Summary: To clarify fro my last post markets never go straight up. Most of you are in a great place and have Fixed Index Annuities and cannot lose money. We may have a ruff 2nd quarter but as energy prices abate the FED will have room to cut rates in the 3rd and 4th quarters. When that happens the markets will surge upwards. Be aggressive with your savings.

Rationale:

The recent inflation data from March indicates a significant surge, suggesting a potential continuation of the Federal Reserve’s tightening cycle. With inflation as the primary focus, decision-makers are likely to base their rate cut timing heavily on such data. The market had previously been optimistic about the Federal Reserve easing monetary policy in 2024, but the likelihood of a rate cut as early as June 2024 has recently diminished.

Firstly, the resilience of the U.S. economy suggests there’s no pressing need for immediate monetary easing. Despite high interest rates, GDP growth is expected to continue, with projections until 2028 not far from the pre-pandemic rates of 2019. Additionally, the Federal Reserve’s “Dual Mandate” includes maintaining a stable labor market. With unemployment currently at 3.8%, nearly two percentage points below the long-term average, the labor market conditions mirror those of pre-pandemic times, further supporting the case against early rate cuts.

Secondly, inflation is heavily influenced by energy costs, particularly oil and gas prices. Although the U.S. has become a major hydrocarbon producer, OPEC still controls about 40% of the global oil supply due to current administration policy on energy production and exploration. The government has revised the U.S. Interior Department’s five-year offshore oil and gas leasing program, scaling back the number and scope of drilling auctions. This adjustment forms part of a wider initiative aimed at facilitating a shift towards cleaner energy sources, and it includes a historically low number of auctions under the new plan. Additionally, The recent decision by oil-rich nations to extend oil output cuts demonstrates their intent to keep prices elevated, contributing to this year’s steady increase in oil prices. An early rate cut by the Fed could boost economic activity and energy demand, potentially driving up oil prices and exacerbating inflation.

To summarize, the U.S. economy’s strength, characterized by low unemployment and rising oil prices, suggests that global consumption remains robust. If the Fed were to cut rates prematurely, it could lead to higher energy prices and trigger another wave of inflation. This scenario poses a risk to growth stocks, which are sensitive to inflation due to their reliance on discounted future cash flows. Consequently, interest rates are expected to remain higher for longer, impacting the valuation of stocks. We may see a down quarter until energy prices come down and then the FED will have room to lower rates causing a tail wind for the stock market in the later part of the year.