One might say the Federal Reserve is in the worst imaginable position – with resiliently high inflation and having to tighten into an impending slowdown, cautions Jim Stack, a "safety first" money manager and editor of InvesTech Research.

In our historical view, Jerome Powell wants to become known as the next Paul Volcker — the highly respected former Federal Reserve Chairman who, in the early 1980s, was credited with bringing uncontrolled inflation to its knees.

Of course, that also triggered the deepest recession since the 1930s. And we should note that Paul Volcker inherited his inflation problem when appointed as Chairman in August 1979, while Jerome Powell created his!

While we are very anxious to look across the current economic valley and take advantage of a new bull market opportunity, it might be foolish to underestimate the depth of that chasm ahead.

Consumers have been the persistent driver of the U.S. economy during much of the last decade, but this may be changing as they are facing a growing number of challenges. Pandemic-related support and stimulus checks led to a significant rise in consumer savings during 2020-21.

However, these savings were quickly depleted as consumer spending rose, the economy recovered, and inflation surged to a 40-year high. As a result, the U.S. Personal Saving Rate has now fallen to the lowest level since we emerged from recession in 2009, sending a clear signal that consumers are struggling to deal with rapidly rising prices.

The CEO Confidence survey validates that hard times likely lie ahead for businesses. This quarter, CEO Confidence fell back to one of its lowest readings on record, as 93% of chief executives say they are preparing for a recession.

As part of these preparations, CEOs have significantly scaled back on their hiring and capital expenditure plans. Historically, every time CEO Confidence has fallen to this level it has preceded or coincided with recession, and it’s unlikely that this time would be different.

The outlook of small business owners is just as dismal as that of their Fortune 500 counterparts. NFIB Real Sales Expectations have fallen to one of the lowest levels on record due to the lethal combination of high inflation and softening demand.

Furthermore, such a pessimistic reading from this indicator has never occurred outside of a recessionary scenario! The weakening consumer has clearly started to impact the expectations (and decisions) of both big and small businesses, which increases the odds of a protracted bear market and recession.

Remarkably, there seems to be a universal complacency among stock market investors with respect to the Fed’s determined path toward higher interest rates and ultimately reining in unacceptably high inflation.

Today’s apparent complacency could quickly turn into a renewed rush for the exit if the danger flags inside continue to wave, and if housing does hit a hard landing. Although our InvesTech Housing Bellwether Barometer peaked only a month before the broader stock market’s January 3rd top, the plunge closely parallels the foreboding collapse of the 2005 housing bubble that led into the Great Recession.

Overall, there are ominous signs that the strongholds of the U.S. economy — the consumer, corporate earnings, and the labor market — are starting to lose ground. While we don’t know how weak these areas could ultimately become, their current trends confirm that this remains a very high-risk environment.

Consequently, the Model Fund Portfolio remains defensively positioned, and we continue to be focused on limiting downside risk until the evidence improves and the next great buying opportunity emerges. The Model Fund Portfolio currently has a net invested allocation of 44% (56% long positions and 12% in an inverse index ETF). The remainder of the portfolio (32%) is held in short-term Treasuries or a money market fund.

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