By Nancy Tengler, CEO & Chief Investment Officer

Stop looking in the rearview mirror and start concentrating on the road ahead, because, you may be missing all the signs that lead you in the right direction.”


Our troubles began two years ago when Federal Reserve Chairman, Jay Powell, announced at the Jackson Hole confab that the committee was moving away from forecasting in favorof data dependence.

While the FOMC was busily examining historical data and repeating the “transitory” treachery until November of 2021, we warned that inflation was morphing from a controlled burn into a wildfire. Tengler Report: Mr. Magoo’s Washington

The perfect storm that fanned the inflationary flames arrived in the spring of 2021 while the Fed was laser-beam focused on lagging employment data.  After $3.3 trillion in COVID spending, the Washington bureaucrats passed the $1.9 trillion American Rescue Plan in the spring of 2021 after the economy reopened and vaccines were plentiful.  Thanks to record spending out of Washington that makes the proverbial drunken sailor seem a miser another $2 trillion in legislation has been voted on and signed into law since.  M2, already at historic highs rose further.

In September of 2021—despite—rising inflation the Fed’s dot plot was forecasting a Fed Funds rate of 0.25% in 2022, 1.0% in 2023 and 1.75% in 2024.  The chairman was talking about “substantial further progress” (whatever that means) and stated that the Fed would continue to hold the Fed Funds rate at 0.0%- 0.25% until “the economy reaches conditions consistent with maximum employment and inflation has reached two percent and is on track to moderately exceed two percent for some time.”  This, though month-over-month core CPI had hit multi-decade highs and the year over year number had been persistently in the mid-single digits for months on its way higher.

Source: Strategas, September 13, 2022

After three hikes beginning in March 2022 of 25 bps, 50 bps and 75 bps through June, the third quarter began on a happy note as bond yields moderated and stocks began a six week rally reflecting the view that inflation had peaked.  Though Powell declared in May that policy moves could result in a “softish landing” for the U.S. economy (another reason for market optimism) by August’s 2022 Jackson Hole meeting the Chairman’s short speech suggested monetary policy would cause consumers and businesses “pain”.

Still, we believe inflation peaked in June of 2022. Indeed, this is supported by the data. Leading Economic Indicators are a perfect recession prediction and are signaling just that. The yield curve is deeply inverted and has been so for months.  Recently the inflation breakeven curve un-inverted joined by plummeting freight costs, declining PMIs, soft new orders and lower prices paid all the while inventories are piling up (check out Nike’s recent earnings report).  Delivery times have improved, housing is rolling over and M2 growth is almost flat after years of 20+% growth.  This suggests (if history is any guide) that inflation has peaked.  Add to that consumer surveys show inflation expectations remain grounded—a good sign for moderating inflation.  (Though we think sticky inflation will remain above the Fed’s 2% target for some time.)

Source: CSM Piper Sandler, September 23, 2022

Powell’s first bear market occurred in 2018 after a number of rate hikes and hawkish comments by the chairman in early October.  By 2019 the Fed was easing and stocks rallied 31.5% for the year despite mid-single digit earnings growth on expectations that lower interest rates would spark economic growth.

The policy error has occurred.  The market is terrified the Fed will go too far.  For now, all we can do is wait and watch the potential wreck that can come when the driver is focused on the rearview. 

What can there possibly be to be optimistic about?

Tech capex spending for one. Chief Information Officers recently surveyed showed that spending priorities are software and cyber security.  78% have increased their budget in 2022 and  86% have increased spending on software (only 27% of total budgets, with room to grow).  The number one spending priority for CIO’s is security.  And the biggest beneficiary of tech capex spend?  Microsoft.  The company ranked among the highest for spending in 2022, but importantly it ranked the highest for spending through 2025.  We stand by the cloud and security companies in our 12 Best Ideas portfolio:  MSFT, AMZN and PANW.  We are using weakness to add to these names for the next three- to five-years, among others.  The secular trends in technology spending will not only improve productivity but serve as a source of labor in a tight labor market.  Spending on robotics (which is captured in old economy capex, thereby understating the spend on tech capex) in the second quarter totaled $585M, representing 25% more units year over year.

Source: CSM Piper Sandler, September 26, 2022

A different kind of recession.

This not a typical recession driven by housing or weak financial institutions.  Rather, this recession is being engineered by the Fed.  We have two observations.  First, if you look at the Fed’s own projections it would seem the Fed still expects a soft landing.  That might explain why the committee members continue to pound the hawkish war drum. 

We are suspicious of this forecast because we expect the economy to go into recession if we are not already there.  Regardless, financial conditions have tightened considerably (coincident with previous recessions) which is certainly one of the Fed’s goals.  The chart below from our friends at Alpine Macro illustrates this.

We will be watching JOLTS this week along with initial jobless claims and non-farm payrolls. We are also focused on the stubbornly high PMIs being reported today. 



General Disclosures ­­­

The comments expressed represent the personal views of Laffer Tengler’s investment professionals based on their broad investment knowledge, experience, research, and analysis. The comments are not specific advice tailored to the specific circumstances of a particular individual. The comments are general and for informational purposes only, based on information and conditions prevalent at the time of publication. Viewers should not consider or place specific reliance on the content presented as comprehensive advice nor as an offer or solicitation to buy and/or sell securities. Laffer Tengler will not provide notice of any change in its opinions or the information contained in this piece. Individuals are strongly encouraged to seek professional advice specific to their market, economic, regulatory, political conditions, and obligation change.

The information contained in this piece is for informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Do not use this information solely when making investment decisions nor select an asset class or investment product on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs, and investment time horizon. There can be no guarantee that any listed objective is achievable nor assurance that any specific investment will be profitable. Laffer Tengler does not undertake to advise you of any change in its opinions or the information contained in this piece. Different types of investments involve varying degrees of risk, and there is no guarantee that a portfolio will achieve its investment objective. Always consult a financial, tax, and/or legal professional regarding your specific situation. Past performance is no indication or guarantee of future results.

Laffer Tengler does not control and has not independently verified data provided by third parties, including the data, charts, and graphs presented in this piece. While we believe the information presented is reliable, Laffer Tengler makes no representation or warranty concerning the accuracy or completeness of any data presented herein.

Laffer Tengler Investments, Inc. is a Registered Investment Advisor. Registration with the SEC or a state securities authority does not imply a certain level of skill or training. Laffer Tengler’s advisory fee and risks are fully detailed in Part 2 of its Form ADV, available on request.