At a Glance

• William Boomer joins White Cloud Wealth Management
• The federal reserve has the tools to start and end recessions
• The case for bonds and the history of bonds

Here Comes The Boom

We are excited to announce William Boomer has joined the service team here at White Cloud Wealth Management.  William has a finance degree and is excited to put it to good use.  He’s a strategic and futuristic thinker who will bring value to our team and your experience.  We hope you can all give him a warm welcome.

It’s All About The Fed

In May the Federal Reserve raised the fed funds rate by 50 basis points and committed to shrink the Fed’s balance sheet starting in June.  Towards the end of this month Jerome Powell and other Federal Reserve officials have hinted at a pause in raising rates after the next two hikes. In addition, chairman Powell said a 75 basis point hike is not on the table at this time.  Inflation will continue to be their number one priority and they will fight it with raising rates and reducing their balance sheet (tightening).  This will slow the economy by reducing demand.

You may ask, “When do we hit bottom?”  The talking heads on TV are trying to pick the bottom, but I say leave the bottom picking to the aquanauts.  There is evidence to suggest that bear markets tend to end with the Fed reducing rates. 

• 1980-82: S&P 500 — down 27%, ends with 13.5% in rate cuts.
• 1987-88: S&P 500 — down 33%, ends with over .75% in rate cuts.
• 1990-91: S&P 500 — down 20%, ends with 6.25% in rate cuts. 
• 1998: S&P 500 — down 19%, ends with .75% in rate cuts. 
• 2000-03: S&P 500 — down 49%, ends with 5.50% in rate cuts. 
• 2007-09: S&P 500 — down 57%, ends with 5.00% in rate cuts (plus QE, plus TARP)
• 2018: S&P 500 — down 20%, ends with .75% in rate cuts the following year (and fresh QE)
• 2020: S&P 500 — down 34%, ends with 1.50% in rate cuts (and radical QE measures) 
(Information from Rosenburg Research)

Powell will pivot again and when he does that is a green light in our opinion.  In an interview with the Wall Street Journal on the 17^th of May he said this, “Restoring price stability is an unconditional need.  It’s something we have to do because really the economy doesn’t work for workers or for businesses, or for anybody without price stability.”  Right now, the economy and labor markets are secondary to his goal of achieving price stability. He said the Fed doesn’t have precision tools and that they raise rates.  To get price stability “we have to slow growth to do that” he said. 

A Case for the Bondies

With slower growth on the way we will most likely be in a recession if we aren’t in one already.  In the beginning of May the 10 year Treasury hit an intraday high of 3.20 percent and it ended May at 2.85 percent.  That is very good news for bond holders as their values have started to recover.  When rates go down values go up.  Here are the last 9 trough to peak cycles in the 10 year treasury bond.  You’ll notice that over the past 40 plus years yields have continued to decline.  Time will tell if the May 6^th 2022 yield of 3.12% is the peak in this cycle and we are heading down to a low. 

(Source Rosenburg Research)

During recession yields tend to fall.  Since the 60s the 10 year treasury yield in a recession has fallen by about 1.5%.  Why does this happen?  When stocks and real estate values fall money typically flows to bonds.  This is called a flight to safety or quality.   The following chart shows the absolute change in interest rates during high volatile times.  This illustrates the flight to safety.  You’ll notice the big one was in the early 80s when Paul Volker slayed the inflation dragon along with the economy in two back to back recessions.  How did he do it?  He raised the fed funds rate and slowed the economy down. 

 (Source Russell Investments)

A Look Ahead

All eyes are on the Fed and their rate decisions.  We expect them to continue to hike rates a few more times this year.  Inflation showed signs of slowing this month which is good news and may change expectations on whether the fed will continue to raise rates the rest of this year.  The consumer is showing signs of fatigue as retail sales volumes are shrinking.  Retail stores have been stock piling goods at the same time the consumer is slowing purchases of goods and switching to services and experiences. This is very good news for all of the bargain shoppers as there may be some awesome clearance sales in the months to come.  If stock markets continue to slide as an economic slowdown begins, there may be some clearance sales there as well.  We look forward to the rest of this year and the opportunities to come. 

We hope you are off to a fantastic start to June and summer time.  Your situation is unique, please call us with any of your specific investment, retirement or tax planning needs.

Written By Sean West, CFP^®

Disclosure

This blog reflects the personal opinions, viewpoints and analyses of the White Cloud Wealth Management employees providing such comments, and should not be regarded as a description of advisory services provided by White Cloud Wealth Management. The views reflected in the blog are subject to change at any time without notice. Nothing in this material constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security.