After falling more than 20 percent in the first half of the year due to a massive policy mistake by the Federal Reserve and exacerbated by questionable domestic energy policy and the Russia/Ukraine war, the S&P 500 index rallied more than 9 percent in July following months of persistent weakness.

The interest rate on 10-year U.S. Treasury Notes fell to 2.67 percent from roughly 3.50 percent in mid-June, and a barrel of oil fell almost $10 in the past four weeks

TJT Capital Group’s InVEST Risk Model ® has helped our clients participate in bull markets and protect capital from the devastation of bear markets by focusing on 5 indicators that really matter when it comes to determining the health and direction of markets.  The following is the most recent update.

Click here to read the full report.

The Federal Reserve has made an enormous mistake and the stock, bond, currency, and commodity markets are paying the price. Moreover, the Fed is the problem, and they do not know it.

In August 2020, the Fed reached a conclusion centered on the assumption that inflation was too low. The Fed then changed monetary policy based on an untested theory – flexible average inflation targeting – with a goal of increasing inflation “moderately above 2 percent.”

The Consumer Price Index (CPI) hit nearly 8 percent before that Fed actually raised interest rates – its “primary tool for adjusting monetary policy.”

As former Federal Reserve Chairman Ben Bernanke wrote, “the Federal Reserve’s objectives – its dual mandate, set by Congress – are to promote a high level of employment, and low, stable inflation” (Emphasis added). The Fed failed catastrophically in one-half of its two mandates.

In June, Fed Chair Jerome Powell told the Senate Banking Committee that the Fed needs “compelling evidence” that inflation is falling before interest rate hikes slow after ignoring “compelling evidence” that inflation was well-above its 2 percent target.

The markets have lost confidence in the Fed. As a result, the S&P 500 index lost 8.3 percent in June and has had its worst start to the year in decades.

Few markets have been spared. The yield on 10-year Treasury securities have risen from 1.52 percent at year-end to roughly 3 percent after hitting nearly 3.5 percent in mid-June. High yield (“junk”) bonds have soared to 8.88 percent from 4.35 percent at year-end. These massive rates of change suggest that the people in charge of monetary policy should no longer be making decisions.

A barrel of oil was trading around $105 at month-end from roughly $125 four weeks ago, however, oil is still up more than 40 percent year-over-year. Copper is down more than 20 percent, cotton dropped nearly 30 percent, and natural gas fell 16 percent in a matter of weeks as the global economy slowed.

Click here to read the full report.

The S&P 500 index eked out a gain of 0.22 points in May following a brutal 7-week selloff primarily due to the massive mistake by the Federal Reserve that let the inflation genie out of the bottle. As a result, the Fed has done enormous damage to its credibility and reputation, and markets reacted accordingly.

While we have written extensively about Federal Reserve mistakes in the past, the Fed compounded its mistake by increasing interest rates only 25 basis points (0.25%) in March, and continued to purchase bonds despite inflation running at a 40-year high. Moreover, less than one week following the March Federal Open Market Committee (FOMC) meeting, Fed Chairman Jerome Powell emphasized the need to raise interest rates “expeditiously,” seemingly unaware of the fact that the Fed could have done so the previous week, not to mention months earlier.

The significant gap between what the Fed said they would do and what they did has caused confidence to evaporate.

To be clear, the Russia war with Ukraine has added to price pressures including substantially higher oil and gas, wheat, and fertilizer prices. And U.S. policy regarding domestic fossil fuel production has essentially created a self-inflicted oil embargo. Nevertheless, the Consumer Price Index was 7 percent in December, before the Russia/Ukraine war, and roughly 8 percent before the Fed raised interest rates.

Click here to read the full report.

The markets were under a great deal of pressure in April as high inflation, a significant rise in interest rates, continued geopolitical turmoil between Russia and Ukraine, and a Federal Reserve with a credibility problem weighed on stocks and bonds.

The S&P 500 index fell 8.79 percent in April and the yield on the 10-year Treasury security rose from 2.32 percent to 2.89 percent as the Consumer Price Index (CPI) increased 8.5 percent year-over-year. Moreover, the high yield bond index saw interest rates rise from 5.46 percent to 6.84 percent over a four-week period. The rate of change and lack of confidence in the Fed is causing leverage to be unwound, and investor sentiment has turned decidedly more bearish.

Click here to read the full report.

The month of March saw big swings in stocks, bonds, and commodities as the Russia/Ukraine war entered its second month, inflation rose to roughly a 40-year high, and the Federal Reserve signaled a significant change forthcoming in monetary policy.

The S&P 500 fell 5.26 percent in January, 3.00 percent in February, and 4.57 percent between March 1 and March 14, 2022, before gaining nearly 11 percent over an eleven-day period to finish down 4.9 percent in the first quarter.

A barrel of West Texas Intermediate crude oil rose as high as $130 in March as President Biden announced a ban on Russian imports of oil, although technically it does not go into effect for a few more weeks. In fact, a tanker carrying 680,000 barrels of oil left Taman, Russia on March 22, 2022 for New Orleans, LA. After April 22, 2022, the U.S. will no longer allow oil imports from Russia.

Nevertheless, in an effort to reduce gasoline prices at the pump, President Biden announced a plan to release 1 million barrels of oil per day from the strategic petroleum reserve. Oil ended March near $100 a barrel.

Click here to read the full report.

The S&P 500 index fell 3.1 percent in February as the Russian invasion of Ukraine added to the growing list of uncertainties affecting markets. Oil spiked to more than $105 a barrel, while wheat jumped to its highest level since 2008 as Russia and Ukraine account for roughly 30 percent of all wheat exports. Prices for corn, iron ore, sunflower seeds, barley, among others produced in Russia and Ukraine rose in tandem.

This is happening at a time when inflation has been increasing for more than a year while the Federal Reserve has failed to act. We consider this reckless behavior. As recently as January 26, 2022, Federal Reserve Chairman Jerome Powell referred to “the relatively high-class problems” that come with the economic recovery, including “high inflation.” Inflation is running at a 40-year high, and real hourly earnings (meaning adjusted for inflation) have declined for 10 consecutive months.

The Fed has lost touch with reality. One day Fed Chairman Powell states inflation is a high-class problem, while another day he claims the Fed understands “that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food.”

Click here to read the full report.

In our early December piece, we wrote “Of greater concern is whether the Fed is making another mistake.” And specifically, “any perceived mistake could result in a significant reduction in risk assets” as “hedge funds are exceptionally good at crowding the exits.” That is exactly how the year began.

A rough start to the year got even worse following a press conference by President Joe Biden whereby the S&P 500 index dropped 6.8 percent over the following three days. That is not a political statement – it is a fact. It is quite clear that the markets did not like his comments that suggested a “minor incursion” by Russia into Ukraine would be tolerated, and that the 2022 elections might not be legitimate.

The S&P 500 index declined 5.25 percent in January having been down more than 11 percent only a week before. The bond market sensing a major mistake by the Federal Reserve regarding inflation saw the 10-year U.S. Treasury yield rise from 1.35 percent on December 3, 2021, to 1.87 percent on January 18, 2022. The nearly 40 percent increase in interest rates over a seven-week period was a catalyst for a selloff in the U.S. equity markets, with the NASDAQ Composite falling more than 15 percent at one point in January.

Click here to read the full report.

The month of December ended a volatile six-week period with the S&P 500 index and NASDAQ Composite experiencing several weekly losses and gains exceeding 2 percent and 3 percent, respectively. Concerns about Federal Reserve policy, inflation, the Omicron variant, and the future of the Biden administration’s Build Back Better, among other things, were responsible.

Nevertheless, the S&P 500 index gained 4.3 percent in December and was up 26.8 percent for the year as inflation spiked to multi-decade highs led by oil prices, which rose roughly 55 percent. Meanwhile, interest rates on the 10-year Treasury Note rose from 0.93 percent at the end of 2020 to 1.52 percent at year-end 2021.

The headline numbers by themselves were deceiving as there was quite a bit going on underneath the surface. The median S&P 500 stock has corrected 15 percent from its 52-week high, and as many as 208 stocks trading on the New York Stock Exchange and 738 stocks trading on the NASDAQ hit new 52-week lows on the week-ending December 3, 2021.

In addition, the Initial Public Offering (IPO) exchange traded fund was down more than 10 percent in 2021 despite the hype of the new issue market. It seems that a number of companies that had immature business models went public because money was available and interest was high.

Click here to read the full report.

The S&P 500 index dropped 2.2 percent and 1.9 percent in two of the last three days of November on concerns about a new COVID variant (Omicron), rising inflation, and renewed tension over the federal debt ceiling. In November, the S&P 500 fell 0.8 percent, the yield on the 10-year Treasury Note declined from 1.55 percent to 1.43 percent, and a barrel of West Texas Intermediate oil dropped more than 20 percent to roughly $66.50.

At this point not much is known about the Omicron variant, but we do know that viruses generally mutate, and although they become more transmissible, they generally become less severe. Nevertheless, some countries have already issued travel restrictions. The initial knee-jerk reaction was “here we go again,” however, the Delta variant did not result in a shutdown and it remains to be seen what happens with Omicron.

Of greater concern is whether the Fed is making another mistake. We have been critical of the Fed because both the 2000 and 2008 bear markets in stocks had the Fed’s fingerprints all over them. Moreover, the Fed tends to deny responsibility and accountability, so there seems to be few lessons learned. For example, in 2007, former Federal Reserve Governor Edward Gramlich wrote a book titled Subprime Mortgages: America’s Latest Boom and Bust. A few years later former Fed Chairman Alan Greenspan wrote an article titled “Never Saw it Coming.”

Click here to read the full report.