QUOTE OF THE WEEK
“A true friend is someone that thinks you are a good egg even though he knows that you are slightly cracked.” – Bernard Meltzer
TECH CORNER
The prior week, earnings came in for some of the Magnificent Seven companies. Two companies reported disappointing earnings and forecasts and two reported good earnings and forecasts. The two that reported good earnings sparked a big rally on Friday driving the S&P 500 up +2.28% for the week. From a technical standpoint this is a normal bounce after the big losses during the prior weeks.
The Federal Reserve Open Market Committee met last week. The Fed will leave rates where they are for now. The reason I think that is because of the Federal Reserve’s preferred measure of inflation and the personal consumption expenditures (PCE) price index report. The Bureau of Economic Analysis reported Friday that it increased +2.7% year over year in March. That was up from +2.5% one month earlier. The issue that the Fed is paying attention to is the rate of change and the direction of the change. In other words, the fight against inflation is going in the wrong direction.
Even after stripping out more volatile food and energy prices, core PCE increased at a +2.8% annual rate in March, which is substantially above the Fed’s 2 percent target. It doesn’t look like the Fed will be inclined to lower interest rates. That can’t be a good sign for businesses and consumers going forward.
The other big news last week was the report on the Gross Domestic Product (GDP) for the first quarter of 2024. The consensus was for around +2.5% growth. The report came in at +1.6%, which is an indication of the economy slowing primarily due to the lag effect of the higher interest rates being higher for longer. We shall see if this is a trend, but it is starting to look like what we said would happen is starting to happen.
The recession call is still valid. The plan going forward is to stay in safe positions. If the recession starts, historically interest rates will start to come down. Then we will move into longer-term bonds to take advantage. Remember, bond prices go up when interest rates decline.
