![]() The Fed is now forecasting that PCE inflation will rise at a 4.4% rate in 2022. All nine voting governors were in agreement as inflation remains elevated. This is the second increase since the central bank lowered the fed funds rate to the rock-bottom level of 0.00%-0.25% early in the pandemic, and the first 50-bps hike by the Fed since 2000. The Federal Reserve wrapped up its Open Market Committee meeting on Wednesday and, as expected, raised the federal funds rate by 50 basis points to 0.75%-1.00%. economy.īLK,AMAT,DE,GOOGL,AAPL,PNC,CVX,ADI,DHR,COST,V,LLY,SPGI,PANW,BAC,ADSK,JBHT,EL,AMT,PWR,MCD,TECH,MCK,TMO,ADBE,MCHP,ISRG,DVN,AMZN,ODFL dollar relative to currencies around the world attests to the confidence that global investors have in the innovative U.S. corporations weren't innovating, creating new products (such as vaccines) and services (such as Zoom calls) and moving into new markets and applications, the domestic economy would not be growing, and capital would not be flooding into the country. economy, even during the pandemic and the current period of high inflation, has expanded to record levels. Manufacturing industries that dominated the economy decades ago - textiles, televisions, even automobiles to a large degree - have moved overseas, where labor and materials costs are lower. ![]() The United States economy is full of innovation. Supreme Court Justice Potter Stewart, you know it when you see it. Our current recommended asset allocation model for moderate accounts is 70% growth assets, including 65% equities and 5% alternatives and 30% fixed income, with 200 basis points of the bond allocation in cash. Based on the current model input levels, we expect a recovery in stock prices from bear-market lows in 2H22 and are maintaining our year-end S&P 500 target of 4,000. ![]() Markets can manage with premiums and discounts for extended periods. Starting in 2009, at the depths of the financial crisis, the model indicated stocks were deeply oversold - another good call. The model indicated that stocks were at a sharp premium to fair value compared to bonds prior to the "dot-com crash" of 2001 and also prior to the Great Recession in 2007-2009. Stocks were very attractive compared to bonds in the late 1970s, when benchmark Treasury rates were in the high teens before heading consistently lower. The model has done a good job of highlighting asset class value. Bond yields around 4%, by comparison, come closer to our fair value target yield of 4.5%. The current valuation level is a 1.1 sigma premium for stocks, which is just outside the normal range. The mean reading from the model, going back to 1960, is a modest premium for stocks of 0.15 sigma, with a standard deviation of 1.0. The model output is expressed in terms of standard deviations to the mean, or sigma. Our model takes into account current levels and forecasts of short-term and long-term government and corporate fixed-income yields, inflation, stock prices, GDP, and corporate earnings, among other factors. Our bond/stock asset-allocation model indicates that bonds are very close to fair value, as rising yields have made fixed-income investments relatively more attractive. Daily Spotlight: Favorable Value for Bonds
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