The Federal Reserve’s Federal Open Market Committee (FOMC) met Wednesday and said they’ll continue to maintain a zero percent interest rate policy and the $120 billion per month in quantitative easing purchases.
If there was a surprise in the Fed’s announcements, it was that 13 of the 18 FOMC members expect key interest rates, known as the federal funds rate, or the rate banks can charge each other to borrow or lend excess reserves overnight, will go up in late 2023. Previously, the Fed stated that the federal funds rate would increase in 2024, so they accelerated the timeline a bit from when they last met in March.
The FOMC also raised the GDP growth forecast for the year to 7.0% from 6.5% in March. And most importantly, the Fed raised its inflation forecast to 3.4% from 2.4%. So that means as long as inflation stays under 3.4%, we don’t have to worry.
Now, we have had a lot of commodity inflation. Prices for aluminum, steel, copper, lumber and oil have been on a tear.
The Consumer Price Index increased 5% on an annualized basis in May, the most in almost 13 years, according to the Bureau of Labor Statistics. Producer prices jumped 6.6% year-over-year, which represents the largest growth on record since the BLS began track the data in 2010.
Energy prices, in particular, are distorting the inflationary picture. This includes May’s 1.1% rise in import prices, which marked the seventh consecutive monthly gain in import prices.
Prices for copper and iron ore, for example, rose to historic highs in recent weeks, while the global oil benchmark price topped $70 per barrel for the first time in two years at the beginning of the month.
But in June most of those commodity prices are lower. The steel industry bellwether, the NYSE Arca Steel Index, is more than 38% higher this year, but fell over 2.5% yesterday. Copper prices, which have surged 67% over the past year, dropped to a two-month low today on news that China plans on releasing industrial metals from its state stockpiles in an effort to tame global inflation pressures. Aside from copper, China will release reserves of aluminum, zinc and other metals.
Commodity prices are still up for the quarter, and companies in those sectors will have strong earnings for the quarter, but it looks like they’ve peaked near term.
And when inflation numbers come out later in June and July, we can expect some relief. In other words, the Fed has built up a lot of credibility when it’s said in recent weeks that inflation would be transitory.
So, it looks like this “Goldilocks” environment of an accommodative Fed, and strong corporate earnings will continue. In fact, the second-quarter earnings season is expected to represent peak earnings. According to FactSet, earnings are expected to surge 61.5% year-over-year, and revenue is estimated to rise 19.3% year-over-year.
Now, Wall Street reacted adversely to the FOMC news on Wednesday, with the S&P 500 falling 0.5% and the NASDAQ dropping 0.2%.
However, I’m not concerned by the pullback. But the reality is that just because the Fed moved up the potential date for raising interest rates a bit has zero impact on any fundamentally superior stock I recommend. In other words, the negative market reaction has been a gross over exaggeration.
What we’ve seen is essentially an inflation bubble move through the market, but it’s ebbing, so we shouldn’t worry about it.
Money is sloshing around the system and it doesn’t know where to go. And when all the dust settles, the stock market looks like a great place to be.
The bottom line: it’s lock and load time for my fundamentally superior stocks.
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