From an investing and economics perspective, the first half of 2023 has certainly been interesting.
A hot jobs market, coupled with continued inflation concerns, led the Federal Reserve to hike interest rates 75 basis points to a range between 5% and 5.25% since the beginning of the year.
That changed yesterday when the Fed, using Consumer Price Index (CPI) data, elected to pause rate hikes for the first time since March 2022.
Today, I want to dive deeper into inflation data, examine how the markets have behaved in the first half of the year, and share what may be on the horizon for your investments (and how to best protect your portfolio).
Hold on … Inflation Is Still Around
The Fed’s decision to pause rate hikes this month was largely due to the CPI figures that came out on Tuesday.
Mainstream media touted the 0.1% increase from April and the 4% annual jump as good news.
A lot of that downturn was driven by lower energy and food prices.
However, when you take out those volatile numbers, it paints a less-than-rosy picture:
As you can see, the CPI for all items (green line) only rose 0.1% … which is good.
However, the CPI without food and energy prices (orange line) was up 0.4% … which isn’t so good.
What it means is energy prices fell significantly during the month (down 11.7%), which pushed the broader CPI lower. Prices for everything else didn’t actually fall…
Food prices even ticked up 6.7%.
We’re still feeling the negative impacts of high inflation, no matter what the headlines might tell you.
But does that matter to us as investors?
Market Doesn’t Care About Inflation
While the CPI has bounced around, the market is acting like everything is fine.
In the first six months of the year, all three major indexes have advanced higher:
- The Nasdaq is up 29%.
- The S&P 500 has jumped more than 13%.
- The Dow Jones Industrial Average, despite lagging behind its index peers, is still up 3%.
Last week, the S&P 500 officially moved out of a bear market by advancing 20% off its October 2022 lows. But that doesn’t indicate we are in a bull market just yet.
But it’s as if investors are ignoring inflation and higher rates altogether. To make it more interesting, tech stocks have screamed higher, despite 5% interest rates decreasing the value of future returns.
Like my colleague and chief investment strategist, Adam O’Dell, I’m not doom-and-glooming this market run-up.
But if this upward trajectory continues, I expect the road will be filled with bumps and potholes.
In a note to his Max Profit Alert subscribers, Adam mentioned that the 20% threshold for new bull markets is rather arbitrary.
We should be looking for higher highs and higher lows before starting the new bull market ticker-tape parade.
The reason is that there have been instances (I’m looking at you 2000 and 2001) when the Nasdaq rallied into a theoretical bull market before reversing lower again.
Not to mention, the Fed signaled it may hike rates at least two more times this year…
It just means we aren’t out of the woods just yet.
Safeguard Your Portfolio
None of us have a crystal ball.
While this week’s rate-hike pause is a welcome change, it doesn’t indicate we’re done with rate hikes… It depends on what the economy does next.
However, if there are more bumps in the road, you want to protect yourself.
The best way to safeguard your portfolio is by using our proprietary Green Zone Power Ratings system.
If you aren’t familiar, it assigns ratings to thousands of stocks based on six popular factors: momentum, size, volatility, value, quality and growth.
Stocks are rated from 0 to 100 and assigned a recommended action to take on each stock:
- 61 to 100: “Bullish” or “Strong Bullish.”
- 41 to 60: “Neutral.”
- 0 to 40: “High-Risk” or “Bearish.”
It’s your guide to safe, sound and smart investing.
And remember … no matter what the broader markets or the Fed does next, our Green Zone Power Ratings system will keep highlighting stocks that work … and ones that don’t … no matter what happens over the next six months.
Stay Tuned: A Huge Mistake
Tomorrow, Chad has a little rant about a recent situation he found himself in.
And it led to him using Green Zone Power Ratings to find three stocks to avoid now.
Until next time…
Matt Clark, CMSA®
Chief Research Analyst, Money & Market