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A PIVOT-ISH?

As a kid, I grew up playing a ton of sports, and in my neighborhood, we pretty much played whatever was in season. Sort of a pivot when the championship in one major sport gave way to the start of the season in the next. I most significantly played basketball and hockey. I stand at 5 feet 8 inches and while I know that does not sound like the frame of a basketball player, I was this height in 7th grade, so everyone thought I would be much taller. My son is about 6 inches taller, but in any event, I thought hoop dreams were for me! The reason I mention basketball and hockey is that you can have set plays but often the game is dictated by the strange bounce or rebound of the ball or the puck. Investing has that same underlying theme in that one cannot become dogmatic about a market view because strange bounces abound.

A central part of our market view hinged on the Fed focusing on fighting inflation. Indeed, in 2022 when near-term inflation peaked at over 9%, Powell and company were acutely focused on strategies to combat inflation. With inflation measures much lower today, it appears that the Fed may be pivoting to a view that an inflation number starting with a three may be low enough to allow the Fed to start reducing the Fed Funds rate. Depending on your selected inflation measure, the Fed Funds rate is about 200 basis points over inflation so many may think moving Fed Funds to be in line with inflation is what gives rise to the call for any number of interest rate cuts by the Federal Reserve.

Since I was talking about my childhood, I will also reach back to my “childhood” in the financial markets. As a young analyst in the fixed income group at Evaluation Associates in the early 1990s, the 10-year Treasury was generally about 200 basis points higher than inflation. We currently stand with the 10-year Treasury at about 100 basis points higher than inflation…we are halfway there!

So, what does this all mean, and is there a theme to these different thoughts? The Fed is signaling that they will allow inflation to run above their stated 2% target to keep the employment market from becoming damaged. The Fed has their twin mandate of low, stable inflation and full employment and it seems as though they feel inflation has fallen to a level where they do not want economic policy to damage the economy. The investment implications will be tied to a higher level of interest rates, and this may weigh on corporate profitability. At the same time, a tight housing market and wage growth running at a higher level than in recent history may keep the consumer spending, and this can be positive for equities. Ultimately, getting the Fed out of the middle of the markets is better for long-term health, but we still have a long way to go on that front.

This commentary has been prepared by Knights of Columbus Asset Advisors (“KoCAA”) for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions and information expressed herein reflect our judgment and are subject to change without notice. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations, and (6) changes in the policies of governments and/or regulatory authorities.

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