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Malvern Bank's "Money Matters"

Money Matters: Rest Assured from our Partners at Bell Rock Capital

June 14, 2022

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Hello,

Given that there is an immense uneasiness in the markets due to inflation fears, we are sharing an informative market communication from *Bell Rock Capital, LLC. Malvern Bank National Association in affiliation with Bell Rock Capital, LLC brings Malvern’s clients a team of investment professionals to offer personalized guidance to help you make the right decisions at the right time.

Rest Assured

We know it gets depressing seeing red everyday when the stock market seems to keep going down every day, week after week. It is depressing for us too – and it is in fact our longevity in this business that keeps us focused, looking for new green chutes and continuing to develop our medium-term outlook for the economy and the stock market.

It is important to keep things in perspective, and while we cannot affect daily market conditions, what we can do is look to historical periods and acknowledge that being proactive helps us prepare for times like these. To that end, as many of you know that have followed our writings over the last twelve months, we have always said that inflation was NOT going to be transitory. While we were an outlier opinion at the time, it was with that conviction that we started preparing clients as we could; holding more cash, taking some money off the table in “consumer cyclical” types of holdings, and developing a thesis of “what next”.

And now we are at that “what next” fork in the road. There is no doubt the price of oil continues to have a meaningful ripple affect not only on the price of gas, but all of the activities that correlate to gas prices. But of course, as we are pounded by the media every day, we must acknowledge the role of covid-induced Chinese lockdowns affecting the supply chain. The trillions of dollars of liquidity thrown at the markets during covid have created some of these demand side issues as well. And then, let’s throw in the mix the poor timing of government trying to push an overly aggressive “green agenda” at the most delicate time just as the world was trying to find its footing on the recovery from covid shutdowns, and the shocks to consumers, manufacturing, financial institutions, etc. All of these (and I’m sure we missed a few) factors are leaving us with a persistent inflationary environment. And, as a result, the Fed, as we have been expecting, will now turn aggressive to counteract inflation using their biggest tool, which is raising the Fed Funds rate.

We have included here a calendar of June economic numbers due out that should prove to show a trend of some kind. This Wednesday, we expect a 75 bps move higher in the Fed Funds rate, and we won’t be surprised that the “short” interest investors (investors shorting stocks) that has dominated the markets over the last several days all close their positions, knowing that Wednesday whatever the Fed does, will in some regard be viewed positively. Why? Because it means they are finally doing something about core inflation.

Money Matters

The tea leaves of the bond market tell us this by the move higher in the rate of the 2-year Treasury over the last couple of days, and of course the 30 year treasury also showing very little movement over 3%. Both of these items together signal that bigger Fed fund increases are coming so that we are closer to 3% in the next 12 months, but that it will be a short-lived trip higher on rates because the 30 year is showing us virtually a core rate of zero, with simply the 3% representing the Fed’s new stated core inflation rate.

So, the moral of the story, of course, is don’t fight the Fed. What does that mean? It means let’s just be a bit patient, sit in more cash and fixed income, consumer staples, fossil fuel / minerals, but with the understanding that this inflationary environment is going to soon come to a screeching halt in our opinion, very quickly, and that by year end, we will be seeing more signs another 180 degree turn with rates going lower in the near future as a slowing economy will need some tail winds. The current yields on bonds, particularly investment grade, with five year or less maturities is very attractive because we view this as a fairly short (i.e. 6 month) window of opportunity to grab some decent coupons before the Fed has to lower rates again and we go back to getting zero sitting on cash in bank accounts.

We also want to point out that there are some very different under currents going on in the world now that did not exist in 2008-2010 or any other previous recession / inflation / deflation dynamic. We count several of these factors as the aging baby boomers, which means a smaller workforce, the use of technology to leapfrog over and supplement that smaller workforce, and trends taking hold in decentralized finance – not just cryptocurrencies (which we are not a fan), but more importantly the concept of blockchain technology which in our view is going to be the biggest disruptor to everything from banking transactions, investing, real estate transactions, and virtually every sort of written legal contract. This is at the core of why we think the supply chain issues, in the medium and long term, are going to dissipate, and we will be left back to a world adapting to the positive aspects of how technology can give people more autonomy, transparency, and control over their own destiny.

Finally, we point out these two charts, which we liked from the respected Dr. Ed Yardeni, economist extraordinaire. The charts below show that the growth rate in the total assets of the Fed, the European Central Bank (ECB), and Bank of Japan (BOJ) all are actually leading indicators for S&P 500 revenue growth and the yearly percent change in the S&P 500. Interestingly, despite what the Fed has said, the combined balance sheet growth rate was down to only 1.0% at the end of May – despite their proclamations they were pulling back more aggressively. And so this points to slower revenue growth.

Money Matters

The S&P 500 being down since the beginning of June actually may be the signal that investors have already discounted the end of quantitative easing and maybe also the beginning of quantitative tightening. Remember, that balance sheet tightening along with rate hikes will be a double whammy to combat inflation very aggressively. This will be a good thing!

If you would like to talk to someone more about this, start the conversation by contacting Sally Lawson, Senior Vice President of Malvern Bank. You can reach Sally at 610.695.3651 or SLawson@MyMalvernBank.com.

Sincerely,

Anthony C. Weagley
President & CEO
Malvern Bank, National Association
Beyond Your Expectations ™
Office : 610.644.9400

*Bell Rock Capital, an SEC Registered Investment Advisor, is working in affiliation with Malvern Bank, NA. Products offered are not insured by the Federal Deposit Insurance Corporation (FDIC) or any other federal or state deposit guarantee fund or other government agency; Not endorsed or guaranteed by the bank or their affiliates; and are not deposits or obligations of the bank and are not guaranteed by the bank, and are subject to investment risk, including potential loss of principal.

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