Stableford Capital Insights

The Fed Reiterates Its Stance

Markets haven’t believed the Fed all year. At every FOMC meeting Chair Powell seemingly surprises investors with Fed hawkishness. It’s like the movie Groundhog Day—the same scene keeps repeating itself. To some extent this makes sense: Decades of ‘the Fed has your back’ are hard to un-learn. But those days are long over; investors are now struggling to catch up with the Fed’s hawkish stance at every meeting.The December Fed meeting was no different. Buoyed by the apparent peak in CPI inflation investors drove equities up over 5% during November. Alas, Jay Powell was having none of it. His ‘higher for longer’ Fed Funds outlook combined with zero governors pricing in rate reductions in their 2023 outlook weighed on equities once again, driving the S&P 500 down 5.9% during December.[caption id="attachment_3998" align="aligncenter" width="940"]

Exhibit 1—Fed Comments Drive Equities Down 5.9% in December[/caption]Meanwhile, U.S. 10 Year Treasury Yields moved up 27 basis points in December. This move is harder to dissect as rates were down initially but drifted higher in the second half of the month. Much of the move appears to have been a rebound from temporary lows in early December that were driven by flurry of buying as traders worked to establish positions prior to the low volume holiday trading days.[caption id="attachment_3999" align="aligncenter" width="940"]

Exhibit 2—Bond Yields Rose 27 Basis Points to 3.88% During December[/caption]Stableford’s ViewOur view is largely unchanged. We like our exposure to U.S. Treasuries and high-quality equities. The treasuries provide two ways to win through either Fed over-tightening which causes a recession, or inflation falling. We’ve also increased exposure to very short-term fixed income which provides a decent yield as we look for opportunities in equities or longer duration fixed income at better prices.While there does appear to be a high likelihood of recession in 2023, it need not be deep nor prolonged. There are no obvious structural financial flaws as there were in 2008 that might lead to something “breaking”. Most corporations have manageable levels of debt and access to capital has been unchecked thus far, despite a record 425 basis point increase in Fed Funds during 2022.So, we are waiting for a better opportunity to increase equity exposure, which we believe will occur during 2023 as companies manage earnings expectations down to manageable levels. In the interim, clipping coupons from low risk fixed income with the potential for price appreciation from long duration bonds seems like a good place to be.

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