The Fed is on pins and needles; My message is the same amid more bearish and bullish data

1) The major stock indexes rose yesterday because the Federal Reserve... did nothing.

With all eyes on the Fed, its interest-rate forecast remained unchanged from its projection three months ago.

Take a look at this chart from an article in yesterday's Wall Street Journal titled, Fed Projections See an Economy Dramatically Reset by Trump's Election:

But reading the article accompanying that chart, it's clear that the Fed is now on pins and needles – not knowing what's going to happen in light of the Trump administration's actions, mostly on tariffs. Here's an excerpt:

There are signs the interest-rate outlook is shifting away from cuts in the near term, something investors have been slow to appreciate. The number of officials who penciled in fewer cuts compared with December went up. And [Fed Chair Jerome Powell] conceded that a "highly uncertain environment" led some officials to simply not fuss over big changes to the rate outlook. "There is a level of inertia where you just say, maybe I'll stay where I am," he said...

Officials could be hard-pressed to declare price increases from tariffs as temporary if they set in motion a reordering of global production processes that takes years to play out.

On top of that, Fed officials are nervous that the postpandemic inflation might have given businesses and consumers more acceptance of higher inflation. Policymakers pay close attention to expectations of future inflation because they think those expectations can be self-fulfilling.

2) Speaking of which, this is exactly what the Fed is watching – whether rising expectations for inflation lead to actual inflation. Just take a look at this chart posted on social platform X by Liz Ann Sonders, chief investment strategist at Charles Schwab:

In another post on X this week, Sonders also showed that consumers are expecting higher unemployment:

And it's not just the Fed and consumers who are worried...

Sonders shared this chart on X yesterday showing that businesses' outlooks are also falling:

So aren't all of these bearish signs that indicate prudent investors should sell and flee to cash until the outlook improves?

Actually, no...

If you look closely at these measures, they tend to be contra-indicators.

Look at the last time consumers expected higher unemployment and businesses' outlooks plunged: late 2022, which reflected all of the negative headlines about the stock market decline that had already happened. In fact, it was a great time to buy!

3) Meanwhile, I came across this great chart by Ritholtz Wealth Management posted on the Irrelevant Investor blog – it notes that "there's always a reason to sell":

4) Meanwhile, as Creative Planning's Charlie Bilello shows in this chart he posted on X, U.S. household net worth – all assets minus all liabilities – is at an all-time high... so there's a strong balance sheet to cushion the effects of short-term turmoil:

5) Lastly, as Bilello shows in this next chart from another post on X, stocks have done better than U.S. Treasurys over every time period from one to 30 years going back nearly a century:

So my message remains consistent: Tune out the short-term noise and sit tight!

Best regards,

Whitney

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