Stop and Smell The Money
The human brain is wired to give priority to bad news. When I was starting out as a punk kid in the newspaper business, we had an expression in the newsroom: If it bleeds, it leads.
Hence the gloom that pervades national polling this election year, when the truth is, the economy and stock market are performing well.
Federal Reserve Chief Jerome Powell put it best at his press conference the other week: “This is a good situation. Let’s be honest, this is a good economy.”
We should believe him. Remember the old adage on Wall Street: Don’t fight the Fed.
My faith in Powell increased when I learned that the Fed Head is a Deadhead. “I’ve been a Grateful Dead fan for 50 years,” Powell recently admitted in public.
I’m a fan of the Grateful Dead myself. The fact that Powell (a registered Republican) has been spotted attending live concerts of the Grateful Dead gives him a more human dimension.
As investors, let’s stop and smell the scarlet begonias… and the money.
Stocks have been hitting record highs, a surge driven largely by strong quarterly corporate earnings results. So far this earnings season, 77% of S&P 500 companies have surpassed earnings expectations, and 68% have beaten revenue forecasts.
For the most part, the mega-cap tech stocks have beaten expectations on the top and bottom lines, providing fuel for the rally because of their bellwether status and disproportionate impact on the broader indices.
The U.S. economy also has consistently beaten expectations, defying pessimistic projections that the Fed’s aggressive rate hikes would trigger a recession. Far from imploding last year, gross domestic product (GDP) expanded 2.5% on a year-over-year basis, up from 1.9% in 2022.
At the same time, inflation is stabilizing without a recession. Inflation fell sharply in 2023 after reaching its highest level in over 40 years in 2022.
Forget the absurdly dark (and dishonest) rhetoric you’re hearing from politicians who are intent on trash-talking the economy. The U.S. currently enjoys the world’s best recovery. In the International Monetary Fund’s category of “advanced economies,” the U.S. is at the top of the list in growth, as the following chart shows:
Source: International Monetary Fund
The upward trajectory in stocks has occurred despite the rise in bond yields. The benchmark 10-year U.S Treasury yield (TNX) in recent days has edged above 4.1%.
This yield is used to help set the price of money for everything from mortgage rates to corporate borrowing. The TNX has popped higher as investors have adjusted their overly optimistic expectations regarding Fed interest rate cuts. Keep an eye on the TNX; a dip below the psychologically critical threshold of 4% would be bullish for stocks.
The hope that the Fed would cut as early as March has been dashed by the remarks of Fed officials, particularly Powell, that easing won’t come sooner than May or June.
But the point is, a cut will come, and this reality is helping to keep stocks afloat. The odds of at least three rate cuts later this year have been propelling stocks higher, even though the TNX has risen.
As interest rates fall later this year, two sectors that are positioned to shine are utilities and real estate investment trusts (REITs).
I particularly like utilities right now. Utilities’ balance sheets are strong, dividends are amply covered, regulation is getting more favorable, and federal environmental policy currently supports infrastructure expansion.
Utilities are sensitive to interest rates. Rising rates pressure utilities because utility firms tend to have major capital expenditures and high debt-to-market cap levels. However, as the Fed loosens this year, the utilities sector should get a boost. What’s more, lower rates make dividend-paying stocks more attractive.
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John Persinos is the editorial director of Investing Daily.
This article previously appeared on Investing Daily.