Weller Group Week ending 11/10/2023

Presented by Weller Group

Markets

The S&P 500 increased +1.31% to close at 4358.34. Unlike the previous week when all 11 market sectors were positive, this week only 3 sectors were green (tech, consumer staples and communications).
Oil prices dropped from $80.89 to $77.35.
Key observation: The entire weekly gain for the S&P was from Friday alone. This is an excellent example of “time in the market” having more impact than “timing the market.”

Fed speak

On Thursday Jerome Powell (Fed chair) announced his future expectations for monetary policy (i.e., interest rates). While Powell is impressed with the health of the economy, he hedged by stating “If it becomes appropriate to tighten policy further, we will not hesitate to do so.”
During and following Powell’s remarks, markets dropped sharply throughout Thursday afternoon. However – evidenced by the significant rally on Friday – markets ending the week seemingly unconvinced the Fed will increase rates at the last 2023 Fed meeting in December.

U.S. debt outlook & ratings

On Friday (after the 4:00pm EST market close), Moody’s Investor Services announced a cut (i.e., reduction) in the outlook for U.S. debt. A reduction in outlook is not the same as a reduction in credit rating – Moody’s did not reduce their credit rating of U.S. debt.
In addition to Moody’s, S&P Global Rating and Fitch are the other major credit agencies rating U.S. debt. Presently, Moody’s is the only agency with a triple A rating. Fitch cut U.S. debt to double A in August 2023, and S&P cut and has kept the rating at double A since August 2011.

Money supply

Inflation could be defined as too much money and not enough supply of goods and services. The Fed has used various tools the past two years attempting to decrease money supply.
The most transparent tool is the public announcement of interest rate policy at the Federal Open Market Committee (FOMC) meetings. At each of the 8 FOMC meetings per year, the Fed announces whether the Federal Funds rate will be increased, decreased or remain the same (Reminder: last week on 11/1 the Fed Funds rate was not changed). Increasing rates lowers money supply; decreasing rates increases money supply. The massive interest rate increases throughout 2022 were the Fed’s attempt to decrease money supply.
A second Fed tool or strategy to control money supply is to either buy bonds or sell bonds. The Fed buys and sells bonds through banks and financial institutions. When the Fed buys a bond, the bank selling the bond to the Fed receives cash and the Fed receives the bond. This increases money supply in the banking system. When the Fed sells a bond to a bank, the bank delivers cash to the Fed. This decreases money supply.
A third Fed tool is the reverse repurchase (repo) facility, where the Fed takes in cash from banks and financial firms and pays those parties an interest rate that is purposely tied to the Fed’s target for the Fed Funds rate (that same interest rate discussed in the first point of this section). The following is an indication that the Fed’s objectives are heading in the intended direction: Money flowing into the reverse repo program has decreased below $1 trillion for the first time in over 2 years (after peaking at more than $2.5 trillion in December 2022). Fed reverse repos fall under $1 trillion for first time since August 2021 | Reuters
Key point: to decrease inflation, money supply needs to decrease and/or the supply of goods and services needs to increase. The Fed can’t control the supply of goods and services; however, the Fed can and does control money supply.

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