Savvy Investors aren’t Buying Fed Mixed Messages

Jerome Powell and the Federal Reserve Board may or may not raise interest rates in the next twelve months. That’s essentially the message we received after an exhaustive week of conflicting statements from the Fed Chair and St. Louis Fed President Jim Bullard.

The confusion comes as no surprise to savvy investors. When the Fed adopted a policy of Flexible Average Inflation Targeting (FAIT) in 2020, this should have been predicted. Policy makers are going to struggle as they strive to hit their inflationary target of 2%.

We’re in a unique situation right now. Post-pandemic economics are unprecedented, so there are no guidelines to work with. Is the inflation we’re seeing a temporary condition due to the reopening? Any answer to that is a guess. Don’t buy or sell based on that.

Jobs Data Looks Promising as Q2 Comes to a Close

Opinions are not facts, no matter where they come from. You can spend time stressing about hypotheticals or review some real data to make your investment decisions. Jobs reports are coming out this week and the numbers are exceeding expectations.

According to the US Department of Labor, the number of unemployment claims for the week ending June 26th came in at 364,000, lower than the projected 390,000. The previous week’s total was 411,000. The current national unemployment rate is 5.8%.

Meanwhile, a recent Dow Jones survey projects that 683,000 jobs were added in June. The exact number will be released on Friday, July 2nd. Today might be a good day to look at some options plays. I just bought a call on Palantir Technologies (PLTR) to break $25 tomorrow.

Preparing for the Inflationary Worst-Case Scenario

Let’s assume that inflation will continue, and interest rates will go up in 2022. Most advisors recommend going with a 60/40 portfolio, like the DFA Global Allocation Fund (DGSIX). That’s not my style, but I was pleasantly surprised that the fund is up 9.62% this year.

Under 10% is not enough for me. In a moment of clairvoyance, aka understanding market conditions, I bought the Vanguard Real Estate Index Fund (VNQ) back in January. It’s up 25.05% YTD. Property values and rental income tend to rise with inflation, so it was a safe bet.

Like the traditional 60/40 model, my portfolio is comprised of high and low risk investments, but I don’t buy bonds. The current yield on a ten-year treasury note is at 1.46%. 30-year yields are estimated at 2.072%. The Fed is working to keep inflation at 2%. Do the math.

For me, a low-risk conservative investment is a fund like the SPDR S&P 500 ETF Trust (SPY). It’s not a sexy choice, but it’s up 16.46% YTD with a five-year cumulative return of 104.59%. How many bonds do you have to buy to get that kind of return?

Investing in Precious Metals and Commodities Futures

Barrick Gold Corp (GOLD) is down 15.70% this year. Contrary to uninformed popular opinion, gold is not a hedge against inflation. The US hasn’t used a gold standard since 1971 and rising interest rates affect gold prices. You’ll lose money if you go the gold route.

For a truly “precious” metal, invest in Lithium. I’ve been bullish on Piedmont Lithium (PLL) since Tesla (TSLA) bought them in 2020. Their share price is up 167.02% this year. Ironically, Tesla is down 7.36% YTD, but I’m viewing that as a correction on an overvalued asset.

My final recommendation today is the iShares S&P GSCI Commodity-Indexed Trust ETF (GSG). Normally I’d put this in a higher risk category due to the volatility of commodities futures, but the economic reopening has been driving the price up. It’s showing a 32.68% gain YTD.

I spend a lot of time with self-directed investors and my advice is always the same. Don’t trade based on rumors and innuendo. That’s what the Fed is giving us right now. Use common sense to predict the market and do your homework by analyzing real data. That’s what I do.

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About the Author

Savvy Investors aren’t Buying Fed Mixed Messages

Kevin Flynn

A former financial professional and founder of AdvisorScale Financial Writing, Kevin lives in Leominster, Massachusetts with his wife Evelyn, two cats, and nine wonderful grandchildren.