Almost There

August 3, 2023
Dow: 35,216

Are we there yet? Ok maybe we are there. The “there” being the end of the Federal Reserve interest rate increases. Inflation is coming down, the economy is still growing, unemployment has not increased meaningfully, and the consumer may still have purchasing power to spare. So, what is the next challenge for the market? There are always possible threats on the horizon, but here are a few of the current headwinds and tailwinds.

Jerome Powell overdoing the rate increases has been our primary concern, as most of you know from past Viewpoints. The Fed Funds rate has been increased 10 times, for a total of five percentage points, in the last 15 months. The speed and magnitude of the increases has slowed, but that has been no less worrisome, as monetary policy works with a lag. On the plus side, S&P 500 corporate earnings fell during 2022 but are showing a recovery in the first two quarters of 2023. The unemployment rate has remained below 4% for the last 17 months, even as rates have increased significantly. This certainly demonstrates economic resiliency.

We must chuckle as Jerome Powell takes credit for lowering inflation as he as much as told us all that the economy and the job market had to be slowed in order to conquer inflation. Yet inflation has slowed while the job market has remained robust and economic growth has turned positive. Better update your rulebook, Jerome.

Although the news has been good so far, we must keep an eye on economic indicators, as rate increases affect the economy over time. So far, some slight slowing in employment cost indexes and payroll growth should give the Fed some pause, and manufacturing has definitely slowed this year. We need some slowing to rein in the Fed, but not so much that it slows profit growth and dampens consumer confidence. So far, the economy seems to be settling in that Goldilocks sweet spot.

The Goldilocks soft landing scenario is reflected in earnings. Company reports beat analyst estimates by a fair margin in the first quarter and are doing the same in the second quarter. This is driving the market. You can almost feel the bears and the underinvested participants being pulled in and forced to buy over the last few weeks. This is what drives bull markets. Prices go up faster than earnings as price to earnings ratios expand. A number of popular bearish strategists are being forced to concede to the market’s strength. Many of these analysts had a following because they were bearish last year and correct, but the perma bear approach doesn’t work with a dynamic economy that is continually evolving and adapting.

Once the market moved up 20% off the October 2022 low, the S&P 500 Index was officially declared to be in a bull market. The average increase from that point, before another bear market, is 100%. Sure, there can be corrections or unforeseen events that can drive a new bear market, but another 100% gain without a 20% pullback is the historical baseline.

The bond market is also behaving as if economic growth has legs. The ten-year Treasury yield has begun to move up, seemingly signaling decreased chances of a recession near term. Corporate yield spreads to Treasuries have also stayed in a narrow range, reflecting the perception that companies can afford to repay their debt, even if they have to borrow at higher current rates. It certainly is rewarding to invest client bond allocations in quality securities yielding 5-6% now that rates are higher.

So, if the Fed is able to complete this rate increase cycle without pushing the economy into recession, we are willing to concede mission accomplished, and we would be happy to let another actor other than Jerome Powell take center stage. Maybe someone will step-up and address the concerns raised by Fitch in their latest downgrade of US debt.



Random Thought:  “I did not succeed in life by intelligence. I succeeded because I have a long attention span”  – Charlie Munger, Vice Chairman of Berkshire Hathaway


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Stuck in the Middle With You

May 30, 2023
Dow: 33,042

We refer to the title of a 1973 hit song by Stealers Wheel. This has to be the way Jerome Powell, or any Federal Reserve Chair, feels at turning points in the rate cycle. “Clowns to the left of me, jokers to my right, here I am, stuck in the middle with you.” Catchy lyrics; and at the beginning and ends of rate cycles, it is usually most difficult to build consensus. Powell is truly stuck in the middle, or he has to stake out a position that becomes the middle in order to develop consensus.

For the last few weeks, it felt as if a pause was the clear consensus, but the equity market has moved to new highs and economic reports have been somewhat resilient. There may well be a pause at the June meeting, but markets are now expecting another increase at the late July meeting. We hope this isn’t so as the M2 measure of money supply is shrinking at an unprecedented rate. Supply and demand governs many market relationships and is a key source of market discipline. From 2020 through 2022, the economy was flooded with cash through many government programs designed to support the economy. These programs worked, but there was no return to normal. Many stimulative government programs continued into 2023. The money supply ballooned during this period, and inflation followed. We don’t disagree with the implementation of these large stimulus programs, but it now seems unusual to believe that the inflation would be temporary if the stimulus that caused it isn’t promptly removed from the system when the economic danger passes.

As we have pointed out before, over the next seven weeks, we will get two more inflation reports that should move the trailing year inflation numbers into the mid 3% range. If the Fed truly believes that their policy operates with a lag, they should pause. Inflation rates dropped to the mid 3’s in the third quarter of 2022, and they have maintained those levels as the Fed has continued to increase their policy rate. The economy has remained resilient as the Fed has raised rates and moved nearer the end of their tightening cycle. Last year we talked about this being our best-case scenario, and so far, it has played out.

Although the Fed policy rate has increased three times this year, Treasury yields at two-year maturities and beyond have barely budged, resulting in positive year-to-date returns for fixed income investors. Long rates have moved off their lows, implying a reduced risk of an imminent recession. As first quarter earnings season has concluded, fear of an imminent downturn in profits has also receded, and total returns of most equity indices are soundly higher. While the S&P 500 Index is up over 10% for the year, 100% of the return can be attributed to just eight of the largest stocks with only 28% of stocks outperforming the Index return.

Stuck in the middle with you is also an apt description of the current relationship between the Speaker of the House Kevin McCarthy and President Biden. They have spent a good deal of time together over the last few weeks – how can that not be a good thing? Most of the reporting on the debt ceiling has been incorrect and borderline dangerous. Treasury Secretary Janet Yellen recently said that in the event the debt ceiling isn’t raised, “We have to default on some obligation, whether it’s Treasuries or payments to Social Security recipients” – this is irresponsible. A late payment made by the government to anyone or any entity other than a debtholder is not a default, it is a late payment. If a company pays a supplier late, it is not a default. Government officials know that interest and principal on Treasury debt will be paid first, above all else, but stating that does not help them increase their political leverage.



Sad Random Fact: In the fiscal year ended September 30, 2022, the deficit was $1.4 trillion dollars, or approximately $160 million per hour.




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Show Me the Money

April 11, 2023
Dow: 33,684

The depositors in many regional banks seemed to echo Cuba Gooding Jr’s famous line from the movie Jerry Maguire, “Show me the money.” The bankers’ response seemed to echo Jimmy Stewart’s from It’s a Wonderful Life, “The money’s not here, it’s in Joe’s house” and other income producing investments. A great example of how a bank is a collection of assets and liabilities, loans, and deposits. That little thing called leverage also usually plays a role in fast moving liquidity crises. No bank can sustain a short-term demand for the return of a majority of its deposits – a bank run. It is the job of the banks individually, and the government and regulators as a whole, to ensure that there is confidence in the system. The failure lies both with the management of the banks, and with the regulators and government officials tasked with both limiting the risk that there will be a bank run and reacting appropriately to stop it when it happens.

The stock market is up since its recent low of March 13, which was higher than its December low, which was higher than its October low. So far, markets and the economy are holding up in the battle against the Fed’s effort to slow the economy and raise unemployment. The battle is not won. There are unforeseen fragilities in the system, as the struggles in the banking system demonstrated last month. First quarter earnings will provide a barometer of how the economy is holding up through the most recent rate increases. We expect that the news will be largely positive. Companies have discovered a new focus on controlling costs and focusing on profit. Consumers are largely optimistic as they have seen inflation roll over in the second half of 2022. The immediate shock of higher mortgage rates is working its way through the housing market. Supply chain issues have continued to abate, which helps businesses plan better and optimize their operations.

The Treasury market has shown significantly increased volatility as banks became more stressed. Even as the Fed raised rates at their March meeting by 25 basis points, Treasury yields fell across the yield curve. The two-year Treasury fell 80 basis points in March, and the ten-year Treasury fell 45 basis points. Instead of expecting Fed Funds above 5% by year end, the market now expects rates to be cut at least three times by year end.

There have been three Fed rate hiking cycles since the late 1990’s, and we are now in the fourth. In every case where the two-year Treasury yield dropped below the Fed Funds rate, the next Fed rate move has been a cut. The two-year Treasury dropped below the Fed Funds rate in June of 2000, and the Fed cut rates six months later. It happened again in July of 2006, and the Fed did not cut rates until 15 months later. The Great Financial Crisis followed, and the S&P 500 Index did not bottom until eighteen months after the first rate cut. In the third instance, the two-year Treasury dropped below Fed Funds in March of 2019, and the Fed cut rates four months later. The ten-year Treasury yield moving below the three-month Bill yield may be an even better indicator of imminent Fed rate cuts, and that spread has been negative for five months.

Some indicators of economic activity are slowing without an abrupt reversal, and the labor market seems to be softening ever so slightly. These are both excellent signs because they demonstrate that the economy may remain healthy as we approach the end of the Fed tightening cycle – the proverbial ”soft landing.” Corporate earnings and company outlooks will be insightful as they begin to be reported for the first quarter.

Market returns have been respectable in the first quarter in both the stock and bond markets, representing a partial recovery from 2022 returns and recognition that we may navigate this Fed tightening cycle without material damage to the economy. If we had to pick one economic indicator to use to navigate the markets, it would be the unemployment rate. As long as we do not see a material rise in unemployment, the economy should be able to navigate higher short-term rates without a slowdown.

There seems to be a significant amount of pessimism present among market participants, evidenced by declining long-term Treasury rates and expected Fed rate cuts in the back half of the year. Higher than normal pessimism is usually accompanied by market opportunities, and we seek to take advantage of these opportunities.



Random thought:  FDIC Insurance historically had limits, until it recently seemingly didn’t:



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Good News is Good News

February 22, 2023
Dow: 32,875

In the markets, sometimes good news is bad news and bad news is good news. Stick with us here. Market movements always factor in expectations, or more specifically, changes in expectations. When a company announces good news, sometimes its stock will go down if the news was not good enough relative to expectations. Or a stock may go up even if the company announces bad news, if the news is still better than expectations. For a number of months, the stock and bond markets have shown many instances where they have sold off on stronger economic news and rallied on weaker economic news. Why? It has to do with expectations, specifically expectations of future moves in the Fed Funds target rate.

Market participants fear a Fed-induced recession. The Fed has stated that they want slower economic growth and higher unemployment, so recent stronger than expected economic news has led to higher expected Fed Funds rates and lower stock and bond prices. Conversely, weaker economic news has led to expectations for a lower terminal Fed Funds rate.

It’s time to reframe this tradeoff; good news is good news. As the Fed nears the end of its tightening cycle, economic growth has stayed strong. Recall where we were at June 30, 2022: the Fed had just raised rates from 0.875% to 1.625%, GDP had declined in the first quarter of 2022 and would fall again in the second, trailing year CPI was 9.1% as of 6/30/22, and the S&P 500 Index fell 20% in the first six months of the year.

In the second half of 2022, the S&P 500 Index rose slightly. GDP rose slightly more than an annualized 3% ‒ not too hot, not too cold. CPI averaged less than an annualized 3% in the second half of the year, even with a revision that increased that rate. This economic rebound happened while the Fed raised rates from under 2% to over 4% by year end. In the bond markets, rates increased far more on the short end than the long end, as recession fears were pervasive.

So the question of whether the economy and the markets can outlast the Fed rate increase cycle is not settled, even as we undoubtedly move closer to reconciliation, with higher rates and decelerating inflation. The end game is near, but still not completely clear. Many of our equity strategies have shown solid performance versus their indexes through the second half of the year and into 2023. Fixed income and preferred strategies have shown strong rebounds at the beginning of 2023. The Fed has chosen to move more cautiously of late, with the last increase being 25 basis points. A resilient economy will keep the Fed active, so inflation needs to continue to decline in order to satisfy the Fed.

Generating positive income and providing relative outperformance is possible even in choppy, unclear environments, and that remains our primary goal.


Random thought:  “What do most people say on their deathbed? They don’t say, ‘I wish I’d made more money.’ What they say is, ‘I wish I’d spent more time with my family and done more for society or my community.”       – David Rubenstein



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Playing to Our Strengths in a Fed-Dominated Fixed-Income World

We closed out 2022 with one of the biggest and best sporting events worldwide – the World Cup.    While the game of soccer sometimes catches some flak for its lack of scoring and hard-hitting plays that we are accustomed to seeing in American football, the game of soccer is known throughout the world as “the beautiful game”.  Yes, most of the typical game is spent with the ball being passed around the middle of the field, but it is those special few minutes when the action is confined near the goals where the magic happens.  The last 18 yards on either side of the field or the “tails”, if you will, are the high impact areas that generally determine the outcome of the games.  This analogy is similar to how investment managers create outperformance or alpha for their investment strategies.  Think of the middle of field as the “market consensus” or average expectations as a lot of time and investment discussions are spent in the middle of the field among the majority of market participants.  If you want market returns then play it safe and spend all your time passing the ball around in the middle of the field but if you want to outperform the market then you have to do something different than the market consensus.  You must spend some time in the goal areas or the tails if you want to outperform the market.  At Dana, we are not in the business of trying to predict macro events – stock market moves or interest rate forecasts.  We construct portfolios based on assessing risks and opportunities. When opportunities arise, we send the ball into the goal areas with the expectation to capitalize on the opportunity in order to generate outperformance for our investment strategies. As we look at the bond market today, we have the excitement of playing in a World Cup match and see tremendous opportunities regardless of the next interest rate decision.

Gone are the days of Alan Greenspan’s Fed being somewhat hush-hush and opaque about policy.  Can anyone forget his famously tongue-in-cheek quip, “If I seem unduly clear to you, you must have misunderstood what I said.”  Today, nearly every day outside of Fed blackout periods, some Federal Reserve governor or regional Fed president is talking hawkishly about keeping rates ‘higher for longer’ or waiting for definitive signs that inflation is on the mend returning to the Fed’s target of 2% to 2.5%.  The constant chatter is compounded by the financial media and broad macro strategists endlessly debating the issue.  It may fill airtime on financial networks as the media needs a spin for daily market swings but it’s overwhelming and exhausting for what purpose?

As portfolio managers, we spend our time separating the noise from the signal to anticipate what is going to matter going forward as we begin our run to the goal areas.  At Dana, within the fixed income market, we see attractive yields that have not been present for much of the last 15 years.  We stay committed to our fundamental investment process by positioning portfolios based not only on understanding current market conditions but, more importantly, where the market is going.  The financial markets are discounting machines as they anticipate future actions into today’s present value, and investors will miss taking a shot on goal if they wait for the FOMC to pivot or continue to spend time debating financial information that is already priced into the markets.  To help separate the noise from the signal, it is important to recognize as well as clarify the roles of three different groups on the soccer field – the officials “the Federal Reserve”, the announcers “the media”, and the players “investment managers” such as Dana.


The Fed’s Job

The Fed has a dual mandate to maximize employment and keep inflation in check through stable prices and moderate long-term interest rates.  Monetary policy actions such as raising or lowering the short-term interest rate known as the Federal Funds rate as well as adjusting the money supply are the primary tools the Fed uses to achieve their mandate.  The Fed communicates their actions to the financial markets through “forward guidance” which informs the financial markets about expectations as well as effects of future monetary policy actions on financial conditions in order to achieve the dual mandate.  Ultimately, forward guidance centers on controlling expectations and pricing volatility.  If the Fed issues a hawkish statement on their expectations for the future path of the Federal Funds rate in order to promote price stability then, the bond market will immediately adjust interest rates higher as they anticipate a higher discount rate into security pricing.  The challenge with controlling expectation and pricing volatility is Fed Chairman Powell and the other members must constantly appear in interviews, issue statements, and give speeches that are in alignment with where they want policy to be going forward.  It’s quite the pageantry.


The Media’s Job

The Media’s role is quite simply to fill the stadium seats so we’ll keep this section quite brief.  The recipe for filling the seats – provide insight or elicit an emotion.  The financial media offers a great outlet for insightful guests and commentary; however, the media can spend way too much airtime debating issues just to fill a time slot.  Case in point, what will the Fed do next?  Endless hours and days spent on speculating on whether a 25-basis-point hike is in the cards at the next FOMC meeting or if a larger half-point increase is in the works?  After the umpteeth time and the umpteeth day, you have to ask yourself does it matter?  We do not see investment alpha coming from that back and forth.


Dana’s Job

Let’s start where we left off on debating Fed moves.  If everyone knows that the Fed is going to move then ask yourself “where is your edge or competitive advantage?”  You have none as the participants within the financial markets have already incorporated the information into security prices.  Does Dana have a viewpoint on future Fed actions?  Absolutely and, to outperform the market, we need to get ourselves into the goal area by breaking away from the market consensus.  How do we do that?  We have to act on opportunities that the market consensus has not yet incorporated into the prices of securities.  After a lift of over 400 basis points in the Federal Funds rate in 2022 and more on the horizon for 2023, we are upbeat about the opportunities available in today’s fixed-income market.  Consider that compared with 10-year historical ranges and averages illustrated below, yields across the bond space are offering compelling value.  We have positioned portfolios to take advantage of elevated short-term rates that feature low duration.  After 15 years of earning next to nothing on high-grade, short-maturity bonds, we can own such securities with yields near or even slightly above 5%.  Additionally, our portfolio managers have been able to purchase individual bonds with unique characteristics that offer expected higher total holding period returns without taking on much additional interest rate or credit risk.


Current Yields Are Attractive Relative to History

Source: J.P. Morgan Asset Management


Bonds are Back: Investment Grade, Low Duration Credit Yields > 5%

Source: Reuters, Refinitiv


You Play to Win the Game

Calendar year 2022 certainty was a challenging period as the Federal Reserve spent the year re-normalizing the yield curve but, as we begin 2023, the fixed income opportunities give rise to optimism for investors.  Bond market yields are back to attractive levels, the majority of monetary tightening is behind us, and inflation is likely to continue to soften.  A portfolio of high-quality bonds consisting of U.S. Treasuries, U.S. Agencies, and investment-grade corporate bonds can yield close to 5% without high interest rate risk. Tax-exempt yields in municipal bonds are also attractive for investors in higher tax brackets.  In these uncertain periods, investors need to maintain a well-diversified core fixed income portfolio in an active manner to continue compounding interest rates no matter what path interest rates may follow into the future.  Whether the yield curve flattens, steepens, twists, or inverts investors need to maintain an allocation to fixed income.  Fixed income investments provide important benefits, including income, diversification from equities, lower volatility and the predictability of an income stream.  Granted, it is very uncomfortable and takes a disciplined mindset to break from the market consensus but if investors want to outperform then they need to play in the goal areas – where the magic happens.


APPROVED FOR DISTRIBUTION TO CLIENTS.   Dana Investment Advisors welcomes any comments to their newsletter and is more than willing to discuss or explain any aspect of the letter.  This newsletter is provided for general information only and is not intended to provide specific advice or recommendations for any individual or entity.  This is not an offer, solicitation, or recommendation to purchase any security or the services of any organization.  The foregoing reflects the opinions of Dana Investment Advisors.


Demand is not the Problem

December 28, 2022
Dow: 32,875

We have heard a lot about the demand side of the economy from the Federal Reserve this year. However, we almost never hear about the other side – the supply side. Jerome Powell has said that we have to lower demand in order to bring the economy into balance and bring inflation under control. Powell wants to inhibit demand by slowing growth in employment. He has said economic growth is too high, and he wants the unemployment rate to be higher than it is now to help keep wage pressure low. He essentially wants more Americans to struggle in order to reduce inflation.

“We are tightening the stance of policy in order to slow growth in aggregate demand. Slowing demand growth should allow supply to catch up with demand and restore the balance that will yield stable prices over time. Restoring that balance is likely to require a sustained period of below-trend growth.”   -Jerome Powell, 11/30/22

This is not the kind of help the U.S. economy needs.

Why not try and grow the economy by finding ways to help increase the supply of goods and services? Make it easier for businesses to hire, rather than more difficult. End the Covid emergency declaration at the Federal level, which will end the expansion of support programs that took place during Covid. These measures will increase the incentive to work, and decrease the disincentives to work. Those who are out of the workforce see their skills and habits erode over time, making it more difficult for them to reenter the workforce, at least at a job level that is equivalent to that which they had when they left the workforce. The goal should be to increase incentives to be in the labor force. Child tax credits should not be refundable, which means that you receive the payment even if you don’t have income and don’t pay Federal income taxes. Refundable credits are disincentives to work, they decrease the labor force, and increase inflation.

If businesses know that Powell is trying to slow the economy, they will try and front run the slowdown. Businesses will try and reduce costs and reduce output in anticipation of the reduction in demand. Companies will try and match supply to future expected demand in order to preserve profit margins. Some of this may have happened already, as it appeared that inventories rose to uncomfortably high levels during the summer at some companies, and they were forced to make adjustments.  Powell assumes he can reduce demand and supply will stay the same as he says in the quote above; this is not true. Witness the layoffs announced by many large companies this fall. One ugly possible result of both supply and demand decreasing can be stagflation, a condition where the economy slows but prices do not come down. Less spending on the fiscal side can help avoid this outcome.

There is more evidence that the economy is bending, not breaking. Gasoline prices have moved down significantly, and the housing market has slowed towards more normal levels of price growth. Year over year home price growth has slowed from over 20% to below 10%, and may continue to slide due to higher mortgage rates. Existing home sales have slowed significantly, but new home sales have actually moved back up over the last two months to pre-pandemic levels. Auto sales have actually increased recently, as companies attempt to ramp up production to meet demand. Retail sales ex-gasoline have slowed.

Despite these signs of slowing, GDP for the third quarter was revised up to over a 3% annual rate, and may run stronger than that in the fourth quarter. For the last two months Core CPI has printed at the lowest levels in over a year. All of this is incrementally good news for the stock and bond markets over the intermediate term. Every month where inflation shows signs of slowing while the economy remains resilient looks more like a soft landing, and moves us closer to the end of the Fed rate hiking cycle. It also decreases the chances of a major Fed mistake. The Fed has already said that increases will slow, although they will not comment on any potential rate cuts. Fears of a recession and lower corporate profits in 2023 still run high, which is the main reason the S&P 500 is having a difficult time moving above the 4000 level. The Nasdaq index may be forming a stealthy bottom, as more than two thirds of the members of the index are outperforming the overall index.

In the fixed income markets, intermediate and longer rates have stabilized, providing positive returns for the quarter even as short rates have continued to move up. Most fixed income portfolios can now earn 4-5% annually, which supports total returns and provides a buffer against price volatility.

2022 has followed the uncertainty of the pandemic years of 2020 and 2021, but has been no easier to navigate. We continue to adjust portfolios to current market conditions and work to anticipate future potential scenarios. A 2022 highlight was Dana Investment Advisors once again being named the best place to work in investment management among companies with 50-99 employees. 2022 was our 11th straight year of receiving such National recognition and is a true reflection of the wonderful team and culture you’ve enabled us to build. This recognition and Firm environment have enabled us to attract and retain an amazingly talented and dedicated team here to serve you. It is our privilege to guide our clients’ assets, and it is a responsibility we take very seriously. We thank you for your business, and look forward to our continued partnership in 2023.


We wish peace on earth and a Happy New Year to everyone.


The Pension and Investments Best Place to Work article link is here:


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 November 22, 2022
Dow: 34,098

The faceoff between Jerome Powell and the U.S. economy continues. At this point, just maybe the economy is gaining the upper hand. Despite four consecutive 75 basis point increases in the Fed Funds rate this year to almost 4%, the economy remains resilient. Treasury yields beyond five-year maturities have moved down aggressively after the most recent report on inflation, and the yield curve is as inverted as it has ever been in the current rate increase cycle. The economy was still able to swing to positive GDP of 2.6% in the third quarter. The monthly employment report has continued to show positive, albeit slowing, growth even as the unemployment rate ticked up slightly. Fed Chairman Powell has said he will not blink and vows continued aggressive rate hikes until the inflation rate reverses significantly and moves back towards 2%.

So, is it wise to cast your lot with Jerome Powell, and take him at his word regardless of what happens to the economy? That would probably mean investing in an intermediate or longer bond portfolio, with the expectation that he will continue to raise rates until inflation is vanquished, regardless of what happens to the stock market and the economy. Ultimately, a Powell win would manifest itself in lower long-term rates due to lower inflation, a much weaker economy, or some combination of both.

Or do you believe that the economy can weather the Powell rate hurricane and remain resilient until inflation begins to decline due to some combination of Fed tightening and marginal economic slowdown? This is often characterized as the “soft landing” scenario. Keep in mind that concurrent economic indicators are at a level consistent with GDP of 3% to 4% in the fourth quarter.
Over the last few weeks, we have had a rally in both the stock and the bond markets, as the S&P 500 Index has moved up almost 11% since October 12 and the ten-year Treasury yield has fallen over the same period. So far this year, the stock and bond markets have typically fallen at the same time, not risen, so let’s peel the onion.

The big move in both the equity and the fixed income markets took place on November 10th. On that day, the headline CPI report for October came in lower than expected, the S&P 500 increased 5.5%, and Treasury yields fell 25-30 basis points – huge moves for a single day. So far, that market gain has held up over the following trading days. Many said the market rally was unjustified by such a small move downward in a key inflation measure. Shouldn’t the market demand far more proof that the inflation dragon was slayed? It is important to note that this sign of moderating inflation was happening at a time when the economy was still rather robust. The housing market has certainly slowed, and there is news of layoffs in the tech sector, but consumer spending is still strong, and the employment market has shown resiliency. This combination of factors is the key. If inflation can turn down while the economy continues to grow, that is the goldilocks outcome where almost everyone wins.

It is also difficult to have a recession or a market correction when everyone anticipates it. Some large businesses are trimming employees, and many are managing their affairs in a conservative fashion, as if expecting a recession. Such anticipation can help avoid excesses caused by optimism that usually builds up before a recession. If companies are leaner, any unexpected pickup in economic activity should result in revenue that creates bottom line profits.

The Fed does not believe we can have a persistent cooling of inflation without weakness in the economy. The October inflation report hinted that just such a combination may be possible. It will take more subdued inflation readings to convince the Fed. With commodities prices, implied inflation in the TIPs market, and crude oil prices all stable to lower, there is reason to be optimistic. In the meantime, we can be thankful that the rally spurred by lower inflation has had staying power and that the increase in interest rates has given savers the ability to earn about 5% in short government and agency bonds.

Happy Thanksgiving to all.


Random thought:  “We have two lives, and the second begins when we realize we only have one.” – Confucius



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The Beatings Will Continue Until Morale Improves

September 28, 2022
Dow: 29,684

Ok Jerome Powell and other members of the Federal Open Market Committee, we get it: you are serious about raising rates. Back in July and August, we (the market) suspected that their work might be done by the end of the year. As outlined in our July Viewpoint, many price indices were falling after the 75 basis point rate increase in June, followed by another 75 basis point increase in July. At that time, another 50-75 basis points were expected at the September meeting. The Fed did their best to talk down the market as it rallied, but maybe there were doubters about the resolve of the Fed. Well there is no doubt now, and the pendulum of Fed resolve may now have swung too far in the opposite direction.

We said in July that if the Fed recognized the easing price pressures in widely recognized market indicators, we may have seen the low in stock prices and the highs in longer term bond yields. Since the July Fed meeting, the broad commodities index is down 7%, crude oil down 15%, gold down 6%, and the dollar index up 6%. Commodities down while the value of the dollar is increasing are classical economic signs of deflation, not inflation. Our hope would be that Powell learned something about these relationships as an undergraduate student, but alas, his undergraduate degree is in political science.

Higher rates are certainly creating opportunities in the fixed income market. Treasury yields have moved above 4% across virtually all maturities. Yield spreads have widened on corporate bonds, moving yields close to 5% on intermediate maturity portfolios. Tax adjusted yields on our municipal bond strategy are even higher. We do believe we are getting close to the end of the Fed tightening cycle, and bond prices usually firm up and move higher when the end of the cycle is near.

Based on Jerome Powell’s comments after the latest Fed meeting, the beatings will continue. One economic positive has been the low unemployment rate, and Fed Chairman Powell has now explicitly stated that the low unemployment rate must also be beaten into submission and driven higher. As of 9/27, the S&P 500 Index is down 9% since the July meeting, and most other equity indexes are down more than 10%. Powell has told us this is mostly irrelevant to the Fed; he has said the unemployment rate must go up for the Fed to be satisfied, regardless of what other market and price indicators are foreshadowing. Investors in U.S. inflation-protected securities indicate future expectations for inflation have moved into the mid-2% range or lower across the curve, from two years all the way out to thirty years.

Another portion of the economy that has turned from tailwind to headwind is the residential housing market. The annualized sales rate for existing homes has fallen for seven months in a row, from 5.75 million in January to 4.28 million in August. This is below the roughly 4.7 million sales rate that existed pre-pandemic. New mortgage rates have skyrocketed this year, and the housing market is slowing even though, or due to, home prices being up 60% in the last three years. The housing market provides a key barometer of capital investment and consumer confidence, and it is one more concurrent price signal that the Fed should heed.

It seems Jerome Powell and the Fed have a both a tin ear and a blind spot for market price indicators. They are also receiving warning signs from global economic activity and exchange rates. The dollar has skyrocketed versus many other currencies. Dollar strength adds a strain to foreign economies in multiple ways. It makes imported goods that are produced in the U.S. more expensive, and it makes debts that are denominated in dollars more difficult to repay. These risks are evident in foreign developed and emerging stock markets that have underperformed U.S. markets.

These are some of the many signs of decelerating economic activity and lower prices to come. We have to believe that they will be recognized by the Fed in the near future. If this happens, there will be strong rallies in both bonds and equities. The price earnings ratio for the S&P 500 Index is now below 17 times 2022 earnings. The last instances of a ratio at this level were briefly during the market correction in December of 2018 and at the beginning of the COVID crisis in 2020. When the bounce in stock prices happens, the P/E ratio of the market goes up because it takes time for the earnings recovery to manifest itself. As the P/E goes up in these situations, deniers who claim there is still too much uncertainty and that prices are not justified by earnings miss these major market moves. While 2022 has certainly been challenging for stock and bond investors, we encourage investors to recognize the long-term opportunities lower stock valuations create and the fact that short US Treasury securities now yield over 4% – the highest levels in 15 years.



Random thought:  “Life starts all over again when it gets crisp in fall”     – F. Scott Fitzgerald, The Great Gatsby



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Listening to the Markets

July 19, 2022
Dow: 31,827

Often the markets will send signals about the current, and potential future, state of both the economy and the markets, but investors have to be willing and open to listening. Most often, preconceived notions about what should be happening get in the way. It’s easy to only see factors that support one’s worldview, and this “recency bias” leads investors to expect that whatever is happening currently will continue. We have suspected since the early spring that the July and September FOMC meetings would be key for the economy and the markets. Rate increases of 25 basis points in March, 50 basis points in May, and 75 basis points in June were expected by the markets. The stakes get much higher from here.

Over the last month or two, fears of a recession have begun to approach or surpass fears of inflation. The markets are sending this message. Most stock indexes fell between 15-20% in the second quarter, and the NASDAQ, the home market for many growth and tech companies, dropped by more than 20%. The Fed paid little respect to the stock market as a leading indicator at their June meeting. Stock prices and valuations dropped during the period, as investors feared future actual and estimated reductions in earnings.

But changes are afoot, especially over the last four to six weeks. National Association of Purchasing Managers manufacturing and services indexes fell to yearly lows, and their pricing index declined for the third straight month. New and existing home sales have declined. Small business optimism is at a nine-year low. Indicators of consumer confidence have plunged. One bright spot is employment; the unemployment rate has remained below 4% since the beginning of the year, employers struggle to find employees, and many who are willing to change jobs can gain significant salary increases. At the same time, changes with the employment picture are also creeping in. Weekly unemployment claims have slowly climbed to an eight-month high. These are economic activity indicators that have rolled over, but price indexes are also moving lower.

The commodities index is now down over 10% since early June. Crude oil is also down over 10% over the same five-week period. Market indicators of inflation over the next five and ten years have moved to twelve-month lows. All of these market price indicators have moved lower. The Consumer Price Index (CPI) is a trailing indicator. Waiting to stop rate increases until you see a decline in CPI is truly like driving a car while looking in the rear view mirror. Chairman Powell, are you playing checkers while market participants play chess?

It is entirely possible that we have already seen the high in longer Treasury rates and the low in the stock market. The FOMC raised rates 75 basis points on June 15th. The ten year Treasury yield hit a high of 3.48% on June 14th and is now 50 basis points lower. The S&P 500 Index closed at a low of 3667 on June 16th and is now 7% above that level. Based on what has happened in the economy and the markets over the last month, we would not expect the Fed to follow through on the 2% of rate increases that are anticipated over the next four Fed meetings this year. Those potential increases would bring short-term rates to over 3.5%. That is higher than all longer Treasury yields, which have moved lower over the last month. Keep in mind that all of these lower commodity prices and slowing of economic indicators have happened with the Fed Funds rate at 1.625%.

If the Fed is successful in recognizing a decline in price pressures, and responding with a slower path of rate increases, that could be very good for both the stock and bond markets. Declines in stock and bond markets are painful, especially when they happen concurrently. In most bear markets, defined as 20% declines from peak, market returns are higher one, three, and twelve months out. So far, that is what has happened since early June.

We have remained focused on summer as a key point of reckoning for both the Fed and the economy. Our best case scenario is that price indicators would slow or reverse their rise and the Fed would recognize the change and slow the path of rate increases. The apparent softness in the economy should help get their attention as well. Our concern is that the Fed now wants to see a material slowing in the economy, in addition to lower price indicators and inflation, in order to feel justified that they have vanquished the inflation genie. We believe that the market is sending signs that their work is on-track and closer to complete than recent backward looking inflation indicators may indicate. Jerome Powell, listen to the markets.



Random thought:  “In my career, the Fed has a 100 percent error rate in predicting and reacting to important economic turns.”  – John Allison IV, retired CEO of BB&T bank



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Is it still 2022? Have this year’s market moves aged you? Don’t worry, you are not alone in these feelings, but rest assured that we are considering all of the relevant information and working hard to position portfolios with a longer-term view in mind. The S&P 500 has had its worst start to the year since 1962, with yesterday’s darlings bearing the brunt of this pain. If anything, the recent market losses serve as a reminder that investors should be focused on their long-term goals that rely upon diligent planning, implementation and actionable items in order to reduce the negative impact of making an emotional decision that is based more upon short-term biases instead of actual facts.

Market corrections have always tested even the most experienced investor. They also happen to be a very normal part of fully functioning investment marketplace.   The real challenge is that corrections test an investors’ fortitude, conviction, goals and overall approach which quickly leads to even more fear, pessimism, and outright despair.  Despite the list of growing negatives that investors are currently facing, there are still a number of positive items that support taking a longer-term view:



How are we positioned and what does it mean to you?

Our investment process revolves around our risk controls. As a reminder, client portfolios remain fully invested, are positioned sector-neutral to respective benchmarks, and currently maintain valuation discounts. These tenets have been accretive year to date, as value stocks (lower price to earnings) have generally held up better than pricey growth stocks (higher price to earnings). Given the severity in divergence of returns across sectors, the fact that we also remain diversified across all eleven market sectors has proven beneficial as well. This fully invested positioning should continue to ensure that when, not if, the market moves higher fully invested client portfolios will stand to benefit from the market’s shift upward.

We have seen a common theme emerge amongst investment managers that believe current market conditions have provided investors with an attractive buying opportunity.  This is a sentiment that we also happen to agree with.  As a result, Dana has been focusing its efforts to identify those companies that are less economically sensitive and those that can protect their profit margins.  Therefore, we are seeking to own companies that exhibit both a resilient business model as well as strong pricing power, both of which are key elements of our investment process.  This type of approach supports a longer-term view regardless of short-term noise.

Overall, we remain committed to our relative valuation discipline which provides the potential for downside protection along with the benefits of more positive price movement when the market regains its footing.

Our counsel has always been to stay invested, within the risk tolerance guidelines that you have set with your clients. Your guidance, as an advisor, is always beneficial in times of stress and uncertainty. This is a time to be proactive with your clients – let us know how we can help.


Disclosure: Dana Investment Advisors welcomes any comments to their blog and is more than willing to discuss or explain any aspect of it. This blog is provided for general information only and is not intended to provide specific advice or recommendations for any individual or entity. This is not an offer, solicitation, or recommendation to purchase any security or the services of any organization or individual. The foregoing reflects the opinions of Dana Investment Advisors.


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