The Latest in Fed-Speak: No Recession Ahead

It's 2007 again... More Fed hikes are 'possible'... The latest in Fed-speak: No recession ahead... But no 2% inflation either until 2025... What the latest run higher in stocks suggests... More about AI...

This could be 'normal' – except...

As we and many others in the markets expected, the Federal Open Market Committee said today that it was raising the central bank's benchmark lending rate by another 25 basis points to a range of 5.25% to 5.5%.

That will bring the Federal Reserve's effective fed-funds rate to its highest level since the summer of 2007, before the great financial crisis and the zero-rate or near-zero-rate era that followed for roughly 15 years.

In that context, you could say today marks a return to what was once "normal" for the U.S. economy, but with a few important qualifiers. Let's not forget that it took 40-year-high inflation and skyrocketing money supply to lead the central bank to this point of making dollars more "expensive"...

That said, the Fed's policy announcement today – typically scrutinized by investors and computers – was largely ho-hum on the surface. The first paragraph stated what anyone paying close enough attention to the economy lately could say...

Recent indicators suggest that economic activity has been expanding at a moderate pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.

And the 25-basis-point hike that followed was exactly the decision that everyone expected...

The thing that matters for markets now is the Fed's stated goal from here...

The Fed maintains its primary focus is to reduce the year-over-year inflation rate to 2%.

Fed members say they are "strongly committed" to that number. Yet their preferred inflation indicator – the core personal consumption expenditures ("PCE") index – is still at 4.6% year over year.

And so does that mean more rate hikes ahead, with the intent of slowing the economy – and inflation – even more?

It's "possible."

That's the word Fed Chair Jerome Powell used early on in a post-announcement press conference when asked about the Fed's plans moving ahead. Overall, he sounded a little less emphatic about hikes than in the past year. Powell said later about future hikes...

We can afford to be a little patient as well as resolute as we let this unfold.

Powell said he was encouraged by the most recent consumer price index ("CPI") reading that came in below Wall Street expectations. However, Fed members will also look at all the inflation, jobs, and economic data that come out between today and their next meeting in September to determine whether to raise rates again. As Powell said...

We're going to be careful about taking too much signal from a single reading... We'll be looking at everything. And of course we'll be looking to see whether the signal from June CPI is replicated, or the opposite of replicated, or somewhere in the middle.

We'll be looking at the growth data, the labor-market data very closely, of course, and making an overall judgment. It's the totality of the data, but with a particular focus on making progress on inflation...

And if we get that signal, whenever we get it, and that's the collective judgment of the committee, then we will move ahead. If we don't, then we'll have the option of maintaining policy at the [current] level.

In the same session, though, Powell also said he expects unemployment to rise at some point. That is the "likely outcome," he said, when "central banks go in and slow the economy to bring down inflation."

So he was asked about the possibility of a recession ahead...

Earlier this year, Fed economists believed a "mild recession" was going to come. Now, that is not the case – kind of. Powell said Fed economists expect a "noticeable slowdown in growth" starting later this year...

But given the resilience of the economy recently, they are no longer forecasting a recession.

After that, he mentioned in a sort of passive tone that he thought inflation won't get all the way back to 2% until 2025. To me, this suggests that the Fed won't be cutting interest rates for a long time, even if it pauses rate hikes.

What this means for stocks is to be determined...

We've already seen that stocks can rise in this higher-interest-rate environment where the pace of inflation has come down but companies still find ways to turn a profit and (by official statistics, at least) the employment picture remains generally strong.

But how long this story can last is undetermined.

In any case, today's knee-jerk reaction to the Fed's latest move and Powell's comments was mixed. The major U.S. indexes traded mostly sideways into Powell's presser, then turned higher until he made the comment about inflation not getting to 2% until two years from now.

The benchmark S&P 500 Index finished 0.1% higher, the small-cap Russell 2000 Index rose 0.8%, the Dow Jones Industrial Average was up 0.3%, and the tech-heavy Nasdaq Composite Index was down slightly. But we'll want to watch tomorrow's action closely, too, as folks digest the latest Fed messaging.

Heading into today, stocks were on a win streak...

Today's moves haven't disrupted the market's overall trend from the past few months. As you know if you've been following along for the past few months, the major U.S. stock indexes have been ripping higher. The S&P 500 is up 27% since its low in October (when investors perceived the first signs of the pace of inflation slowing).

And we've noted lately that bullish sentiment in the markets is growing. Notably, even the boring ol' Dow has been breaking out to levels not seen in more than a year and is up 20% since its own low this past fall.

The recent performance in the Dow, and the most recent surge higher we've seen in particular – up 11 straight days through Monday, for example – is rare. As Stansberry Research senior analyst Matt McCall noted on the latest episode of his Making Money podcast yesterday, that win streak has happened only five other times since World War II.

You may sense that a breather is overdue...

Your brain, if it's anything like mine, might be telling you that stocks are approaching "overdue" territory for a pullback. That may be true.

But if you are thinking longer term, it's a different story. It turns out that the history of the few similar short-term moves higher in the Dow actually portends more of a rally ahead through the rest of 2023.

Following the five other times the Dow has rallied for 11 straight days since 1950, the Dow was higher six months later in each instance, with an average 11% gain, and the index was higher a year later 4 out of 5 times with an average gain of 8.3%.

Matt shared this yesterday via Carson Group Chief Market Strategist Ryan Detrick...

This isn't a large sample size, but the limited examples we do have suggest more gains for stocks ahead.

The rare circumstance makes a point itself...

The rally we've seen in stocks this year, and stretching back to last fall, is already making history and has been good news for those with exposure to U.S. stocks... And more could be coming before the year is out.

We could debate or rehash the reasons we've shared lately about why this may be. But today, I'm reminded of one of the great, simple investing lessons I've learned in my time working with Stansberry Research: Trends can go on much longer than you might think – both bullish and bearish ones.

Be sure to check out the entirety of Matt's latest podcast...

In addition to this history note with the Dow, Matt talks about how close the indexes are to new all-time highs, gets into what to make of economists' predictions, and shares his observations about the U.S. dollar's correlation to stocks, oil, and gold, along with a few ideas of hedging against potential dollar weakness ahead.

And Matt will have another episode tomorrow talking about the latest with the Fed in a discussion with longtime professional money manager Paul Schatz, president of Heritage Capital.

Lastly today, a note from a doctor about AI...

Artificial intelligence ("AI") is really changing things – already.

You've by now likely heard about the brand-new AI event put on by Stansberry Research partner Dr. David "Doc" Eifrig and Chaikin Analytics founder Marc Chaikin. In it, they talked about all the buzz around AI, separated what's real from what's empty hype, and showed how individual investors could possibly use AI to their advantage. The response we've received has been terrific.

Well, I happened to be interviewing a medical researcher at a major hospital here in Baltimore recently – about something unrelated to the financial world, go figure. He works on projects and science related to the brain and immune system.

As he was explaining the complex nature of identifying how or why certain things may happen in the human brain and body, a thought occurred in my old-fashioned head – AI could probably really help...

I decided to ask this doctor about how AI technology might be influencing his work in the lab. He replied by saying, yes, it already is having an impact, and he characterized it in a way that may be helpful for everyone to keep in mind about AI...

It's allowed researchers to ask very specific questions in complicated data sets. Most of the algorithms that are used can give insights into pathways and potential targets that may otherwise have been challenging to identify.

If the stock market is anything, it's one big, complicated data set. And I could easily apply the rest of this doctor's statement to investing. The "pathways" he might look for can be trades or investment vehicles, and the targets can be stocks or other assets.

Invest with AI...

You might see why, as we wrote in our post-event recap last week, while there are a lot of questions and legitimate concerns about AI technology today, it's worth thinking about how investing with AI can help you make portfolio decisions.

It's easy to get overwhelmed with all the information available to us these days. A tool that can cut through it all and help you settle on an answer can be immensely helpful. AI won't do everything for you, nor would I want it to, but it can help.

This is the kind of technology that has typically been reserved for those working for Wall Street firms. But individual investors can now use AI technology, too, as a special guest showed Doc and Marc during the event. He explained how machine learning paired with massive data sets can deliver special results.

Be sure to check out the free presentation for all the details. You'll hear Doc and Marc talk about the latest news in AI and what history tells them about what might come next with the technology. About 20 minutes in, they're joined by a guest who demonstrates the results of an exciting way you can use AI to your advantage in your own portfolio.

The full replay of this event will only be available for a limited time, so be sure to check it out before it's too late. You can also pause and play the video presentation at your own convenience.

It's all free, and just for tuning in, you'll see this AI tool at work in real time and receive three free, precise predictions about where the prices of some of America's most popular stocks could go in the weeks ahead.

Click here for all the details and these three free names and tickers now before the replay goes offline.

New 52-week highs (as of 7/25/23): ABB (ABBNY), Brown & Brown (BRO), Cameco (CCJ), Costco Wholesale (COST), Cintas (CTAS), Covenant Logistics (CVLG), Deere (DE), D.R. Horton (DHI), Electronic Arts (EA), iShares MSCI Emerging Markets ex China Fund (EMXC), Expeditors International of Washington (EXPD), Motorola Solutions (MSI), VanEck Oil Services Fund (OIH), PulteGroup (PHM), Pure Storage (PSTG), Rollins (ROL), Sherwin-Williams (SHW), S&P Global (SPGI), SPDR Portfolio S&P 500 Value Fund (SPYV), ProShares Ultra S&P 500 Fund (SSO), Constellation Brands (STZ), Texas Instruments (TXN), United States Commodity Index Fund (USCI), Vanguard 500 Index Fund (VOO), Verisk Analytics (VRSK), and Zoetis (ZTS).

In today's mailbag, more discussion about Elon Musk and "X"... and feedback on yesterday's Digest about the "message in a box"... As always, thanks for reading, and send your comments and questions to feedback@stansberryresearch.com.

"Hi Folks/Corey, It seems that few have addressed the similarity of the logos of Musk's businesses 'X' & 'SpaceX' (let alone the ghosts of his initial venture X.com). Sure, he says he likes the letter X but he likes to surprise and X is the unknown quantity in mathematics.

"Would you think that this might be an indicator of plans towards a 'long, long time' in the future 'in a galaxy far away'? In other words, of a symbiotic relationship between at least two Musk ventures? Who knows his long-term plans?" – Subscriber Donald M.

"The Digest on Tuesday was a prime example of why I look forward to reading Stansberry's articles every day. The info on PKG was specific to the company, but general to all investors. The chart was from another editor's piece earlier in the day, but fit nicely into the discussion. A reader gave credit to Elon Musk for protecting our free speech rights, which balanced out the previous day's article. The length made for a good read without being too long, and not getting too deep into the investing weeds. Well done, Corey." – Subscriber David T.

"Corey, In your newsletter you wrote 'For now, the U.S. is in a "lower growth, but also lower prices" mode'. As I see it prices are not coming down, they are just increasing at a slower pace.

"I also want to say thanks. Since I started following, my net worth has exploded." – Subscriber Steve C.

Corey McLaughlin comment: Thanks for the note, Steve, and happy to hear about the growing net worth.

Regarding the part you mention from yesterday's Digest, yes, agreed. I was referring there to what I'd written earlier that the "pace of inflation is coming down." Inflation will always be around, so long as dollars and other currencies can be created from nothing by governments. It's just a matter of how much inflation there is at any given time.

All the best,

Corey McLaughlin
Baltimore, Maryland
July 26, 2023