Every so often Washington likes to remind us how hard it can be to get things accomplished. The most recent example is the debt ceiling—the amount Congress can borrow to pay its bills. It seems like we have this debate every few years and in the end a deal is made, which is just what happened this time. Considering equity markets never really reacted to the drama, perhaps this is a good reminder that focusing on long-term objectives is the best strategy, even amid a fair amount of market noise.

Post debt ceiling, markets clearly refocused attention to topics such as inflation, the health of the economy, and the Federal Reserve (Fed)—who back on June 15 left interest rates unchanged but certainly issued hawkish remarks on the fight against inflation leading us to call the recent action a “hawkish pause” by the Fed. The Fed has done a lot of heavy lifting already—raising short-term interest rates by 5% in just over a year. Since rate hikes tend to have a long and variable lag, the Fed wants to see how those rate hikes more fully flow through the economy before its next move.

The Fed’s goal has been to elevate the fed funds rate and make the cost of borrowing money prohibitively expensive, to slow aggregate demand. While this has exposed some cracks in the regional banking sector, it should allow inflationary pressures to abate.      But then what? After winning its fight with inflation, the Fed is expected to start cutting rates early next year. Just as the aggressive rate-hiking cycle took Treasury yields higher, interest rate cuts will take Treasury (and other bond market) yields lower. Both lower inflation and an end to rate increases could be welcome news for core bonds, especially intermediate core bonds, which have tended to perform well after rate-hiking campaigns. Investors may be better served by locking in these higher yields before they are gone.

As you can see on the chart illustrating the S&P500, the current market trend is bullish with rising support levels.  Sentiment however remains low with skepticism on this recent rally dominating the discussions.  Major news media will remark on how “overbought” technology stocks are and how it’s a few of the largest stocks leading the way.  Simply stated, this is not the type of market where we see speculative behaviors and irrational investing, like chasing meme stocks a couple years back.

Don’t forget what Sir John Templeton said quite a few years back…  Bull Markets are born on pessimism, grow on skepticism, mature on optimism, and die on Euphoria.

The recent pullback here in the middle of June comes after the S&P500 surged higher thru levels not seen since last August.  Therefore, a period of consolidation of trading is expected, but the question is are we back to “buy the dip?” Since the end of Q1, yes, our opinions is this has become a buy the dip market.  This recent consolidation we believe is another opportunity.  This is especially true when we believe the upcoming economic data indicators will support our thesis of continued taming inflationary results. In our view, the taming data supports the case for inflationary pressures continuing to subside along with a decelerating labor force.  All these observations and data points leads us to conclude our view that the economy might be closer to expansion than contraction and slipping into a recession less likely.

Only time will tell, but it feels like we are finally on a path to lower interest rates and the end of this inflationary cycle. Of course, there will be other challenges to deal with, that is just the dynamic nature of the markets. But in the meantime, returning to the familiar—lower rates and the end of inflation—is something we can all rally around.

I would like to wish everyone, a Happy upcoming July 4th holiday!

Stay safe. And stay the course.

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