Economic Insights

The latest rate hike announcement by the Fed sent stocks tumbling to the year’s lows. While last week’s market action was brutal, the good news is the markets are set up for a rather significant short squeeze higher.

There are always some hindsight-based methods of predicting bear markets and taking full risk-off positioning. Sometimes they work perfectly. While other times they create a ton of capital gains and tax liabilities only to realize the exit level should have been where the cost averaging strategy began.

Asset bubbles have been prevalent throughout history. Whether it was the “Tulip bubble” in the 1600s, the South Sea bubble of the 1700s, or the Dot.com bubble of 2000, they were all a result of excessive investor speculation.

The August CPI report that came out last Tuesday was the catalyst for a sharp market reversal. The headline number was a benign 0.1%, helped by falling gasoline prices. But the “core” number (ex food and energy) came in at 0.6%.

The August CPI report that came out last Tuesday was the catalyst for a sharp market reversal. The headline number was a benign 0.1%, helped by falling gasoline prices. But the “core” number (ex food and energy) came in at 0.6%.

Historically, equity markets are positive roughly 80% of the time, or 8 out of 10 years. So far this year, they are negative. In addition, the average annual drawdown peak to trough is ~14% (source: J.P. Morgan Guide to the Markets Report).

Since 2016 the payout on the MLP-dedicated Alerian MLP ETF (AMLP) is down by half. Corporations have done better because they generally have higher coverage. Today’s pipeline CFO is building in plenty of cushion to protect payouts even in a steep downturn, which is why dividend hikes and buybacks are becoming more common.

While the Federal Reserve is focused on fighting inflation and willing to cause “some pain” to achieve victory, they hope to do so without evoking a recession. Such may be a challenge for two primary reasons: