The drama in Washington

“Stocks do well for a reason and do poorly for a reason. Make sure you know the reasons.”
-Peter Lynch

Last week, all the major averages advanced, with the S&P 500 adding 1.8%, the Dow Jones Industrial Average increased 2.0%, and Nasdaq continued its bull run adding 2.0%.  In the foreign markets, a mixed bag as the MSCI EAFE was slightly lower -.05% while the British FTSE added 1.56%.

With all the drama and expectations in Washington, the markets were trading in tight ranges and wallowing in daily losses. However, with the end of the debt standoff, the House passed and the Senate approved the deal the White House and the Speaker McCarthy hammered out the previous week. The market optimism pushed the averages to nearing the end of the long Bear Market. Adding to the optimism was a stronger-than-expected jobs report (339,000 new jobs to the expected 190,000) helped boost the Dow to its biggest gain in over six months, while the Nasdaq is near a 14-month high.

The good news was tempered by a decrease in real wage growth which offers a mixed bag for the average American. Further inflation shows no signs of abating and the Federal Reserve remains cautious as they weigh another rate increase. It is fair to say we may have not yet seen the end of rising interest rates.

This week, as we continue to believe the Federal Reserve will pause, but will probably raise rates after it weighs the reaction. We doubt we will see a rate cut any time soon. A probable recession emerging in the 3^rd or 4 quarter seems to be in the cards but the consensus estimates a soft landing. This is with the current nagging inflation and the federal government celebrating. A bipartisan debt deal indicates that the government still does not get it.

The fiscal sanity crowd, you know the ones who expect the government to live within its means, are unhappy with the deal, and the left is unhappy as it says the White House gave too much away. Regardless, if the Republican led house is truly trying to rein in spending, only time will tell if Speaker McCarthy was crazy like a fox or just another politician putting lipstick on a pig. Unfortunately, the short-term consequences become more pressing.

To that effect, our portfolio adjustments are to increase commodity exposure, specifically, natural gas, which has hit bottom recently, and we expect a good opportunity in energy. Further, we have trimmed our S&P 500 positions slightly to move some profits to the energy inflation hedge. The other million-dollar question is when to begin to return to intermediate or dare I say it longer term bonds? Historically, with the recent rise in interest rates, intermediate bonds took it on the chin to the tune of -11.04% from 2022 to February of this year second only to long term bonds which lost -24.80%.

Fortunately, Bill trimmed all intermediate positions and increased short term holdings, and completely avoided long term bonds. But as we enter the probable end of rate hikes, we expect to start looking at intermediate bonds as yields improve and volatility subsides as rate hikes, assuming some progress on inflation, end.

Mike