Physicians' Guide to Wealth

A guide for anyone pursuing financial independence

Q
The Children of Wall Street

Aug 31, 2022

Driving home from church this past weekend, I had our 6-year-old granddaughter, one of 10 of our grandkids, in the back seat. Suddenly she starts crying. “What's wrong honey?”. She cries out, “I'm starving and thirsty!”

We're driving on the back roads to our home, and there are no restaurants, gas stations, strip malls, nothing. We were in the upcountry with cows and farmhouses. However, our granddaughter wants food and water now regardless of the fact that if she looked out the window, she'd know the probability of getting either was ziltz. Besides the fact that she most likely got cookies and other goodies in Sunday school just 20 minutes earlier.  

For years I used to think that Wall Street was comprised of young adolescent, self-centered adults. It's not good enough for Wall Street to cheer if CEOs, typically in their 50s with intimate knowledge of their companies, announce during their earnings reports they met their previous quarter's projections. The stock will plummet in price if the report doesn't exceed the expectations of 30-something-year-old analysts who have never run a company of any kind in their life. Wall Street wants more and wants it now!

Last week I watched Jerome Powell give his much-anticipated speech at Jackson Hole titled, “Recession Constraints on the Economy and Policy”. My impression is he repeated his message since the beginning of the year that during his 10.16-minute speech, the committee's goal is to slow inflation with solid evidence of its importance. He starts out by saying,”

“Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all. The burdens of high inflation fall heaviest on those who are least able to bear them.”

Immediately the stock market started to selloff. I could hear Wall Street already crying out, “not this again!” 

Powell continues, 

“Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very 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.”

AAGGGHHH! Not pain! Stop the pain! Wall Street wants candy, not discipline! Wall Street likes stocks going up 2% a day and houses appreciating 3% – 5% a month. Who cares if lower-income people can't fill up their gas tanks because they can't afford $ 5-gallon gas. A friend, Alex Leon, told me he watched at a gas station several people drive up and put $10 worth of gas in their car and drive away. In California, that's less than two gallons. Why would they put in just $10 of gas? Because food prices are up 100% this year. School is starting, and their kids need supplies. That's probably all the money they have. 

All major networks focused on his comment, “may bring some pain to households and businesses”. The networks featured politicians and analysts incensed about his speech. Democratic Senator Elizabeth Warren criticized the Fed's to Dana Bash on CNN, saying,

“What [Powell] calls ‘some pain,' means putting people out of work, shutting down small businesses because the cost of money goes up because the interest rates go up.”

The sky is falling! People will lose their jobs, businesses will shut down, and the great depression is coming! Wait a minute, more people are working now than in the history of this country, AND there are still 11.2 million job openings. Unemployment is at 3.5% and still going DOWN.

No one seemed to notice Mr. Powell's statement, 

“But a failure to restore price stability would mean far greater pain.”

Does Wall Street, politicians, 30's something analysts want another 2008? Banks closing, 100-year-old Wall Street firms going bankrupt, 30% of all households behind in payments, unemployment soaring, and the President calling emergency meetings to save America? That was only 14 years ago, and now apparently, it is ancient history.

Of course, the Federal Reserve will continue its rate hike policy, as they clearly stated from the beginning of the year. What is the surprise?

However, for the first time since January, Mr. Powell stated some good news that was entirely missed or certainly not the focus of the main media. He said,

“The U.S. economy is clearly slowing from the historically high growth rates of 2021, which reflected the reopening of the economy following the pandemic recession. While the latest economic data have been mixed, in my view, our economy continues to show strong underlying momentum. The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers.”

The economy is showing historically high growth rates. Too many jobs and work for too few people. Why didn't Wall Street pick up on that? Would you like to own a company that sells a product that is in such demand you can't hire enough people and keep up with the orders? That's what is defined in college, not usually until your senior year, as being successful.  

I thought his speech was very positive. One key statement he said was,

“While the lower inflation readings for July are welcome, a single month's improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down.”

What?!? Their policy is working? The pain is nearing an end? How did that statement get missed? 

Most importantly, he indicated for the first time since initiating their rate hike policy, the process will end soon. He clearly, even for Wall Street, politicians, and analysts to hear, said,

“At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases.”

Wow! Jerome Powell, announces on national TV that their policy is showing signs of working, and the end is near. How did all respond? Stocks are sold, politicians go on network roadshows to express their disdain, and analysts predict imminent doom. What all wanted was more cookies and candy.

I apologize to all young adolescent adults reading this Brief comparing them to Wall Street. Wall Street acts more like my first-grade granddaughter. 

What Does This Mean to Me?

The stock market is still weak as institutional investors remain cautious about the recovering economy and confidence in the Federal Reserve. Since this year's market bottom on June 17, the S&P 500 rallied back 17%. The index has given up about half of this gain in the past week. More concerning to the newly established up trend is the index is below its 20 Day Moving Average and 50 Day Moving Average.

It would be important for the index to recover back above these moving averages to re-establish the uptrend from June 17. Overall, we maintain our favorable rating on the US economy and stock market, which is in significantly better shape than all G-7 nations. Even though Wall Street, politicians, and analysts don't support the Federal Reserve policy on slowing inflation, we believe it is not only the right policy but critical they do so to avoid, as Mr. Powell stated, “failure to restore price stability would mean far greater pain.”  

More people working in the history of America means more paychecks are being issued each week in the history of America. Consumer spending is 66% of our economy, households have a steady income, and many have locked in low fixed rate mortgages on their most important asset. We remain optimistic that the Federal Reserve is capable of navigating to a “soft landing” of slowing inflation. It may take 2 to 4 quarters, but the end result will be a stable and sustainable growth economy. I am willing to project that the same groups criticizing Jerome Powell will be cheering his praise once his committee relaxes its rate hike policy and price increases are restored to normal levels. 

Give us a call if you have any questions about this Brief or your account. This market volatility is providing terrific investing opportunities, and we welcome the opportunity to guide you through these times.

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