From the desks of Stanley Katz & Lauren Madera
HAVE YOU EVER SOUGHT A HOLIDAY HONORING UNUSUAL SPRING CLEANING ACTIVIES? LOOK NO FURTHER THAN TODAY, LUMPY RUG DAY.
Stocks largely shrugged off the stream of geopolitical and Fed-related headlines for another week in the green (DJIA: +0.55%, S&P 500: +0.91%, Nasdaq: +1.12%). Markets closed April this week with the S&P 500 returning over 10%, its best monthly performance since November 2020. Generally robust earnings remained a key driver, with more than half of S&P 500 companies having reported. Five of the so-called Magnificent Seven companies reported last week and, for the most part, met or exceeded expectations. Alphabet shares jumped on indications that the company’s heavy investment in AI may be yielding fruit. It wasn’t all rosy reactions though. For example, Meta plummeted after announcing it will boost AI spending even more this year. On the policy front, the Federal Open Market Committee (FOMC) met last Tuesday and Wednesday. As anticipated, they held rates steady. Surprisingly, however, four total members dissented in the most divided FOMC vote since October 1992. While one member voted to ease interest rates, three agreed to hold rates steady but took issue with the Fed’s language implying that the future interest rate moves may be cuts. Their rationale? Sticky inflation made no better by prices at the gas pump.
One question that has nagged many throughout this period of energy market turbulence is this: If the United States is energy independent, why are Americans still paying so much at the pump? First Trust’s latest “Three on Thursday” addresses this directly. The core issue is that oil (i.e., the primary input for gasoline) is priced in a global market, not a domestic one. When supply is disrupted anywhere in the world, prices rise everywhere. Being a net exporter does not insulate American consumers from that dynamic; if anything, it reinforces it. First Trust explains that U.S. refineries were built decades ago to process heavy, high-sulfur crude oil — the kind that Canada supplies in large quantities — not the lighter crude oil that the shale revolution has produced domestically. Retooling those refineries to run on domestic light crude would cost billions and take years. In the meantime, much of the domestically produced light crude is exported, while U.S. refiners continue to import the heavy barrels they need. The result is a system deeply integrated with global energy markets, regardless of what the net export figures suggest. This dynamic — where global oil prices feed domestic inflation regardless of U.S. production levels — is precisely the challenge now sitting in the Fed’s lap.
The Federal Reserve’s April 29th decision to hold rates steady at 3.5% to 3.75% was more consequential than the headline. American Century’s Chief Investment Officer for Global Fixed Income, Charles Tan, assesses in his piece what the decision means for the economy and financial markets. The FOMC meeting was notable for two reasons beyond the rate decision itself. First, it was Jerome Powell’s final meeting as Fed chair, with Kevin Warsh poised to take over next month. Second, the four dissents signal that Warsh will inherit an increasingly divided institution. Tan notes that, despite the challenges from higher energy prices, the U.S. economy remains on reasonably solid footing, supported by fiscal policy, the lagged effects of prior rate cuts, and relative energy independence. He expects headline inflation to moderate as oil prices ease and the Fed’s preferred core measure (which strips out food and energy) to stay relatively contained. Tan is candid that he believes the greatest risk to his otherwise constructive outlook may be a prolonged energy shortage leading simultaneously to slow growth and high inflation…in other words, stagflation. As one era of Fed leadership closes and another begins, the questions facing markets about energy, inflation, and the pace of any eventual rate relief are unlikely to resolve quickly. For long-term investors, this is less a reason for alarm than a reminder of why staying the course has historically been the right call.
Below are links to a number of third-party research reports that we have read and analyzed over the past week. We hope you will find the information interesting, useful, and worthwhile.
First Trust:
American Century:
Argus:
Schwab:
J.P. Morgan Asset Management:
Stanley Katz & Lauren Madera, Financial Advisors
ClientFirst Financial Strategies, Inc.
937-293-5500
Source for weekly stock market returns: Barron’s.
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