Broker Check

The Weekly Update 5/12/2023

| May 12, 2023

As a WSG family member, you will start to see small additions to your asset allocation as we tip toe slowly into our more positive investment positions.  As you will read below, we are not out of the economic woods, yet some of the data appears to be bottoming out.  The investment additions we will make are well thought out, on purpose, and intentional. 

If the Fed is not done increasing interest rates, it appears from their statements, that they are close to a pause.  If this is a correct observation, the valuations of Corporate America, as measured by the S&P 500, would likely continue the current uptrend.

For those of us who have lived through a few of these Federal Reserve interest rate increase cycles it now makes sense to recall the lessons learned.  For example, back in the late 1990’s the dot-com bubble was in full uptrend.  The Fed started to raise rates in mid-1999.  They increased rates for a year until pausing between May and November 2000.

Recall that the S&P 500 dipped from a high in March of 2000 and then went back up to that March level by September 2000.  So, shortly after the Fed “paused” the market values were high and then proceeded to drop 46% for two years into October 2002.  Just weeks before that tech-wreck bottom is when I sent our client family “The Wicked Witch is Dead” Update! (Read it Here)

Then in mid-2004 through mid-2006 the Fed was again increasing interest rates.  The S&P 500 peaked on 10/09/2007, about a full year after the Fed “paused” and then dropped 51% into November 2008, another very painful year for investors.

More recently the Fed was increasing interest rates in 2016 through the end of 2018, at which point they paused.  About a year later the Covid -34% market value reduction (in just 30 days) shellacked investors.  Was the cause of the sell off Covid, or the interest rate pause?  Doesn’t matter really but for sure there is a connection between a Fed interest rate “pause” and a market correction that has followed in these examples.

As I write we remain in a bear (negative) market environment.  Is this time different?  Perhaps the correction “before the pause”?  I don’t know, but I do know we remain in a challenging market environment.  Now that interest rates have gone up the most, and in the shortest time frame in history, home loans are tough to get, businesses, especially small businesses, are less able to get loans.  In addition, consumers are spending less (See Sign #1 and Sign #5 below)

The lesson from history, which may or may not repeat, is this:

When the Federal Reserve “pauses” after an extended period of interest rate increases because they believe they have done enough to slow down the economy, is when market valuation risk can happen.

It is for this reason, and a few others below in this month’s update, that we intend to overweight our cash and super short U.S. Treasury Bills (2, 3, and 4 months to maturity).

Yes, we are nibbling at a few favorite investment positions that appear to offer growth going forward, but our WSG rules have not changed!

They are:

  • To not make our client family poor
  • Don’t fight the Fed
  • Five-year money (Read it Here)
  • No one knows the future

We will stay focused on the Fed’s comments, as they have been most transparent in their speeches and via telegraphs from Nick Timiraos (just do a search) during the Fed’s “blackout” dates.

I’m interested in your thoughts, comments, and observations.  Feel welcome to call, email, or stop by the office and say Hi.


James O. Lunney, CFP®



Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.