Portfolio Manager Insights | Weekly Investor Commentary – 6.29.22

Download the PDF here for the full commentary.

PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 6.29.22
Investment Committee

Energy prices have been a major factor driving inflation higher this year. The strong economic recovery and the war in Ukraine have boosted the demand for energy while supplies of oil and natural gas have fallen. Gasoline prices have become a symbol of the burden that inflation places on consumers, and where they go from here will affect consumer spending, Fed policy and stock market returns. What should investors know about energy prices as they position for the next phase of the market cycle?

The challenges in the energy market of the past six months only add to the storylines of the past few years. During the pandemic lockdown, the front-month oil contract fell into negative territory. This had never occurred in history and was due to a collapse in demand made worse by a lack of oil storage capacity. A negative price meant that contract holders were so desperate to not take delivery of oil that they were willing to pay others to take their contracts.

Since then, the oil market has turned around completely as prices first recovered alongside the economy, then spiked this year following geopolitical events, with a few bumps along the way due to growth concerns. Brent crude jumped to nearly $130 a barrel immediately after Russia’s invasion of Ukraine. It has since settled in around $110 a barrel, the same level as in March, but these are still the highest oil prices since 2014.

In this environment, there are at least three major developments for investors to follow. First, energy prices have been a major contributor to rising inflation. Last month’s Consumer Price Index report, for instance, showed that energy prices rose 35% over the previous year and gasoline prices skyrocketed 49% and are now above $5 per gallon on average, a new record.

For this reason, gasoline and oil are perhaps the most important indicators for the path of the economy and markets. To combat higher energy prices, especially at the pump, the U.S. administration has released oil from the Strategic Petroleum Reserve, is negotiating with Saudi Arabia to increase their output, and has floated the idea of a gas tax holiday (although neither party supports this and only amounts to 18.4 cents per gallon).

This situation may seem odd given that the U.S. is now the top oil producer in the world due to the U.S. Energy Renaissance of the past decade. However, not only has U.S. oil production not fully recovered, but most U.S. refiners require imported oil to make products like gasoline.

Second, this has unsurprisingly become a contentious political and policy issue since higher gas prices hurt consumer pocketbooks and reduce discretionary income, effectively functioning as a tax. For businesses, higher energy prices boost manufacturing and transportation costs, affecting all products and services.

The Fed has become especially sensitive to the impact of gas prices on headline inflation, even though their policy tools can’t directly fix the disruptions to supply. This has spurred the Fed to raise rates at the fastest pace since the early 1990s. Whether the Fed maintains this pace will be determined by consumer expectations on inflation which are largely driven by energy costs. Steadier oil prices over the past three months are a positive but uncertain sign of where inflation may go from here.

Third, the energy sector of the stock market has benefited from higher prices and is the only sector in the black this year, although its year-to-date gain has been cut to 29% from a peak of 65%. However, for those who are properly diversified, the energy sector accounts for less than 5% of the S&P 500’s market capitalization, even after all other sectors have fallen. The fact that the sector has made these gains emphasizes the importance of investing within and across markets.

The next several months will be challenging for investors as markets continue to adjust to high inflation. However, investors are always faced with potential problems whether it’s financial crises, trade wars, the pandemic, lofty valuations, rising interest rates, geopolitical conflicts, or other challenges. Clearly understanding the key issues while resisting the urge to overreact is still the best approach to achieving long-term financial success.


Gasoline Price Components

KEY TAKEAWAYS:

1. The largest contributor to the record-setting gas prices is simply the jump in crude oil prices.
2. Costs associated with refining, distribution and marketing, and taxes have contributed also but to a much smaller degree.



U.S. Oil Production

KEY TAKEAWAYS:

1. With recent geopolitical events, U.S. oil production has bounced from its Covid lows and is spiking near all-time highs from 2019.
2. A strong contributor to the production increase within the U.S. has been the administration releasing barrels from the Strategic Petroleum Reserve.


Sector Returns

KEY TAKEAWAY:

1. Although the energy sector’s year to date gains have been cut in half since its peak, its gains this year demonstrates the importance of why investors should diversify assets throughout sectors and asset classes.



Historical references do not assume that any prior market behavior will be duplicated. Past performance does not indicate future results. This material has been prepared by Kingsview Wealth Management, LLC. It is not, and should not, be regarded as investment advice or as a recommendation regarding any particular security or course of action. Opinions expressed herein are current opinions as of the date appearing in this material only. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate their ability to invest for the long term. Investment advisory services offered through Kingsview Wealth Management, LLC (“KWM”), an SEC Registered Investment Adviser. (2022)

3:00

SVP Paul Nolte Interviewed on WGN Radio 6.28.22

Paul Nolte, Senior VP at Kingsview Wealth Management, joined Bob Sirott to discuss why investors are selling their bonds, what the market looks like this week, and what the Fed might do to interest rates.

Click here to listen to the interview.

7:33

SVP Paul Nolte Quoted On Yahoo Finance 6.22.22

Kingsview SVP Paul Nolte discusses inflation and how the fed is strongly committed to bring inflation down.

Read the full article here: Yahoo Finance

3:00

Nolte Notes 6.22.22

June 13, 2022

Download the PDF here.

It has been said for millennia, sometimes for little comfort. “It is the darkest before the dawn”. Yet another huge drop in the equity market, now down in ten of eleven weeks and well into bear market territory. The Fed meeting did little to assuage inflationary fears as investors believe the Fed has little in their arsenal to fight rising food and energy prices. Powell’s comment at the press conference that another 0.50 or 0.75% rate hike is on the table for July and likely another 0.50 in September. It was only nine months ago that inflation was seen as transitory. What a difference a few months can make! To be sure, the rate increases are impacting parts of the economy, like housing, where mortgage rates are getting over 6%, when they were merely 3% at the start of the year. Housing activity has waned, lumber prices have cratered. One other part of the economy could see some bargains in the months ahead: retail stores. Comments from the biggest retailers about excess inventory could lead to sales during the summer to cut the inventory back to more normal levels. It is not the price cutting that many consumers need to see, but it is a start.

How bad has this year been for stocks? There have been only a handful of times that the markets have dropped by 15% in one quarter (assuming the market finishes close to current prices in two weeks) AND have dropped by 20% over two quarters since WWII. The good news is that, except for 2008, the next quarter was positive. In all cases the markets were higher a year later. When looking at the post-war bear markets, of the 14 prior bear markets, only three saw the markets lower a year later: 1974, 2001 and 2008. Based upon the historical trading record, the markets are likely to bottom within the next six months or so. This lines up well with the pattern of mid-term elections. The markets generally trade poorly into mid/late summer and then rallies strongly to the Presidential election. If there was a fly in the ointment, it is that the markets are still historically priced richly, especially if inflation and interest rates remain high. Fed Chair Powell will get another shot at explaining the Fed’s decision and outlook this week when he visits Congress. Keep your seatbelts fastened.

Interest rates were all over the map last week. The yield on 10-year treasury notes started out at 3.15%, rose as high as 3.50% and ended the week at 3.22%. Commodity prices fell 5% on the week, with oil prices (not at the pump!) dropping 7% just on Friday. Worries early in the week of an impending recession seemed to give way to the belief we are currently IN a recession. This would explain the funk that the stock market is in as well. For now, rates seem destined to rise, especially if the Fed is good on their word that they will be hiking rates through Labor Day.

One other part of the market that is “signaling” that better days are indeed ahead is the various asset classes and sectors within the SP500 are all at or near momentum lows. This has occurred close to market bottoms in 2020, 2018, 2015, 2009 and 2002. It doesn’t mean the markets will go straight up from here, but a bit of nibbling on a broad basket of stocks may be rewarding over the coming 12 months. Given the fall from grace over the past six months, growth stocks could bounce back the strongest in the months ahead. That said, the case can be made for international stocks that could benefit if the dollar weakens. Very broadly, the incredible rise in bond yields have made bonds an interesting sector as well. Everything is cheap, but for a very good reason, higher interest rates and inflation. If either of those can subside or at least stop their meteoric rise, investors may once again return to the stock market. It may be hard to see from here when smoke gets in your eyes.

The daily large swings in the markets are not likely to calm down anytime soon. Fed Chair Powell will be in front of Congress this week and many other Fed officials will be explaining their economic views. The hard economic data will be thin until after July 4th, but that does not mean stocks will be enjoying the summer wind.

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The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.

Program: Fox Now
Date: 6/3/2022
Station: Online
Time: 10:37AM

REPORTER: Unemployment is down a little and the price of gas is up a lot. So what’s that mean for the economy? It’s complicated.

There’s already early signs that inflation is peaking. But if you if you look at numbers such as the number of quits or outstanding jobs, jobs available, they are actually starting to peak and roll over.

REPORTER: Economists are worried because since the fifties, inflation over 4%, combined with unemployment under 5%, has meant the US economy was headed for a recession within two years. Inflation now stands at 8.3% and the May jobs report out Friday is expected to show the unemployment rate dipped to three and a half percent.

SCOTT MARTIN: The data in the economy is not awesome. It’s not really horrible. So I think we’ve got kind of a soft landing slowdown definitely upon us.

STEVE FORBES: When the Federal Reserve talks about a soft landing, you better put your seat along.

REPORTER: Drivers are looking for relief. The national average for a gallon of regular hit 4.72 on Thursday.

CONSUMER: Everything is sky high where I used to fill my tank for $50. Now it’s $80.

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3:00

Portfolio Manager Insights | Weekly Investor Commentary – 6.22.22

Download the PDF here for the full commentary.

PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 6.22.22
Investment Committee

In response to worsening inflation, the Fed raised policy rates by 75 basis points last week, the largest individual hike since 1994. The Fed also sharply lowered their growth projections, increased their inflation forecasts, and boosted their year-end rate target to 3.25%, while emphasizing that they are “strongly committed to returning inflation to its 2 percent objective.” At his press conference, Chair Jerome Powell acknowledged that accelerating inflation is difficult for households and everyday individuals.

As prices have increased for food, gas, and other necessities, investors have grown increasingly concerned about the impact on the economy and markets. How can long-term investors view this difficult investing environment with the proper perspective?

This has been a challenging market because there have been very few places to hide, and there is no doubt that many investors are tempted to sell and simply hold cash. Markets have yet to stabilize this year and the S&P 500 and Nasdaq are both in bear market territory, having declined 23% and 31% year-to-date, respectively. What has made it especially difficult is that bonds have had one of their worst years in history due to the sudden jump in rates. The U.S. Aggregate Index of bonds has fallen 11.5% year-to-date while the corporate index has pulled back 15%.


ALL INFLATION MEASURES ARE NEAR THEIR PEAKS

KEY TAKEAWAYS:

1. All inflation measures are at or near their recent peaks. This is especially true for measures based on consumer prices, such as the Consumer Price Index and Personal Consumption Expenditures.


In many ways, investors are stuck between a rock and a hard place. On the one hand, many are applauding the Fed’s latest effort to combat the highest inflation rates in forty years. On the other hand, doing so by tightening interest rates will likely soften demand for goods and services across the economy. In the best case, spending will slow and inflation will moderate but remain above historical averages. In the worst case, tightening financial conditions will lead to a recession, albeit possibly a mild one.

Mortgage rates of 5.8% and gas prices around $5 are already creating economic weakness in areas such as the housing market and retail spending. Last week’s retail sales report was a negative surprise with consumers spending -0.3% less in May than April. On a year-over-year basis, retail spending still grew 8.1%. However, these figures aren’t adjusted for inflation. So, with the consumer price index rising 8.6% over the same period, consumers most likely received less for their money over the past year, even if they felt as if they were spending more. Thus, it’s no surprise that there are now signs of belt-tightening.

In this environment, there are two facts that long-term investors should remember. First, the temptation to sell investments and hide in cash is even more counterproductive today because high inflation erodes the value of that cash. Additionally, it’s difficult even in more normal times to try to time the market since rebounds can occur when investors least expect them.For both of these reasons, overreacting and shifting from an appropriately constructed portfolio is likely to be counterproductive. It is better to hold onto a diversified portfolio that can help offset these inflationary pressures going forward, even if it has struggled so far this year alongside almost all asset classes. As the old saying goes, it’s best to be fearful when others are greedy and greedy when others are fearful. While there are many reasons to be negative, this is also the best opportunity to take advantage of the most attractive valuations in years.


CONSUMER SPENDING UNEXPECTEDLY
DECLINED LAST MONTH

KEY TAKEAWAYS:

1. Retails sales unexpectedly declined in May compared to the prior month. In all likelihood, the actual numbers are worse than they appear because they don’t account for inflation.
2. These early signs suggest that consumers are responding to high inflation rates for necessities such as food and gas.


THE FED IS STEPPING UP THE FIGHT AGAINST
INFLATION

KEY TAKEAWAY:

1. The Fed raised its main policy rate by 75 basis points in June, the largest individual rate hike in 28 years. However, the Fed can’t control many of the underlying drivers of inflation such as supply chain problems, high energy prices, etc.


Second, markets tend to focus too much on the Fed, even in good times. The truth is that the core drivers of inflation are either out of their control or the result of stimulus decisions made two years ago by the Fed and Congress. Specifically, the Fed acknowledges that it cannot directly address higher food and energy prices which indirectly affect all prices. On a technical basis, these prices, which hurt consumers the most, are important components of “headline” inflation. Traditionally, economists and the Fed closely follow “core” inflation, which excludes the prices that matter the most today, since policy tools can only affect longer-term trends. Perhaps the best the Fed can do is to prevent inflation expectations from worsening and leading to an inflationary spiral. This would be a situation reminiscent of the 1970s in which persistently higher prices lead workers to demand higher wages which further causes businesses to raise prices. It goes without saying that whether this happens will depend on the direction of energy and food prices, which in turn depends on global conflicts and supply challenges.

The timing of the global economic recovery and the war in Ukraine created the perfect storm for the prices that impact consumers the most. Still, oil prices have fluctuated and are now back to the same levels they reached in March. There are also signs that some supply chain and manufacturing problems are easing, including for semiconductors and building materials. So, while these pricing pressures have remained high, they could naturally fall in the coming months. Ultimately, investors ought to focus on what they can control. In this challenging market, sticking with a well-considered financial plan is still the best way to achieve long-term financial goals. Below are three charts that highlight the importance of the Fed’s historic rate hike on consumers and inflation.

The bottom line? Investors ought to stay diversified and avoid the temptation to shift to cash in this inflationary environment. Where the market goes from here will depend heavily on the direction of consumer prices.


Historical references do not assume that any prior market behavior will be duplicated. Past performance does not indicate future results. This material has been prepared by Kingsview Wealth Management, LLC. It is not, and should not, be regarded as investment advice or as a recommendation regarding any particular security or course of action. Opinions expressed herein are current opinions as of the date appearing in this material only. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate their ability to invest for the long term. Investment advisory services offered through Kingsview Wealth Management, LLC (“KWM”), an SEC Registered Investment Adviser.(2022)

3:00

CIO Scott Martin Interviewed on Fox News 6.15.22

Program: Cavuto Coast to Coast
Date: 6/15/2022
Station: Fox Business News
Time: 12:00PM

NEIL CAVUTO: The administration is great, he said, is seriously considering the possibility of temporarily junking the federal tax on gasoline. It’s 18.3 cents a gallon diesel. It’s even more at 24.3 cents a gallon for diesel taxes here. What we don’t know is exactly how far such a tax holiday would go. We do know that in just the last three weeks, we’ve risen about $0.18 on the average price of a gallon of gas. So whatever tax you take off the market all of a sudden shows up in the underlying price. So damned if you do, damned if you don’t. So where is all of this going? And this day, the Federal Reserve is meeting to see what it can do to sort of curb this appetite for not only gasoline and oil, but pretty much everything that’s now taking grip in our economy. Scott Martin joins us. Ray Wong joins us. Gentlemen. I want to begin with you, Scott, because the administration’s approach to this is anything but for the time being, more domestic production. It’s going to try to urge the oil companies to do just that. But the oil companies come back and say, well, you’ve made it very, very difficult, because whatever reprieves you give us are very short lived and very limited. But the message seems to come from the White House. You guys are gouging Americans and it’s got to stop. What do you think.

SCOTT MARTIN: It does, Neil? And you know, you’re making the oil companies the enemy when in fact, there’s a solution. And oil companies and consumers are not stupid. They know this is government policy tried and true. This was the war that President Biden declared on the energy markets when he took office. And so this is just a follow through from that sentiment. And so instead of being, say, friendly to the oil companies and saying, how can I help? Biden comes out and says, you’re doing this wrong. Change your business or else. And that’s just not going to work. And the great point you made about the federal tax holiday, I mean, in Chicago alone, we’ve got state and local taxes, Neil, that are close to a dollar of gas prices that we see today. There’s all kinds of help that if the government wanted to come out with and give the American consumer just immediate relief, they could do this. But instead they kick this political football down the field and say, well, it’s the oil companies, it’s this, it’s that, it’s Putin, for crying out loud. And so they don’t want to address the real problem here. And until they get to the real solution, which is exactly government policy, we’re going to see prices go up even more.

CAVUTO: In the meantime. Ray Wang It’s really the Federal Reserve and only the Federal Reserve, whether you like the Fed, whether you hate the Fed. The fact of the matter is they’re the only ones right now with the ability to sort of directly deal with this head on. We don’t know exactly how they’re going to deal with it today, but it’s looking like at least a three quarters of a percent hike in the overnight bank lending rate called federal funds, which would bring us up to the round, the one and three quarter percent level with likely a lot more to go from there. What do you think?

RAY WANG: Yeah. I mean, part of it was really to get the demand destruction and we’re starting to see implications. Right. Auto sales are down 3.5%. The National Association of Homebuilders have pretty much said their indexes are continuing to go down in terms of confidence, in terms of production of homes. We’re seeing in retail sales that were up 0.1%. But when inflation is 8.6, you’re really behind eight and a half. So I think the market’s taking care of some of this. The question really is, where is the ceiling? And so if they hit 75 basis points today and then say we’re going to do another 50 in July, I think the market will breathe a sigh of relief and say, okay, good, we think that’s the top. But if they keep moving and move too far, I think there’s going to be pushing us into the edge of a recession. And the economy is in a frail point at this moment.

CAVUTO: You know, Scott, I was sort of factoring things out, you know, pen on a napkin here. If they got aggressive and stayed aggressive right through the end of the year. I know the consensus seems to be and I don’t know where you gentlemen are, Scott, talking to you now that we end the year with the Fed funds, probably around three and one half percent. But there’s another argument to be made. If the Fed really gets aggressive and hikes three quarters of a point at every remaining meeting, which would take you through today, the July meeting, the September meeting, the November meeting, and finally the December 13 and 14 meeting. I added all of those up and if it got 75 basis points with each meeting, I would assume unlikely we’d be up close to 5%. Are we going to go there?

MARTIN: We could. And I think, Neil, the key point, good math, by the way, there, I don’t think I even would have gotten that right and I don’t think the Fed would have either. And that’s a scary thing. I think the sooner they get hawkish and the sooner they get, let’s say, tight, Neal, the better off we’re going to be. I know that sounds crazy, but the market has been crying crazy for the last two weeks now in the ten year benchmark for the ten year rate. I mean, look at the rate. You’re right on the ten.

CAVUTO: You’re absolutely.

MARTIN: Right. Yeah. It’s telling the market. It’s telling the Fed, rather. Neal, I think you’ve got to go 100 basis points today. 75 is just the baseline. If they do 100, I got a prediction. The market rallies, the equities rally because they’re like, okay, the Fed is now taking a line in the sand. They’re putting the stake in the ground and saying, no more of this screwing around. We’re not going to do 50 basis points anymore. We’re going to get serious. And the sooner they do that, Neil, the sooner the recession comes and or is over and the sooner to my friend that they can actually start cutting if they need to, to get the market or get the economy back on its footing.

CAVUTO: That’s interesting. You know, Ray, it’s sort of like the rip the damn Band-Aid off approach. It’s going to hurt like heck, but better that than just to sort of slowly do it, which would still be painful. Just painful a little longer. If the Fed were to do something like that, forget about a full percentage point cut today. That could happen. I’ve heard that. But to to raise rates to the point that by the end of the year, we’re close to 5%. If you think about it, we have an inflation rate that’s well north of eight and a half percent. So they’d still be under that. And normally that’s what history says is you’re sort of guideline. Your benchmark, whatever the inflation rate is, is where your Fed funds rate should be. I just wonder, like if you get up to those kind of levels, aren’t all bets off.

WANG: All bets would be off. But most definitely this is just one side of the problem. I think your earlier point really around energy prices, which is driving the inflation piece that’s got to be addressed. This war on American energy is ridiculous. I mean, we need a transition to ESG, but it’s got to be a pragmatic transition that doesn’t bankrupt everyone in the process. If you want to drive down inflation right now, pump oil, drive down energy, open sources. It’s not just the leases. It’s about also making sure the regulations are available, the permitting is available, and the fact that the pipelines, the transit and all those other regulations are removed. But that just means people aren’t serious about driving down inflation if they’re not addressing the energy issue.

CAVUTO: I’m just wondering and very, very quickly, my produce is going to kill me. But you guys are so good. I did want to pick your brains on this. I know you’ll be back a little bit later in the show. Scott, if the Federal Reserve were to signal that an aggressive rate hike, a series of them, a minimum of 75 basis points were in the cards. You argue the administration, the markets would respond favorably and maybe start turning things around. There are many who said even at these levels, the markets are still rich, though. Do you think the markets remain toppy? Even with the 20% plus decline we’ve seen in the major averages?

MARTIN: Short term, they may be a little toppy just because of the valuations that you’re referring to, Neil, and the fact that earnings are going to come down in the next couple of quarters, because we do have that slowdown in consumer spending. But for even the shorter term, which is like two or three days, I think the market loves it. I think anything short of something hawkish or something serious from the Fed today, which is basically 50 basis points or less, to jump back to Edward Lawrence’s amazing reference point to Nancy Kerrigan earlier, that’s your Tonya Harding today, 50 basis points or less. It’s going to whack the market in the knees because the Fed is not serious about getting their handle around things if they go higher. I think that’s where the market actually bounces here because yes, valuations are high, but they’re short term, not to high enough to where the market can rally.

CAVUTO: Now, I left out just looking at the Nasdaq and technology stocks. All right. They’re off, many of them 50%. The average itself. Well well, north of 28%. So you could say that’s overkill. But others are saying it is still rich. Do you?

WANG: You know, I don’t as well. I think the floor and the Nasdaq’s going to hit around ten. I mean, if you’re looking at 15 X on P as kind of like the low point, that’s probably where we’re going to sit somewhere between 14 and 15. I think what we’re going to realize in the Nasdaq is the tech companies are still doing good. The earnings are amazing. You saw what happened with Oracle a few days back. The the real question is really where is the dollar going to be? And, of course, what’s going to happen in the B to C market in terms of consumer sentiment and if that’s going to slow folks down. But tech companies are still growing 20 to 30%, especially the big cap ones.

CAVUTO: Gentlemen, don’t wander too far. I want to pick those fine brains and take your quotes to be my quote. So they were my ideas. But thank you very much, guys.

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5:30

CIO Scott Martin Interviewed on Fox News 6.15.22

Program: Cavuto Coast to Coast
Date: 6/15/2022
Station: Fox Business News
Time: 12:00PM

NEIL CAVUTO: All right. You know, a little more than a week ago, the odds of anything as wacky as a 75 basis point hike in interest rates seemed so low. In fact, it represented about a 3% possibility in people who trade on this sort of stuff. The overwhelming majority betting on on a half point hike. That has completely flipped now, better than 90% betting. That is what we will see today. The overnight bank lending rate known as federal funds increased three quarters of a point. There’s a very small sector of that group insisting that it will be a full percentage point. I don’t know where our guests are on that, but let’s get right to it, because we’re minutes away from that Fed announcement. Michelle Schneider joins us. The Market Gauge Group managing director Ray Wang is back with us. Constellation Research CEO. Everybody wants to rule the world. Ray already is ruling the world, so we just thought he’d throw that into the title. Scott Martin of Kingsview Asset Management, the CEO, Fox News contributor, ruling the the world for young people who want to understand how this whole market stuff works. Welcome to all of you and thank you for joining us. We’re minutes away from a rate hike, Michelle, that we know, but will it be three quarters of a percent?

MICHELLE SCHNEIDER: My guess is that it probably will be a half a percent, but it really at this point doesn’t matter because there’s a few givens. A We are in a bear market. B Certain areas of inflation, we’re seeing cooling already, auto housing market. And C, is is that even if we do get some kind of a relief rally and some some kind of bigger hike in interest rates, we cannot cause certain types of inflation, which is the supply side and more side inflation, which basically affects food. That’s not going to be any.

CAVUTO: You see a half point hike. Right. I know it’s not crucial to you, but you see at least a half point, you’re not in the three quarter percent hike.

SCHNEIDER: I don’t think so now.

CAVUTO: Okay. Where are you on this, Scott?

SCOTT MARTIN: Three quarters and I’ll go. The tears for fears are out. Neil, one of my favorite bands of all time who I think is on tour again, by the way. So pick up tickets if you can. I’ll shout it out. I’ll shout it and tell them they need to do 75. And I disagree with Michele. I think this does matter. She’s right about the supply chain concerns. There’s supply and demand. Demand is cooling, but the market is in such a weird, frisky, emotional state. The market, especially the bond market, are old friend. The bond market that was so gentle, so peaceful and now freaking out needs to see the Fed take a stand. I mean, I’m so excited about this. I’m so wrapped up in this meeting. I combed my hair. I went into the studio because they need 75. The market’s told them 75. Anything less than that huge sell off.

CAVUTO: Wow. Okay. So if it is three quarters of a point and if the Federal Reserve were to follow up with such aggressive rate hikes, at least in the next two, possibly three meetings, now you’re talking, you know, a Fed funds rate that approaches 3% could be four and one half percent by the end of the year. What is an acceptable level?

RAY WANG: Building on the chairs for theosophy. Erskine That would be a mad world. And we’d probably see mortgage rates on 30 year side hitting seven and a half, which would take us probably to almost like 2000 to 2001. So, but, but it is likely, right? I think we do need the shock and I think it’s going to quell some of this. But, you know, it is definitely a supply issue. I mean, this is a supply side issue. And I think if we don’t solve that piece, we’re going to be in trouble. And I think that’s.

CAVUTO: Going.

WANG: We’ll probably see those two rate hikes.

CAVUTO: Okay. I apologize for jumping on you, my friend. Michelle, is this a rich market to you right now? With all the drubbing it’s taken, you could still make the argument it is still rich. It’s still trading at multiples that are north of where they normally should be. And that’s after the selloff we’ve had. Where are you on this?

SCHNEIDER: Well, yes, we have valuations and PE ratios that were historical highs and a lot of the companies that bought back their own stocks through the years and enjoyed zero interest rates and low taxes are going to suffer as a result. And we don’t really know what fair valuation is, but I just want to explain that the supply side inflation, that rage is talked about, it doesn’t really matter at this point what the Fed does about the interest rates. You can’t control things that cannot be produced like food, like energy at this point. And so it doesn’t matter whether they go 75 or 50. And I just want to explain that we are in a bear market. The inflation is going to continue, particularly where it hurts the most. And yes, valuations are definitely still bloated and we don’t really know what fair value is. Maybe that’s the most exciting thing about this. At some point we will be able to establish what actual fair value is if you’re a believer and free market ultimately.

CAVUTO: You know, you can talk about it not having an impact on food prices, but you could argue just the opposite as well. It’s got I mean, you could start saying that people heretofore were buying expensive cuts of meat or whatever or are pivoting to cheaper cuts or or, God forbid, going vegetarian. That’s a whole separate issue. But the people will, in the face of those higher costs, start making these tough decisions. Therein lies the fear of stagflation, that the higher prices beget a slowing economy. Where are you on this?

MARTIN: I agree. I mean, going plant based. Yeah. And driving less. Flying less. I mean, I think Michelle’s right. I mean, it is a supply issue, but the demand side is totally part and parcel of that, too. So, Neil, I think the higher rates curtail the demand and the market though, this is going to sound totally crazy and overkill warning here. The market is going to be head over heels. Another one of my favorite Tears for fear songs. If the Fed gets a hold on inflation, they’ve played this too light. They have played this way too easy. And now they got way behind the curve. And the market is begging them to do something stark here. And so if they do that, the market’s going to start to rebound, I believe, because the inflation is the number one concern right now, both on the supply side, as Michelle pointed out, but also on the demand side. And the demand side will be curtailed if the Fed starts to be hawkish here.

CAVUTO: You know, I think something has changed here and I defer to you. You’re all experts. But as you know, I qualify as one because I read a prompter, so enough said. But having said that, that this is Jerome Powell’s Paul Volcker moment, I think he now aspires to be that blunt, that rough, that tough, and the

cautious Jerome Powell might might not be around any longer. And I don’t know how that plays out. But if if he is Paul Volcker, then we are in for some aggressive rate hiking, aren’t we?

WANG: We are, and we do need a Paul Volcker here, but we also need a Ronald Reagan to come back in and cut regulation. And we need to be able to open up markets and drive down food prices and make sure that we’re safe and secure and we feel well about that. And also open up energy, right? If we were to do some of that, I think we could cover both ends. It’s not an either or. The Fed is just one aspect of it. But there’s regulatory issues, there’s policy implications that are not being put to the test. And if we go back to some of those policies that would actually drive down cost and be deflationary, we’d probably be in much better shape than just relying on the Fed on this.

CAVUTO: All right, guys, I wish we had more time. We don’t. We’re very close. 30 seconds away. To Lauren Simonetti taking over in the next hour.

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5:30

Portfolio Manager Insights | Weekly Investor Commentary – 6.15.22

Download the PDF here for the full commentary.

PORTFOLIO MANAGER INSIGHTS
WEEKLY INVESTOR COMMENTARY | 6.15.22
Investment Committee

The last two years have been the perfect storm for inflation. Not only have these trends not let up, they have also accelerated. Rising prices affect all aspects of the economy, from the Fed’s macroeconomic policies to the microeconomic decisions of households and businesses. Concerns over the impact of inflation on interest rates, consumer spending and corporate profits have pushed the broad market back toward bear market territory. How can long-term investors maintain perspective in this challenging environment?

Last week’s data show that the Consumer Price Index, a common measure of inflation, accelerated again in May after briefly slowing in April. Compared to the previous year, consumer prices rose a whopping 8.6%, the fastest growth rate since December 1981. Even “core” CPI, which measures the underlying inflationary trend, climbed 6%.

It’s helpful to review how we got here. Beginning in 2021, global supply chain problems worsened due to strong consumer and business demand as the economy recovered. The war in Ukraine and other factors then led to steep increases in energy and food prices, directly hurting consumer pocketbooks. The competitive labor market has meant shortages of workers and higher wages, eating into the profit margins of businesses. For these reasons, inflation remains the central issue for investors, and there are two broad areas of concern that have weighed on markets.

First, investors are worried that the Fed will be forced to “induce” a recession in order to control inflation. This is exactly what the central bank did under Paul Volcker in response to the stagflation of the late 1970s and early 1980s. By tightening monetary policy, the Fed was able to control runaway inflation at the expense of economic growth. Fortunately, it worked, setting the stage for subsequent growth over the 1980s and 1990s.

While the parallel to the Volcker era is instructive, there are important differences today. Inflation was much worse throughout the 1970s with multiple periods of double-digit price gains over the decade. Not only have all economists and central bankers studied that period extensively but the Fed is already beginning to tighten more quickly, albeit with an unfortunate delay. In contrast, the Volcker Fed didn’t begin to aggressively tighten until 1979 after annualized inflation had already averaged 8.2% for nearly 7 years.

Also, unlike the 1970s, underlying demand in the economy is still fundamentally strong and unemployment is near historic lows. Ironically, this is one reason inflation is a problem in the first place. Thus, if supply were to catch up, prices could theoretically begin to normalize, easing some of the economic stress. So, while a technical recession is always possible as the Fed tightens, we are not beginning with a period of economic stagnation nor a runaway inflationary spiral.

Second, investors are worried that rising prices could harm consumer and business spending. There are already signs of this in this quarter’s corporate earnings. For households, basic necessities like food, shelter, apparel and gasoline are significantly more expensive compared to last year. Gasoline has reached a new peak and energy prices have risen 35% over the past year. Food at home, a category of the Consumer Price Index, rose nearly 12% over the same period. These prices are especially impactful because they are noticeable and unavoidable, leaving families with less to spend on other goods and services.

This has added to the financial stress of consumers. The University of Michigan’s measure of consumer sentiment is now at its lowest level in the history of the index. This measure is directly correlated with consumers’ expectations of inflation, which in turn depends on the inflation they have already experienced via gas and food prices.

So, while this is a very important indicator for markets and the economy, it is entirely backward-looking and based on measures that are widely understood. For this reason, consumer sentiment tends to be a contrarian indicator for the market – i.e., the best time to buy and hold is when consumers feel the worst. Once the underlying economic stress begins to fade, consumer sentiment improves, and markets rebound. This is exactly what took place in the early 1980s as inflation turned around.

What does this all mean? To no one’s surprise, how markets, consumers and businesses do from here depends entirely on the path of inflation. While the Fed is trying to not contribute to the problem, the underlying issues related to supply chains, manufacturing, and energy are outside of their control. If these issues are resolved, and the largest shocks to price are behind us, then many measures of inflation could slowly begin to turn. If inflation stays worse for longer, there could be a bigger impact on corporate profits. Either way, markets are arguably positioned for the worst-case scenario and the Fed is already stepping on the brake.

Thus, investors ought to stay disciplined rather than try to guess the exact direction of inflation. While this is the first inflationary period in four decades, investors have faced numerous market challenges over the past several years. Staying invested in diversified portfolios has been the best approach throughout these periods in order to best achieve financial goals.



Many consumer expenses have seen significant price increases

KEY TAKEAWAYS:

1. The Consumer Price Index has reached new levels, driven by accelerating prices in a number of key categories. Many consumer necessities such as energy, food, and shelter are climbing at their fastest rates over the past 12-months. This directly impacts consumers’ pocketbooks and reduces their ability to spend on other items.


Record gasoline prices hurt consumers

KEY TAKEAWAYS:

1. Gasoline prices, in particular, hurt consumers who often have no choice but to accept greater fuel costs.


Consumer negativity is the worst on record

KEY TAKEAWAY:

1.Inflation has led consumers to feel the worst since the 1980s period of stagflation. Whether this improves will depend entirely on where prices go from here. Still, consumer sentiment tends to be a trailing and contrarian indicator.


Historical references do not assume that any prior market behavior will be duplicated. Past performance does not indicate future results. This material has been prepared by Kingsview Wealth Management, LLC. It is not, and should not, be regarded as investment advice or as a recommendation regarding any particular security or course of action. Opinions expressed herein are current opinions as of the date appearing in this material only. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate their ability to invest for the long term. Investment advisory services offered through Kingsview Wealth Management, LLC (“KWM”), an SEC Registered Investment Adviser.(2022)

3:00

SVP Paul Nolte Interviewed on WGN Radio 6.14.22

Paul Nolte, Senior VP at Kingsview Wealth Management, joined Bob Sirott to talk about the Fed’s plans to raise rates, why the housing market is slowing down, and the benefits of short term gains. He also discussed why cryptocurrencies are more risky than other investments and retail sales numbers.

Click here to listen to the interview.

5:00

Nolte Notes 6.13.22

June 13, 2022

Download the PDF here.

“My mama told me there’ll be days like this”. If Thursdays 2% drop in the averages was not enough, Friday’s inflation report pushed stocks down another 2%, making it a full 5% on the week. The market is now back to the May lows. The coming week will have plenty for investors to watch, from the Fed meeting to retail sales and other inflation reports. The strong consumer inflation report came as little surprise to main street as they watched gas prices jump daily and every trip to the grocery store was ever more expensive. Even the core rate was above expectations, so the hope of “peak inflation” remains somewhere in the future. As a result, interest rates shot higher, with short-term rates moving more than long rates. The implication is that the Fed could now justify a 0.75% hike in rates this week, up from 0.50% that had been expected. There was a time when the Fed wanted inflation, fearing that persistently low inflation could tip toward a deflationary cycle and persistently poor economic growth. The thought was the Fed could better deal with inflation than deflation, now that inflation is here, the Fed will be put to the test in the months and years ahead.

If inflation is always and everywhere a monetary phenomenon means, according to Milton Friedman, inflation is caused by increases in monetary supply. Historically, monetary growth has been between zero and 10% on a year-over-year basis, with spikes usually occurring as the economy hit a recessionary period. The pandemic gave the Fed and the government a reason to send out huge amount of money as the economy was thrown into reverse. The supply of money just from the Fed jumped 15% in five months and continued higher until last month, when the series turned negative. The chore ahead will be to remove that monetary accommodation from the economy in the months ahead, which is likely to push the economy into a recession. The economy remains in a strange place, with China largely shutdown, demand for goods/services very high and companies trying to expand production. There are signs that the higher rates since the start of the year are biting some sectors, with lumber prices off more than 50% from the start of the year and housing activity beginning to slow as mortgage rates surpass 5% from under 3% at yearend.

The interest rate complex reacted swiftly to the inflation news. Short-term rates rose much quicker than long-term rates, flattening the yield curve. When short rates are above long rates (inversion), it has historically been a recession warning. Rates were briefly inverted in early April and are today merely 0.09%. One other sign of rising risks is the difference between yields on junk bonds and treasuries. That is once again widening, indicating investors prefer the safety of treasury bonds vs. the higher returns and risks in junk bonds. Combined with a once again rising commodity complex, the inflation genie is not likely to be bottled up until 2023 at the earliest.

The decline into the weekend left negative signs across the board, with large, small, value, growth and international all declining as investors sold anything/everything they could. Volume expanded, but not to the level that would indicate panic selling. Investor sentiment is very bearish and could spark a short/sharp rally of 5-10% like March and May. Even the energy sector saw losses last week. For the fourth time since last Thanksgiving, the volume on declining stocks was over three times that of rising stocks for three consecutive days. After each occurrence, the markets managed to mount a “reflex” rally. Add to the mix very pessimistic investors, a rally could be a launching pad for significant gains over the coming year. In the short-term however, investors will still have to deal with the Fed meeting this week. The discussion of how high and quick the Fed will be in hiking rates is likely to be center stage. The short-term pain could turn toward long-term gains IF the inflation picture brightens during the summer.

The impact of the inflation data is likely to roll into this week as well, especially with the Fed meeting that ends Wednesday afternoon. Expectations for rate increases going forward should get reset and the markets may be able to “move on” and turn their focus toward the beginning of earnings season that will start after the 4th of July.

****

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.

Program: Fox Now
Date: 6/3/2022
Station: Online
Time: 10:37AM

REPORTER: Unemployment is down a little and the price of gas is up a lot. So what’s that mean for the economy? It’s complicated.

There’s already early signs that inflation is peaking. But if you if you look at numbers such as the number of quits or outstanding jobs, jobs available, they are actually starting to peak and roll over.

REPORTER: Economists are worried because since the fifties, inflation over 4%, combined with unemployment under 5%, has meant the US economy was headed for a recession within two years. Inflation now stands at 8.3% and the May jobs report out Friday is expected to show the unemployment rate dipped to three and a half percent.

SCOTT MARTIN: The data in the economy is not awesome. It’s not really horrible. So I think we’ve got kind of a soft landing slowdown definitely upon us.

STEVE FORBES: When the Federal Reserve talks about a soft landing, you better put your seat along.

REPORTER: Drivers are looking for relief. The national average for a gallon of regular hit 4.72 on Thursday.

CONSUMER: Everything is sky high where I used to fill my tank for $50. Now it’s $80.

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3:00
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