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What the Fed does next is important to what the markets will do over the next three months

May 09, 2023

With the jobs numbers strong and the Fed increasing interest rates .25% on Fed Funds rate, we enter a time with lots of questions. What the Fed does next is important to what the markets will do over the next three months. My assessment is that a defensive approach for now is wise and that mid-year we will begin a long-term bull market. Allow me to pose three scenarios.

Scenario 1

U.S. enters recession                                          What works

Fed cuts rates Long duration bonds                      Equities fall High quality bonds

Long Term Bond rates fall Value Stocks                (Bond values rise) Hedged Equity

Scenario 2

No/mild U.S. Recession                                     What works

Jobs numbers stay strong                                    Short duration bonds

Inflation stays high 2% - 4% Cash                        Fed pauses, keeps rates high Value stocks

                                                                              New normal Active management outperforms

Scenario 3

No U.S. Recession                                                What works

Jobs numbers stay strong                                       Short duration bonds

Inflation stays high 3% -5%                                     Cash

Fed Keeps raising rates                                          Value stocks/ small cap stocks


 Active management outperforms

My assessment comes between scenarios 2 and 3 for the next three months. The bond market is telling us I am correct. The stock market is pricing in Scenario 1. That is why things appear confusing. I think a defensive approach is necessary for a time. If the Nasdaq drops 10% we will quickly make a shift to large cap growth. If I am correct about the Fed over the next three months and they continue to raise rates, then we will move mid-summer.

Earnings continue to be strong as does the jobs numbers. We still need to see if inflation is slowing receding. I will continue to share with the numbers and the resultant affect on the markets. For now we will stay the course.

I know all of this is confusing to all of you. What is certain is the market is poised for a long term upturn. We just don’t know when that will start. Until then we stay defensive.

According to FactSet Research, we have seen 85 percent of the S&P 500 component companies report their results for the first quarter of 2023. Of the 85 percent that have reported, 79 percent have reported earnings that beat expectations, while 21 percent met or missed expectations. When looking at revenues, 75 percent of companies that have reported have beaten expectations while 25 percent have fallen short. The 75 percent of companies beating revenue expectations is above the average rate of the last 1, 3 and 5 years and is a very positive sign for the overall health of corporate America.

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