Stocks remain volatile because we have gone from TINA (There is No Alternative) to TIAA (There IS An Alternative) as rising treasury and bond yields are now posing a real challenge for stocks. So, create the plan that works for you and then stick to it, advises Kenny Polcari, managing partner at Kace Capital Advisors LLC.
Both the 6-month and 1-year T-Bills are yielding 5.1%-plus, while 3-month and 2-year Treasuries are yielding around 4.8%. Considering that both stocks and bonds suffered double-digit losses last year, 5% for “guaranteed returns and safety of principal” is appealing for the short term.
So, we are seeing money move into that space, hurting the equity markets. That will continue to be part of the story this year.
Remember though: Inflation is still running at 6%-plus, so don’t go crazy. You’re still losing 1% against inflation.
Meanwhile, even as the most recent economic data has caused anxiety for some, the selloffs appear to be short lived. My sense is that investors are taking it all in stride.
On the policy front, the March Federal Reserve meeting is expected to see rates rise by another 25 basis points. Will the March CPI and PPI reports cause the Fed to rethink that? Talk of a 50-bp increase is now out there in the GPS (Global Public Square) and while that is a possibility, it is not one that I see yet.
That’s because it would cause a panic selloff and be an admission by the Fed that they have lost control. I suspect that if the March data remains strong, then a 50-bp move becomes more of a reality for the May Fed meeting. That will give the Fed more time to assuage the markets (a month and a half) versus seven days to try and get everyone on board.
Finally, let’s talk about inflation. Currently the CPI target is 2% - and there has been a lot of conversation about how much damage the Fed will have to do to get there. And questions about whether the Fed can (really) get us there. That brings up the idea that the Fed will move the “goal posts”.
Why not? It makes the whole thing easier. I suspect that by the summer, we will hear rumblings of the CPI target going to 3%, with all kinds of reasons why it is necessary, blah, blah, blah. Yeah, it’s “necessary” because they won’t be able to get it to 2% without a lot of pain. And remember: 2024 is coming and that is a Presidential Election year. Just sayin’.
Overall, the market wants clarity. But can we really ever get it? The answer is “no.” So again, create the plan that works for you and then stick to it.
