Why and How
WTWM Forecasts the Market
In April of 2021, Chair of the Federal Reserve, Jerome Powell, uttered the phrase "transitory inflation" for the first time.
(1) Inflation, as measured by the Consumer Price Index ("CPI"), had crossed 4.0% and many at the Federal Reserve ("Fed") believed the global re-opening surge post-pandemic would result in price increases that are only temporary in nature. Once supply chains filled in and the world re-opened, Fed officials anticipated inflation pressures would wane and self-correct.
In direct contradiction to those statements, inflation accelerated through the latter half of 2022, and the "transitory" theory never materialized. By June of 2022, as inflation surged to a multi-decade high of 9%, the Fed finally fully engaged in the battle against inflation and commenced the most aggressive tightening cycle since the early 1980's.
Year over Year Consumer Price Index (CPI)
Chart courtesy of Trading economic
I remember this next part crystal clear. After the Fed meeting on May 4
th, 2022, reporters were trying to gauge just how far the Fed would have to raise rates over the next year and how quick the Fed tightening cycle could potentially be. As we have covered in other
Special Market Updates and White Papers, higher interest rates can impact many important parts of the economy. The more quickly rates are increased, and the longer they stay elevated, a recession becomes more plausible. The Fed had raised the Fed Funds Rate by 25bps (0.25%) in March 2022 and 50bps at the May 4
th meeting, so a reporter asked if 75bps (0.75%) hikes were being considered for future meetings.
(2)
A 75-basis point (3/4 of 1%) increase is not something that the committee is actively considering
Jerome Powell
The Fed subsequently embarked on three consecutive 75bps interest rate hikes (June, July and September 2022), sending both the bond and equity markets into a tailspin.
It was at this point, when the Fed was 0 for 2, that the Investment Committee ("IC") at WT Wealth Management decided we needed a process to evaluate economic data independently, even if it was vastly different from the widespread beliefs of Wall Street and the Fed.
From that experience, hard work and innovation from our WT Wealth Management ("WTWM") Research Team and Investment Committee, the WTWM Bull/Bear Sentiment Indicator was born.
Understanding the condition of the economy and subsequent decisions by the Fed on monetary policy is critical to positioning our portfolios in stocks, bonds and other asset classes. If the Investment Committee at WTWM had anticipated that three 75bps increases from the Fed would have been a possibility, we would had been more cautious heading into the summer of 2022.
With our internally developed Bull/Bear Sentiment Survey, each IC Member grades 30 separate economic indicators using a scale consisting of 5 ratings ranging from Bear-- (significant negative impact) to Bull++ (significant positive impact) in an effort to gauge each datapoint's impact on the equity market in the next quarter (1-3 months).
Below is an actual survey response from one of our Investment Committee participants.
Prior to the Bull/Bear Sentiment Indicator Survey, Investment Committee members each had their favorite indicators and sources they consulted to prepare for Investment Committee meetings. By working collaboratively to compile a comprehensive list of what we believe is important for market forecasting, we now have a highly developed process to review, examine and score the relevant data. The aggregation of the individual surveys of each Investment Committee member, the Bull/Bear Sentiment Indicator, provides key insights that the Investment Committee uses in our investment management and portfolio construction decisions for our Clients' accounts.
As Chief Investment Officer, I tell our Team every day that we cannot be complacent with the correct decisions we have made in the past. It is imperative to be prepared for what is next. I refer to this as solving the Rubik's Cube. In our business, the size, shape and colors of the Rubik's Cube change with every market cycle so, we need to adapt, persevere and overcome the challenges of each new cycle.
The WTWM Bull Bear Sentiment Indicator will not be perfect, and the current version may be different in the future. However, we believe it is essential for the benefit of our Clients to have an independent view, so that we aren't stuck, like many others, relying on Fed and Wall Street guidance, which went 0 for 2 during a critical period in this monetary policy cycle.
Sources
- Federal Reserve calls inflation "transitory" as it keeps interest rates near zero
cbsnews.com
- Fed's Powell: 75 basis point rate hike not being 'actively considered'
reuters.com
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