wrote the following: "A soft landing is - unofficially - when monetary policy makers both slow the pace of economic growth and reduce inflation without causing a recession.  So far, that appears to be the most likely scenario.  I think even a mild recession, or a "soft-ish" landing, could be understandable at this point.  One factor I have been monitoring has been the unemployment rate, which is beginning to rise slightly despite being near historic lows."  Since then, unemployment has risen from 3.8% to hover between 4.0-4.3% range for several months.  Monetary policy had appeared to do its job for a soft landing.  However, more recent fiscal policy has caused a distinct change of direction.  


Many of you may have heard me previously describe the US economy like a submarine; it's massive, has tremendous momentum, and can change directions, but doesn't turn on a dime.  Likewise, we have received signals, like a sonar ping, that help tell a story.  These tariffs, however, seem to have caused the economy & markets to be more like a "Crazy Ivan" (a hard turn made by a submarine to check its blind spot and potentially gain a tactical advantage, made famous by The Hunt for Red October by Tom Clancy).



Ping #1 = The Federal Reserve

The Federal Reserve's outlook for 2025 according to the December 2024 Summary of Economic Projections called for slightly higher inflation, rising unemployment, slower GDP, and 1-2 possible rate cuts in order to support the economy.  The Federal Reserve Bank of Atlanta also created an estimate of GDP for 1Q25 through an analysis of current data.  The GDPNow estimate showed a contraction from 2.9% on January 31 to (1.5%) this week, due to reports reflecting softer consumer spending, lower consumer sentiment, & fewer capital expenditures than expected.  There is also a concern about companies front-loading their imported goods before the tariffs take effect in April in order to take advantage of lower prices.


Ping #2 = Wall Street Revisions

Wall Street firms are also beginning to lower their year-end targets for the S&P 500.  Within the last few days, RBC changed from 6600 to 6200 (-6%); Goldman Sachs changed from 6500 to 6200 (-4.6%); & Yardeni Research changed from 7000 to 6400 (-8.6%).  At the start of the year, firms were calling for double-digit market growth.  Just these revisions changed from an average of almost 14% down to about 6.5%.  However, they also called for a possible contraction in 1H25, although the reasons for it varied.  The catalyst for the contraction has been the tariffs/trade war, which was not necessarily expected.    When factoring in the revised targets, after a 10% correction, the math shows that these firms are calling for an average recovery of 18.4% in the second half of 2025.  It sounds that they believe the rebound would likely be sparked by the resolution of the trade war, but a clear catalyst to that sort of growth in 2H25 is undetermined at this time.

Ping #3 = Investor Sentiment

Your portfolio's total return has two components:  appreciation/depreciation & income.  Less confidence in the stock market usually leads to an increased focus on generating portfolio income (dividends & interest).  However, lower investor sentiment also could lead to contraction in the Price-to-Earnings ratio.  The P/E ratio basically shows how much an investor is willing to pay for an investment for every dollar in earnings that investment generates.  Given the above points, it would be logical to think that earnings would be negatively impacted, so investors wouldn't be willing to value the investment the same as they did before.  The greater the uncertainty, the more an investor would want to be compensated - which usually means a lower purchase price (i.e., market depreciation).


So, if you have more uncertainty regarding the stock market than you did a month ago, you might want to be compensated for taking on additional risk by investing more at lower prices, depending on your personal goals, circumstances & risk tolerance.   

American Association of Individual Investors (AAII) Sentiment Survey for the week ending 3/12/2025.




Conclusion

There is a lot of uncertainty presented in today's markets.  With the right plan in place, we can work together to help guide you through these times with a sound strategy that is tailored for you.  If you want help navigating all of the noise, click the button below to schedule a time to speak.

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]]>Tue, 18 Mar 2025 14:24:09 -0500<![CDATA[2025 Federal Reserve Outlook]]>https://www.omnidivitia.com/blogs/post/2025-federal-reserve-outlookThe Federal Open Market Committee (FOMC) consists of 12 members:  the seven members of the Board of Governors of the Federal Reserve System; the ]]>

Walking an Economic Tightrope

The Federal Open Market Committee (FOMC) consists of 12 members:  the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.  A major part of this committee's job is to review economic data & discuss their outlooks in order to establish monetary policy.  The challenge they will have in 2025 is how to balance the fight against stubborn inflation against the desire to maintain low unemployment.  Below are 4 graphs explaining their outlook, taken from the December 2024 Summary of Economic Projections.

GDP Growth

The FOMC projects real GDP growth to average 2.1% in 2025, down from 2.5% in 2024.  The committee expects growth to slow in the first half of 2025, followed by a modest pickup in the second half of the year.

Inflation

The FOMC forecasts the personal consumption expenditures (PCE) price index, their preferred inflation measure, to rise to 2.5% in 2025, up from 2.4% in 2024.  The committee expects inflation to remain above its 2% target through the first half of 2025, before gradually declining.


In addition to the FOMC analysis, we also should consider the potential o=impact of the new administration's fiscal policy regarding tariffs. On one hand, it could be argued that the positions could be used simply to establish a bargaining position.  On the other hand, if they were to be implemented as they have been described so far, they could lead to even higher inflation as either the additional cost due to tariffs would be passed on to US consumers, or because domestic producers might have higher labor costs than overseas producers.

Unemployment

The FOMC projects the median unemployment rate to increase to 4.3% in 2025, up from 4.2% in 2024.  The committee expects the labor market to remain strong, with a relatively low unemployment rate, from a historical perspective.

Interest Rates

The FOMC projects the federal funds target rate to decline to 3.9-4.0% by the end of 2025, down from 4.4-4.5% at the end of 2024.  The committee expects to manage interest rates in a data-dependent manner to combat inflation and maintain a healthy economy.


IMPLICATION FOR MARKETS

In summary, the FOMC data for 2025 projects slowing GDP, slightly higher inflation, rising unemployment, and potential Fed Funds cuts in order to support the economy.  However, several major banks/brokerage firms have placed targets on the S&P 500 reflecting high single-digit to low double-digit percentage growth.  Given the gap in the current fundamental valuations and current levels, coupled with the above FOMC projections, it seems logical that both could occur, but a correction may be needed to provide more attractive entry points in the short term.  Long-term investors should review their goals, timeline, & asset allocation, as well as having a thorough understanding of the risks that yo may be taking on.


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]]>Fri, 24 Jan 2025 13:41:16 -0600<![CDATA[A Lot Can Change in Two Months]]>https://www.omnidivitia.com/blogs/post/a-lot-can-change-in-two-monthsThe outlook for the markets & economy are quite different in August than they were in June.]]>

"It's The Economy, Stupid!"

The last two months have been a roller coaster, to put it mildly. 

  • 6/27 = Biden/Trump Presidential debate
  • 6/30 = S&P 500 ends 1H24 up just shy of 15%.
  • 7/13 = Assassination attempt of former President Trump
  • 7/19 = Crowdstrike cybersecurity crash 
  • 7/21 = Biden pulls out of the Presidential race
  • 7/24 = Kamala Harris becomes the Democratic nominee
  • 7/26 = Paris Olympics begin
  • 8/4 = S&P 500 drops over 6% since the beginning of July
  • 8/11 = Paris Olympics end
  • 8/21 = S&P 500 recovers, gaining about 8% from the 8/4 low, now up just under 17% YTD.
  • 8/23 = Federal Chairman Jerome Powell indicates that rate cuts are on the way.

Despite everything that has occurred, the remainder of the year will still be focused on... (you guessed it)... the economy.

Economy & Markets

Through 6/30/24, the Russell 1000 index, which covers large-cap stocks, was up 14.24%.  Since then, after rising a little further, it dropped approximately 8%, and then recovered to be up about 18.33% as of 8/23/24..  The Federal Reserve's focus has shifted from the fight against inflation to supporting the labor market as recent data points toward a slowdown.  In fact, the Bureau of Labor Statistics recently revised employment downward by 818,000 as of March, possibly meaning that the economy may not be as strong as figures have appeared in recent months.


In August 2022 at Jackson Hole, Fed Chairman Powell famously said "While higher interest rates, slower growth and softer labor market conditions will slow down inflation, they will also bring some pain to businesses and households."  Two years later, at the most recent Federal Reserve retreat, he stated "The time has come for policy to adjust.  The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balancing of risks.  We will do everything we can to support a strong labor market as we make further progress toward price stability.  ...there is good reason to think that the economy will get back to 2 percent inflation while maintaining a strong labor market."  In other words - THE SOFT LANDING.


It's also clear that there is a market rotation away from the large growth stocks that have brought the market along to new highs.  However, overall valuations are still quite high, and there may be a desire for opportunities with more reasonable valuations, or with reduced risk, especially as interest rate cuts may be ahead.

Political Noise through Year End

Joe Biden's decision to drop out of this year's Presidential Election sent a shock wave  throughout the United States.  Recent polls, even with the revised matchup, show that the election will likely be quite close.  Polls by ABC News/FiveThirtyEight.com show the Biden/Trump pairing to be in Trump's favor 43.5% vs 40.2% as of July 21st.  However, as of August 25th, the ticket of Vice President Kamala Harris & Gov. Tim Walz now leads the former President Donald Trump/Senator J.D. Vance ticket by more than 3% (47.2% vs 43.7%).


The political discourse is likely to be loud through the year end.  However, the saying "It's the economy, stupid!" will likely dominate the conversation as November 5th approaches. Candidates' fiscal plans will certainly be scrutinized by both individual voters and the business community, especially with the background of a slowing economic backdrop.


]]>Mon, 26 Aug 2024 06:00:00 -0500<![CDATA[The Stubborn Soft Landing]]>https://www.omnidivitia.com/blogs/post/the-stubborn-soft-landingAre we actually on track for a "soft landing"?]]>

The Battle Against Inflation is Not Over

The S&P 500 is up just roughly 25% since late October, and the other benchmarks have also continued their momentum. The improvement in forward earnings estimates would appear to justify the growth. Other styles have also performed well. The underlying sentiment seems to be that a soft landing was likely, and the Fed would cut rates numerous times this year to keep the economy from slowing too much.


However, hopes for rates cuts by the Federal Reserve have been premature as the fight against inflation continues. The Consumer Price index not only remains above 3%, but it also ticked upwards slightly in February. Even the Personal Consumption Expenditures Index, the Federal Reserve's preferred measurement of inflation, was up over 2.5% from February 2023 (2.8% excluding food and energy). With inflation being so stubborn, and remaining above their long-term goal, it is likely that "higher for longer" will be the case (i.e., a higher interest rate environment will last for longer than people previously thought).  

This excerpt from a recent Federal Open Market Committee (FOMC) report, known as the "Dot Plot", reflects how views on the economy have changed. While some market analysts have anticipated as many as seven rate cuts in 2024, this shows that the FOMC members anticipate that there will likely only be three cuts in 2024, leading to a Fed Funds rate ranging from 4.50% to 4.75%, from the current range of 5.25%-5.50%.

This would also explain the recent bond market performance, since a lack of anticipated rate cuts would lead to investors searching elsewhere for more attractive return prospects.

A "soft landing" is - unofficially - when monetary policymakers both slow the pace of economic growth and reduce inflation without causing a recession. So far, that appears to be the most likely scenario. I think even a mild recession, or a "soft-ish" landing, could be understandable at this point. One factor I have been monitoring has been the unemployment rate, which is beginning to rise slightly despite being at near historic lows.

Unemployment was measured at 3.9% as of February 2024, the most recent reading as of publication. If actions by policymakers cause consumer demand to slow too much, companies may begin to slow production &/or reduce headcount as an attempt to maintain progress toward their financial goals. This could lead to an increase in unemployment, causing consumers to spend less, and continuing the cycle. 


2023 was all about AI-related stock "FOMO" (fear of missing out), resulting in a few stocks with outsized gains & dragging the market along with it. I believe 2024 will be all about the FOMC's focus on managing inflation. If inflation remains stubbornly above the long-term goal of 2%, interest rates will be "higher for longer" and will dominate the conversation all year (up to & possibly during the election).

How Can We Help?
]]>Fri, 05 Apr 2024 13:34:38 -0500<![CDATA[Recession or Soft Landing?]]>https://www.omnidivitia.com/blogs/post/recession-or-soft-landingConsumer spending and low unemployment have helped counter actions by the Federal Reserve.]]>

Jackson Hole could provide some insight.

Last year during his speech at Jackson Hole, WY, Federal Reserve Chairman Jerome Powell stated the following:  


"Restoring price stability will take some time and requires using our tools forcefully to bring supply and demand into better balance.  Reducing inflation is likely to require a sustained period of below-trend growth.  Moreover, there will likely be some softening of labor market conditions.  While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will likely also bring some pain to households and businesses.  These are the unfortunate costs of reducing inflation.  But a failure to restore price stability would mean far greater pain."


What is unclear is not if the Fed feels accomplished; it's likely they do not.  Rather, the question may be how much further do they need to go?  Despite inflation's decline over the last year, it has done so without slower growth or significantly softer labor conditions.


Growth Continues to be Strong

This chart reflects GDPNow, an estimate of the Gross Domestic Product for the United States, managed by the Federal Reserve Bank of Atlanta.  The GDP estimate had slowed to be just above an annualized rate of 1.13% in 1Q23, but the estimate for 3Q23 is now roughly 5.75%, even with the reduction of the money supply (M2) and all of the interest rate increases that have occurred.

The Labor Market is Still Tight

The unemployment rate has been pretty stable over the past year, according to the Bureau of Labor Statistics.  In fact, despite the four-week average of initial jobless claims moving slightly higher this year, the unemployment rate sits lower than a year ago, at 3.50%, much lower than the theoretical rate of "full employment".  Continued claims for unemployment insurance are also lower than before the COVID-19 pandemic began (1,879,000 for the week ending 1/4/2020; 1,716,000 for the week ending 8/5/2023).


Why is this important?  A tighter labor market leads to higher wages, which likely also leads to more consumer spending.  It seems as if the full impact of the interest rate increases over the last 18 months still has to be felt.  We may be toward the end of the Federal Reserve's rate-hiking cycle, but I would not be surprised if the Fed keeps rates higher for longer than what some believe.

Watch Household Credit & Consumer Spending

Consumer spending & household debt could be one measure signaling if the US could have a soft landing or a recession.  The housing market has already slowed over the past 12-18 months, as interest rates have risen and sellers (with mortgages at historically lower rates) are hesitant to upgrade with mortgage rates around multi-decade highs. Affordability is also much lower due to limited housing supply.  In addition, according to the most recent quarterly Household & Credit Report by the New York Federal Reserve Bank, two concerning points  were raised.




  • "Credit card balances saw brisk growth, rising by $45 billion to a new series high of $1.03 trillion."
  • "Credit card balances saw the most pronounced worsening in performance in 2023Q2 after a period of extraordinarily low delinquency rates during the pandemic."

Higher delinquency rates could lead to tighter lending conditions and increased reserve requirements for lenders.  This could accelerate a slowdown in demand, as well as impact lender earnings, which could then result in lower stock prices for financial services companies.  Another point to remember:  the student loan payment moratorium ends August 31, 2023. (What do you think will happen when payments start up again in October?)

Conclusion

Continue to watch reports on household credit & consumer spending closely as we enter 4Q23, especially during the holiday spending season.  In my opinion, if consumers initiate a slowdown in spending (because they feel less confident in the economy), we may have a more moderate slowdown, i.e., a soft landing. Households would likely pay down debt &/or improve their respective balance sheets.  However, if lenders proactively created a somewhat tougher lending environment in order to manage risk & mitigate the increase in delinquency rates, it might induce increased market volatility and lead to a recession.  While painful in the short term, it could also create better long-term opportunities because of the more reasonable valuations.


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]]>Wed, 23 Aug 2023 11:27:41 -0500<![CDATA[All Things A.I.]]>https://www.omnidivitia.com/blogs/post/All-Things-A.I.The first half of 2023 was one with strong market performance, as the S&P 500 returned 16.89%.  However, deeper analysis paints a picture tha ]]>

A.I. related companies seem to be driving this market.

The first half of 2023 was one with strong market performance, as the S&P 500 returned 16.89%.  However, deeper analysis paints a picture that isn't quite as rosy.  The S&P 500 is a market-capitalization weighted index.  When you look at the equal-weighted index, the return is only 5.97%.  The difference is due to the significant influence of some of the largest companies, particularly those related to artificial intelligence.  As of 6/30, seven mega-cap companies accounted for about 26% of the S&P 500 index, had an average return of 93% in 1H23, and a weighted return of 19.77%  This also means that the remaining 493 stocks (with a 74% weighting) actually had a loss of about 3.90%.  There are also some concerns about the sustainability of this market's rally.

Valuations Seem High

As of 6/30, the Wilshire 5000 stock index (intended to represent the entire US stock market), is 1.6 standard deviations above its long term trend.  This is a signal of being overvalued.  Also, even with earnings recovering slightly, markets seem to ignore not only the Fed's current actions, but also the likelihood that they will likely have to continue raising rates because inflation has been so stubborn, and becoming embedded in consumer prices, which has been a stated concern ("...long-term price stability.")

In other words, if the trendline in the previous chart (in red) was translated into a baseline (dotted line in this chart), the current market's deviation is similar to the "dot.com" bubble from 1999-2000, although not quite as large as it was before the Fed started raising interest rates in March 2022.

A Turn in the Business Cycle?


The Conference Board's Leading Economic Indicators have been less than its Coincident Economic Indicators for the last three months.  In other words, based on the chart to the left, not only have survey results indicated more a more pessimistic outlook within 6-12 months from that particular survey date, but for the last three months they also have indicated that the near-future business cycle will be worse than the current situation.  With the first gap being in March 2023, this indicates a potential turn in the business cycle starting in 4Q23 or 1Q24.

Paying a Premium for More Risk?

As of 6/30, the earnings yield on the S&P 500 was about 5.22%.  The yield on the 3-month US Treasury bill was 5.46%.  This means that investors are literally paying 0.24% to take on the risk of the stock market (instead of receiving a benefit of 4.5-5.0%).  At some point, risk management and fundamental valuations will come back into focus, but as long as the market is increasing, many are content to simply ride the wave.  This could lead to some good opportunities when the market corrects, especially if it overshoots the mark trying to correct.


In the short term, "caveat emptor" (let the buyer beware).  To learn more about how our process could benefit your situation, click the button below.

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]]>Tue, 04 Jul 2023 16:07:13 -0500<![CDATA[Identity Crisis]]>https://www.omnidivitia.com/blogs/post/identity-crisisA recap of 2022 and outlook for 2023]]>

Recovery or Bear Market Rally?

4Q22 provided a substantial bounce in the markets as inflation continued to decline from its June peak.  However, the market's performance in 4Q22 was probably premature in terms of being a sustainable recovery. It appears to be a typical bear market rally.


STYLE4Q222022
 Russell 1000 Index 7.24% (19.13%)
 Russell Midcap Index 9.18%(17.32%) 
 Russell 2000 Index6.23%  (20.44%)
 MSCI EAFE Index 17.40%(14.01%) 
 MSCI Emerging Markets Index 9.20%(22.37%) 
 Bloomberg Aggregate Bond Composite Index 1.87%(13.01%) 
 US 90-day Treasury Bill 1.00% 2.01%
Source: https://www.federalreserve.gov/

The Economy Still Has a Way to Go

Investor optimism seemed to increase in 4Q22 since inflation declined to 7.1% from its June peak of 9.1%. However, even with the improvement in CPI, we must remember that it takes time for rate increases to have a tangible impact on the economy. If we assume a 6-12 month lag for rate increases to have an effect, we are just beginning to see the impact on slowing down demand. Remember how aggressively the Federal Reserve Board of Governors has acted in their attempts to tame inflation.  Not only were Fed Funds rates raised by more than 3.50% in the latter half of 2022 in order to slow demand, but the Fed is also slowing the growth of money in circulation, as you can see in this chart. I would not be surprised to see funds being pulled out of circulation to slow demand further to bring inflation to the stated 2% long term rate, especially given the amount of funds that have been put into the economy over the last several years as support for various reasons. 

    

The challenge is how much to press on these economic brakes while making sure the "car" is still moving forward.

There were three times in 2022 when the markets declined more than 10%. Each time, the subsequent recovery failed to meet it's previous high, and the following lows went even lower. I believe we might be in the fourth leg of this cycle since rates will still likely increase in the first three to six months of 2023.


Another concern is valuations. the year-end P/E ratio for the S&P 500 was roughly 16.7, which is only slightly elevated in "normal" times, but quite elevated given the current level of inflation. However, with a backdrop of higher inflation (i.e., increased risk) than historical norms, buyers should be compensated with lower prices. Given the outlook for interest rates, one could easily make the case that the P/E ratio should be even lower.

Pundits seem to be searching for the identity of this economic environment for 2023.  Throughout much of last year, we began to hear the same refrain that is being echoed now. "The Fed is going to have to pivot (to cutting rates) in order to keep the economy from going into recession. To put it nicely, I think it is (and has been) hogwash to take this position when the Fed has told you explicitly what they are going to do and have not deviated from that path. Consider the following quote from Fed Chairman Jerome Powell's speech at the Jackson Hole retreat in August 2022.

 

‌"Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."

In the words of Maya Angelou, "When people show you who they are, believe them the first time." 


*Note:  We gathered this information from sources we believe reliable, but do not guarantee its accuracy.
]]>Tue, 10 Jan 2023 19:42:33 -0600<![CDATA[Two Steps Forward, One Step Back]]>https://www.omnidivitia.com/blogs/post/Two-Steps-Forward

The Fed's Strategy is Working

Just a quick thought today - 


This morning, the Bureau of Labor Statistics announced that inflation declined to 7.7% in October over the last 12 months.  After peaking in 9.1% in June, inflation has come down due to the Federal Reserve strategy of raising interest rates and reducing the amount of money in circulation.  Both CPI & the M2 money supply show considerable progress.  However, Jerome Powell has told us a number of times that there would be some pain for households and businesses along the way.  That means reducing demand will lead to lower spending, reduced production, and reduced headcount.  Layoffs are a part of the pain.  Take a look at this article to see some companies that have announced layoffs so far this year.


We're moving forward toward the goal, but remember... less bad is not the same as good.  I think we'll still have some challenges ahead.  This mornings sharp increase in the market is nice, but valuations still matter.  Keep your eye on how well the retail sector does this holiday season, and on earnings guidance moving forward.


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