'Higher Rates for Longer'... But How High and for How Long?

The Weekend Edition is pulled from the daily Stansberry Digest.

Everyone wants to know if or when the Fed will "pivot"...

In the September 26 Stansberry Digest, we talked about "narratives." Federal Reserve Chair Jerome Powell has said he wants to hear them... so these stories can help the central bank make sense of the data and make better decisions.

Well, I had a thought: Powell should look in the mirror. The biggest narrative driving stocks and bonds today is about the Fed itself.

We've beaten this narrative into submission, but only because it matters. And today, we have another spin to share on it. In short, our Stansberry NewsWire team recently analyzed when the story might change... and when precisely, down to the month, the Fed might really pivot.

You see, the central bank has been raising its benchmark federal-funds lending rate – raising borrowing costs in the economy. And it's increasingly trimming its massive $9 trillion balance sheet to do what it can to lower 40-year-high inflation.

A lot of folks in the market have been conditioned, especially over the past 15 years, to expect the Fed to step in at the slightest sign of economic weakness with "easier" policies. But they have been disappointed all year long.

Even though inflation is at nosebleed levels, the Fed is deliberately weakening the economy instead... It's telegraphing higher rates for longer.

The rate hikes so far – from near zero to around 3.25% today, and likely going higher – are filtering through the economy, notably denting real estate. The average 30-year fixed-rate mortgage now has a nearly 7% interest rate, more than double what it was a year ago.

Home prices are starting to rise more slowly after two years of rapid, strong increases... More and more people are putting everyday purchases on credit cards... And many folks are taking on part-time work just to make ends meet.

In the markets, folks are hoping... wishing... even begging for what financial folks call the Fed pivot. In other words, when will the central bank make things easier for businesses and our debt-addicted world again?

The answer, so far, has been not until further notice. Inflation is public enemy No. 1, the Fed repeats. And as the longstanding investing adage goes, it's a bad bet to "fight the Fed."

Eventually, the Fed will relent – when it feels the time is right...

Last week during a press conference, Powell said that the central bank won't consider changing its tune on inflation until its benchmark lending rate is higher than the inflation rate, or until "real" rates are positive.

In other words, that's when Fed-dictated interest rates are weighing on growth, not stimulating it... as could be argued is still the case.

Right now, the annual inflation rate of 8.3% is still about five percentage points higher than the Fed's fed-funds rate range target. That's a big gap to make up – and the Fed has already raised rates higher, faster than during any recent interest-rate cycle.

At the same time, "official" inflation measures like the Consumer Price Index ("CPI") – which we have qualms about as a perfect inflation indicator – may have already peaked...

The question is: When do these two rates meet in some economic utopia?

Well, NewsWire editor C. Scott Garliss and analyst Kevin Sanford recently ran the numbers to try to figure it out. They set out to gauge when the Fed might actually pivot and reach its 2% inflation target.

We'll briefly cover the steps behind their research. It's a lot of numbers, but don't worry... Their final chart makes everything clear.

First, the team made four different assumptions for the CPI rate moving forward, or the pace of inflation growth or decline. One was for a slight decline (down 0.1 percentage points from month to month)... One was for generous monthly growth (0.5 points)... And two were for slight or moderate growth (0.2 and 0.3 points).

Then they plotted out the possible path of "official" inflation data over the next 18 months using these assumptions. For example, a 0.1-point decline in CPI from each prior month would result in 2.3% year-over-year CPI readings by March and deflation in the second half of 2023.

(Without getting too deep in the weeds, the headline CPI is an annual comparison, meaning it compares the rate of September 2022 with that of September 2021. What matters in this analysis is the month-to-month change.)

On the other end of the range, a 0.5-percentage-point month-over-month increase in CPI would make for a 6.7% CPI in March... and 6.2% inflation by the end of 2023. In between, 0.2- and 0.3-point monthly CPI growth would make for a roughly 4% or 5% annual inflation rate by March.

After laying out these scenarios, Scott and Kevin plotted these possibilities against the eventual benchmark interest rate of 4.6% for next year that the Fed implied in its economic projections last week. As they wrote...

Here's what all four scenarios look like in comparison with the new implied fed-funds rate...

As we can see in the charts above, policy changes combined with slowing inflation is working... but it will take some time... In other words, in the short and long term, rates must remain high until prices stabilize.

All in all, this shows a variety of possible answers for when the fed-funds rate might overtake inflation. A lot depends on the rate of inflation in the second half of this year...

As you can see, if inflation actually decreases month to month, even by a little, "real" rates could turn positive faster than many folks might think. But if monthly inflation grows even modestly, it could be the second quarter of 2023 at the earliest before a pivot happens.

And if inflation keeps accelerating, the Fed will likely need to keep rates at least where it's projecting today – or maybe even hike them higher next year.

Another big part of this discussion is the jobs market...

But right now, the Fed doesn't seem to care all that much about it. It still sees a "hot" market that has near record-low unemployment and millions of job openings that we can afford to lose, at least according to its statistical review.

The other important point to consider is what number the Fed actually uses to gauge inflation when it matters most. It has said in the past that its preferred measure is the core Personal Consumption Expenditures ("PCE") price index, which doesn't include food and energy prices and checks in at 4.6% today.

But Powell has also said the CPI matters because that's what people pay attention to – and, of course, ignoring energy and food prices today would be just plain ignorant. So we don't know for sure.

In any case, until we reach a point when enough people think "real" rates are positive or the Fed signals confidence that it's getting closer to this point, the story of the economy and markets today won't change.

Simply put, the Fed's position is: "Higher rates for longer... deal with it."

Here is one more indicator worth paying attention to today...

We've mentioned our friend Marc Chaikin a few times lately. He's the founder of our corporate affiliate Chaikin Analytics. And he recently teamed up with Joel Litman – a forensic accountant and the founder of another of our affiliates, Altimetry – to deliver a critical message on the markets.

Marc's a Wall Street legend... and he has developed tools that are available on every Bloomberg Terminal in the world today. He has been in this industry for five decades and has survived nine bear markets.

So, in short, it might be wise to listen to his latest findings...

Earlier this week, things were so dicey that Marc shared a startling warning with readers of his free PowerFeed newsletter. It comes straight from the Power Gauge, a tool he has created for everyday investors to level the playing field with Wall Street.

For those who don't know, the Power Gauge assigns "bullish," "bearish," or "neutral" ratings to tens of thousands of stocks, plus industry groups. And it features dozens of other filters and indicators. It's a great tool that can tell you a lot about both specific and general trends.

As Marc wrote earlier this week, one of them is this...

As of this past Monday's close, only 12 stocks in the S&P 500 received "bullish" or better ratings.

That means the Power Gauge sees big outperformance potential in the near term with only 12 out of roughly 500 stocks. That's only about 2%. And that's not all we know...

The Power Gauge is also "bearish" or worse on 117 stocks in the S&P 500 today. And the rest are stuck in "neutral" territory.

Now, I'm thankful to have that list of 12 "bullish" opportunities. But when it comes to the broad market, we need to face an uncomfortable truth right now.

Now, some might say, "Well, if everyone else is so bearish, isn't this time to get bullish and buy?"

In long uptrends like the record bull market we saw last decade, sure, that's a good strategy. And it makes sense in the long term overall. But this year, "buy the dip" has been a failure.

You need a new investing playbook...

"Sell the rip" might be a better idea. In Marc's view, now is simply not the time to make a big contrarian bet. In the short term, he says the market could easily continue falling from here...

Only a handful of stocks are pushing against this decline. And no historical truism tells us that a drop of roughly 25% is a guaranteed bottom. Things can always get worse.

So for now, stay patient. Seek out the opportunities that do exist. And make sure you're using tools that keep your emotions in check...

That's sage advice from someone who has been there before.

If you want to hear more directly from Marc, you're in luck. He joined Joel last week for a brand-new, must-see presentation about the state of the market.

They covered a lot of ground, including warning of a new financial crisis that's already underway, and shared why folks need a new investment playbook to get ahead of what's coming next...

Marc and Joel have different stock-analysis systems. But they combined them for the first time to see what's in store for the final weeks of 2022. They also shared a total of eight pieces of stock advice – with two stocks each to buy and two to sell if you own them.

The replay includes all of these free recommendations, including a stock of one of the most recognizable businesses in America today that Marc says is headed for disaster. But don't delay... The video won't be online forever. Check it out now.

Good investing,

Corey McLaughlin

Editor's note: Marc Chaikin and Joel Litman recently went on camera to share an urgent warning. You see, a crisis is unfolding for U.S. stocks... but it goes much deeper than what you'd expect. That's why Marc and Joel are sharing the "financial lifeline" that could help you preserve – and even grow – your wealth while others are left with losses.

To get the full details, watch the replay of this online discussion here, before it goes offline.