Good News JUST Came Out | Time to Get Back into Stocks?

Hey everyone, me Kevin here. So this

morning we got some good news. But

before we talk about that good news, I

just want to clarify something that left

some folks confused. So I've said many,

many times before that the Federal

Reserve does not care if stock prices go

down to the extent that they don't

affect inflation or jobs. And this is

true. If we have plenty of jobs that

people can get and inflation is very

high, the Fed doesn't mind fighting

inflation. Even if that means taking a

little bit from the jobs bucket because

we got plenty of jobs. fighting

inflation to bring that inflation down.

And at the same time, if that means

stock prices decline because valuations

are compressing, that's okay as long as

it happens in an orderly manner. What

matters to the Fed solely is employment

and inflation. Now, some folks got

confused this morning, and then we're

going to talk about the good news that

came out. Some folks got confused this

morning when I said the Federal Reserve

is not trying to shock markets. And so

folks are doing the usual, oh, here's

Kevin flip-flopping again as usual. And

this is unfortunately the fifth grader

mentality. The fifth grader mentality in

investing is, wait, you said the Fed

doesn't care about stocks, but now

you're saying the Fed cares about the

market. Which one is it? Okay, fifth

graders, time for a very simple lesson,

and we're going to get on to the good

news. Very simply put, the Federal

Reserve does not care about prices

trending down. They care about dealing

with inflation and jobs. And if that

means they have to hike rates to 2% or

3% this year and potentially next year,

then they will do that. Even if that

means we'll have less cheap money to buy

stocks, people will be less incentivized

to hold margin or debt, which means

they'll have less money available

potentially to put into stocks, which

means aggregate stock prices could come

down. As long as that is the case, the

Fed doesn't care. The Fed does not care

about stock prices slowly coming down.

Their job is not to prop up stock

prices. This is different from shocking

the market because if you shock the

market because let's say the Federal

Reserve comes out and says we're raising

rates to 2% today and all of a sudden

banks are like, you know, you see the

Dow and the S&P drop 10%. And it's not

so much the implication of just the

values coming down, but it's what

happens after that. This is the

important part. financial stability gets

shaken. Banks start freezing credit

lines, start freezing lending, stop

lending on mortgages or autos because

banks are like, "Okay, oh my gosh, so

much has changed so quickly. Everything

freeze and then you stop the economy for

days to potentially a few weeks." And

when you do that, then you really kill

earnings at companies and then you

really kill the stock market. So for the

fifth graders in the comments who like

Kevin sounds like he's slip dapping

again. Don't watch this channel if you

can't handle nuance. If you don't

understand nuance, go to the channels

that just want to overly simplify things

for you. That would rather give you a

simplified explanation and let you know

that everything is okay and then jump

onto the popular bandwagon and go

everything's going to be fine. I'm a

long-term investor. If you don't want to

hear what's actually happening, don't

watch this. All right. Now, let's talk

about some good news. So, we had a uh

survey that just came out. It is the New

York Fed survey on consumer inflation

expectations. It is the first time that

we've actually seen the outlook fall

since October of 2020. Uh this is a big

deal. The 1year, that is a medium-term

expectation, is that inflation will go

down to 5.8%

in about one year. The outlook for three

years dropped even more sharply and was

the largest decline that we've seen in

inflation expectations on the

three-year. We had a 2% decline in the

one-year expectation, a.3% decline on

the three-year and uh I'm sorry, a.5%

decline on the um 3year and a 2% decline

on the five. And so uh what this is

suggesting is is actually important. Now

uh before I talk about what the

importance of this is, there are a

couple things a couple sort of baseline

things to understand. First very very

simple takeaway here is that the overall

trend of inflation expectations has been

going down since 2014 uh at at least

what we're seeing in the surveys from

the Federal Reserve here. This makes

sense. I drew the purple lines by the

way. Okay, I just spit over the purple

lines here to kind of show roughly the

trend that we're seeing. It's worth

noting though that consumer expectations

can vary very quickly. So, if you take a

look over here at this blue consumer

expectation from the New York Fed, this

skyrocketed on forward inflation

expectations when recent news came out

about inflation coming out because of

the Delta variant, right? But I want to

show you something else that's really

really important here. Uh, and I think

it's useful because it's critical to the

Fed. But first, I just quickly want to

take a look at this. This is quite

useful. So if we go to right here, we

see that quote, we find that over the

past two years, consumers

shorter horizon expectations have been

highly attuned to the current inflation

news. So in other words, the one-year

inflation expectations are very

responsive to the inflation data and

news that's coming out. However, the

longer term stuff like the 3year

inflation expectation is a lot less

sensitive to what's happening in the

news today. Now, the three-year is the

one that just went down.5%.

Uh that's the one that that had the

largest drop we've seen. Really, really

good. Now, what I love about this is

what it means for the Federal Reserve.

The Federal Reserve is doing one very

important thing. They are trying to do

something known as control

[clears throat] inflation

expectations.

Now they could do this through their

meetings, through their talk about

policy actions or whatever, right? And

controlling inflation expectations is

very important because when inflation

expectations become entrenched to the

upside, then what happens? If people

think that prices are going to go up,

they'll spend more money today, which

has the effect of driving prices up,

which then reiterates people's belief

that, aha, see, prices went up. I

thought they'd go up, and sure enough,

they're going up. And so, what then

happens again? People spend more money

today, which again drives inflation

higher and higher, and you end up

getting this this crazy spiral here. And

this is what the Federal Reserve is

trying to control. So the Federal

Reserve with this latest survey

depending on of course what CPI does on

the 10th might be inclined to continue

to take the soft slow approach of

raising rates. Now the downside of

taking this soft and slow approach is if

they are too far behind then at some

point they might have to U-turn and

become a lot more aggressive kind of

like they did in December. But if

they're right and inflation expectations

going down actually signals that

inflation is somehow peaking and maybe

we're finally getting to that apex, then

the Fed will be correct. That means the

Fed will be proven right and that they

will be able to take a slower rate hike

approach. If the Fed can take a slower

rate hike approach, stocks go up and

that would be very good. No guarantees,

but that would be very, very good.

[laughter]

Anyway, uh this gives you a little

insight here. Feel free to check out

Extra via the link down below. And of

course, check out the programs linked

down below with my private course member

live streams every day the market opens

up. Uh and use that V-day coupon code.

Thanks so much for being here and we'll

see you in the next one. Bite.