Loose Powell Movements? | MBMG Investment Advisory Report and Outlook 1st August 2022
Irregular Powell Movements
Last Wednesday, July 27th, the Federal Open Market Committee (FOMC) of the Federal Reserve System enacted its second consecutive 0.75% increase in the Federal Funds Rate (FFR), its benchmark overnight interest rate, which was increased to 2.25%-2.5% (the FFR currently operates as a target range than a single rate).
Chair of FRS Board of Governors, Jerome Powell, explained the hike with a rather confused message about the revised rate being “right in the range of what we think is neutral” (i.e. not requiring further adjustments) before affirming that further increases will almost certainly occur but at a slower rate of increase and the FOMC will then assess the impact of those slower increases to determine further policy responses.
This unclear message is a significant and deliberate departure from the minutes of the previous meeting, which we have previously summarised as:
• The current instance of inflation is primarily driven by supply issues.
• Monetary policy can do nothing about supply issues.
• Therefore, raising interest rates is simply meaningless virtue signalling, but is detrimental to the economy in that it constrains, if not destroys, demand for goods and services.
• But hey, we’re going to raise them anyway and keep raising them!
Set against that context, the markets, especially risk assets such as growth or technology stocks, which tend to be most sensitive to higher interest rates, breathed huge sighs of relief and embarked upon strong rallies over the final 3 days of the month, that were sufficient to herald the most positive monthly returns in some markets for over 2 years, and the US Dollar which had been heading seemingly inexorably higher, softened significantly.
The day after the FOMC meeting, initial estimates of Quarter 2 2022 US economic activity were released which indicated that the US economy is continuing to contract (2 consecutive quarters, as has been seen this year, is unofficially widely viewed as a recession).
Markets have continued to rally, seemingly in the belief that slowdown will not be severe enough to damage corporate earnings but will force the FOMC to stop increasing interest rates and begin to think about cutting them.
We’ll try to cover as much of this as we can in this month’s Outlook.
1. MBMG Portfolios based on the average performance of MBMG IA’s private client portfolios of USD 1 million or more, from 1st January 2017 to 31 July 2022 (based on latest actual & provisional data to 31 July 2022).
2. Average US$ portfolios based on estimated ARC Research Private Client Indices from 1st January 2017 to latest available data to 30 July 2022)- https://www.suggestus.com/pci.
Over the past five ½ years, MBMG’s average portfolios have generated cumulative gains of over 45%. This equates to around 3.5 times the return of the average wealth manager portfolio across all asset classes and is equivalent to an annual rate of return (CAGR) for MBMG IA advisory portfolios of around 7%, versus the industry average of 2.7%. The average MBMG portfolio loss of -3.1% year to date compares favourably with the average wealth manager loss of –12.6% this year:
However, this month, perhaps more than most, the figures barely begin to paint the story of what happened. Most risk assets, especially in USA, reversed their dramatic descent, especially in the last three trading days of the month:
We’ll look into this phenomenon more closely in the next part of this outlook, The Backdrop, especially in terms of how sustainable this changed tone might prove to be.
August is that last flicker of fun and heat before everything fades and dies. The final moments of fun before the freeze. In the winter, everything changes –
August is always like this – Rasmenia Massoud
The Backdrop
In last month’s backdrop, we covered the ‘highlights’ of the worst first half year in equity markets since 1970, the worst quarter for equity markets since the COVID-19 lockdown, and the seeming collapse of the digital ‘asset’ sphere.
It’s worth revisiting just how dreadful things were for risk assets:
ALSO WORTH LOOKINGDisclaimer: The above information has not been independently verified. This investment brief is given for information only and does not represent an investment proposal, recommendation or advice to invest in the shares or business of the subject company. Additional information shall be made available to interested parties subject to the execution of the requisite confidentiality undertakings. The financial information, actual and/or forecast, provide herein is based on management representation.
