To The Moon

Quick Recap US “hotter than expected” inflation data out on Wed, 10 Apr 2024 - resulted in a pandemonium in the stock market: Headline CPI: was 3.5% vs 3.4% expected vs 3.2$ (February). Core CPI: was 3.8% vs 3.7% expectations vs 3.8 (February). Fact: 3rd month in a row that inflation reported has been hotter than expected. Assumptions that persistent inflation is “seasonal” should be throw out of the window by now. Panic sell caused the market to lose its footing yet again. When market closed for Wednesday: DJIA: -1.09% (-422.16 to 38,461.51). S&P 500: -0.95% (-49.27 to 5,160.64). Nasdaq: -0.84% (-136.28 to 16,170.36). Decliners outnumbered advancers for a 3.99-to-1 ratio. Chain Reactions. The followings happened after CPI report was out regardless of whether it was timed or otherwise. (1) CME Fedwatch Tool. Traders slashed bets of the Fed cutting interest rates in June. (see above). Views from the street is that FOMC will wait until September before it deliberates a cut. (2) FOMC’s March 2024 Minutes of Meeting (MoM). Broadly, FOMC’s March’s MoM centred around 2 main topics. (a) Interest cut. Most members were uncomfortable with interest cut; not until they see a consistent pattern of decreasing inflation. Additionally, members were concerned inflation was not moving quickly toward the 2% target. This added to Wednesday’s bearish sentiment. (b) Fed’s Balance sheet. In March 2020, to prevent the US economy and markets from crashing, the Fed pumped money into the system (QE) to increase liquidity. This made the Fed's holdings jump from $4.4 trillion (March 2020) to a whopping $9 trillion (summer 2022), a massive +204% increase in just over 28 months. Since 2023, the Fed has been trying to take money out of the system (QT) to reduce excess liquidity. So far, it managed to trim $1.5 trillion from its holdings. If the aim is to get back to $4.4 trillion, they still have $3.1 trillion to go. March’s MoM revealed that the Fed decided to cut its QT pace in half, from reducing $95 billion monthly to about $47.5 billion. Note - The slowdown could lead to (a) higher stock & bond prices in the short term, but also (b) carries a risk of inflation if the “extra” money ends up back in the system. (3) Treasury Bond 10 Years. Yields across government bonds spiked after CPI data was released. Referencing the 10 years bond, it has climbed back to 4.5008% - its highest level since November 2023. This comes also based on likelihood of an interest cut being pushed further along to September 2024, as evident in the latest CME Fedwatch tool. My viewpoints : mine & mine only. Given the latest happenings, what is going to happen next? (1) US market. The bulls are here and will stay on (easily) for the next few days, until calm and commonsense prevail. As individual investor, prudent to (i) monitor closely the current situation and (ii) mapped out a “high level” Plan B, based on where market could be heading next. When life gives you lemons, make lemonade - right! (2) Inflation coming from where? Diving into the inflation numbers, its a “joy” to know that goods inflation has essentially disappeared. (see above) Goods inflation rate has been under 1% for 6 months in a row. In March 2024, inflation rate for commodities was just 0.6% YoY. Culprit contributing to high inflation is “Services”. (see above) Top 3 contributors are: Auto insurance. Rent. Housing. With Wages coming in at 4.1% (see above) and inflation at 3.5%, shoppers have “more” disposable income and could buy more again. This compared to Covid days where supplies were short and people cooped up at home, buying a lot of stuff not required. (3) Where to Invest ? In volatile times, it will be prudent to invest in products that have guaranteed returns; even though they may not be 10% or higher. (a) Certificate of Deposit / Fixed Deposit. One of the safest and “risk free” investment during volatile times would be to park your hard-earned monies in (i) Certificates of deposits (CD) and (ii) Fixed deposit. With current elevated interest rate staying put until September 2024, investors should take advantage of it and lock-in portion of your investment monies for short term. It will not be the leaps and bounds returns from equities, but it allows you to sleep better at night knowing that your monies are working hard for you at a 4.x%. (b) Cash Funds. Another short-terms divestment when US market is consolidating will be Cash Funds. Advantages: Investment Objective: Cash funds aim to preserve capital and offer a small return on cash holdings. Risk: Cash funds are very low-risk investments as they primarily invest in government securities. Liquidity: Cash funds are highly liquid, meaning one could easily buy and sell shares daily. Return Potential: Cash funds offer low but stable returns. Example : $Vanguard Federal Money Market Fund(VMFXXX)$. (c) Income Funds. Third alternatives. Life is about choices right. Investment Objective: Income funds invests in a portfolio of debt instruments and aims to generate higher yields than cash funds. Risk: Invest in a wider range of assets like bonds, dividend-paying stocks, or even real estate investment trusts (REITs). Liquidity: Compared to cash funds, they are less liquid investment, and its share price can fluctuate based on market conditions. Return Potential: Income Funds have (potentially) higher returns but also carries the risk of price volatility and potential capital loss. Example : $Eaton Vance Tax-Managed Global Diversified Equity Income Fund(EXG)$ where I am collecting dividend monthly as well - kaching ! 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