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Is the Fed Really This Hawkish?

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Fed presidents sound hawkish … Luke Lango believes it’s a poker face … Louis Navellier’s take on last Friday’s soft economic data … how to invest in oil and tech together

The various Fed presidents either have zero faith that lower inflation will continue…or they have the best poker faces ever.

Take Atlanta Federal Reserve President, Raphael Bostic.

Last Friday, we received encouraging data about wage gains (and by extension, inflation) that should have at least caused the Fed president to crack a smile.

As we reported in the Digest, the latest numbers showed average hourly earnings rising 0.3% for the month and 4.6% from a year ago. This was lower than the estimates of 0.4% monthly growth and 5% yearly growth.

This was welcomed news for the Fed because wage gains add to our inflation woes. This data is exactly what the Fed wants to see.

So, it should have sparked some sort of mildly optimistic comment from Bostic, right?

Here was his take:

It doesn’t really change my outlook at all.

I’ve been looking for the economy to continually slow from the strong position it was at in the summertime. This is just the next step in that.

We’ve got to stay the course. Inflation is too high. We need to reduce those imbalances so it moves more rapidly to our 2% [inflation] target.

How investors interpret this type of comment creates a fork in the road for bulls and bears

Bears are more inclined to take such comments at face value. Bulls believe it’s posturing, just a fantastic poker face masking what will soon be a pause in rate hikes from the Fed.

Our hypergrowth expert Luke Lango falls into the second camp. Here he is from one of his recent Early Stage Investor Daily Notes explaining this perspective:

…Everything except the Fed’s own rhetoric strongly suggests a pivot is coming in the first quarter of 2023.

That is, all of the incoming economic and financial market data strongly suggests that the economy is slowing, inflation is crashing, the labor market is starting to crack, and the Fed will pivot within the next three months.

Yet, the Fed continues to play “tough guy” by pointing toward further rate hikes in 2023.

To be clear, this is exactly what the central bank should be doing. It needs to talk tough in order to ensure that rate hikes work.

So, Luke isn’t buying this hawkishness from Bostic or any of the other Fed presidents.

In fact, he’s adamant that a Fed pause is coming in Q1. Here he is from last week, detailing what he sees happening in the wake of that pause:

…The Fed will inevitably end its rate-hike cycle within the next few months. As inflation falls and the economy slows, it will stop hiking interest rates.

This so-called “Fed pause” is very bullish for stocks. In fact, Fed pauses systematically spark stock market booms.

That is, every single time the Fed has paused a rate-hike cycle over the past 50 years, it caused a big stock market melt-up.

Legendary investor Louis Navellier also believes we might be seeing some Fed posturing today

To unpack this, let’s start with the “terminal rate.” That’s the name for the eventual peak rate we’ll see from the Fed.

At the Fed’s December meeting, members surprised Wall Street by raising the expected terminal rate from where it had been in September, 4.75%, to an upper range estimate of 5.25% (today, the Fed’s target rate is 4.25% – 4.50%.). If you recall, this resulted in a panicked selloff in the market.

Well, last week at least one Fed president suggested the terminal rate will go even higher than 5.25%.

For these details, let’s turn to Louis’ Platinum Growth Club Market Update Podcast from last Thursday:

So, we had the FOMC minutes come out [last week], and it shows that 17 of the 19 FOMC members are expecting 5% interest rates this year. It also implied that they’re not going to cut rates this year.

And Neel Kashkari, who’s the Minneapolis Fed President, came out with an essay, and he thinks rates will go to 5.4%…

Sounds bad, right? After all, a climb to 5.4% would mean nearly another 100 basis points of hikes from here.

Well, based on last Friday’s soft wage growth numbers as well as the contraction in the services industry, Louis is skeptical this will happen.

Let’s pick up with his Platinum Growth Club Market Update Podcast from Friday:

There’s a lot of gossip on Wall Street that the Fed might only increase rates 25 basis points on February 1st instead of 50 basis points, due largely to falling treasury bond yields.

It’s very clear that as soon as Wall Street realizes that the Fed is going to be done raising rates, we’re going to take off.

But what if the Fed isn’t showing us a poker face? What if the terminal rate really is 5%+?

Well, fortunately, Louis believes there’s one corner of the market that’s going to treat your money well regardless of what we see from the Fed…

Energy.

Last week, Louis held a live event called the Big Energy Bet to detail what he believes is the best opportunity available to investors today

From Louis:

The reality is that there’s a big opportunity brewing in the energy sector.

While it began soaring in value in early 2022, I believe oil and gas companies will continue to boast record quarterly results for the foreseeable future.

In fact, I believe the energy bull market that’s coming is going to be the biggest one to date.

On that “quarterly earnings” note, we begin Q4 earnings season this week when the big banks report.

Analysts are calling for underwhelming results – except from the energy sector.

Here’s Louis with those details:

It’s no secret, earnings season is my favorite time of year. It’s when we get to separate the weak from the herd – and when investing in fundamentally superior companies truly pays off.

What this means is that we have to remain laser-focused on companies with superior fundamentals in order to be successful. And, right now, that’s in the energy sector.

Consider this: FactSet currently estimates that the S&P 500 will report an earnings-decline of 2.8% in the fourth quarter, while the energy sector is still expected to post earnings growth of 64.4%.

Without energy, the S&P 500’s earnings decline would be even bigger, at a 7.3% drop.

That’s great news for energy stocks.

Outside of energy, there are no sectors in the S&P 500 that are forecasted to post positive earnings growth, so it is slim pickings out there when looking for stocks with strong sales and earnings.

If you missed last week’s live Big Energy Bet broadcast, you can watch a free replay right here.

Now, Luke is very bullish, primarily on tech stocks, and Louis is very bullish on oil stocks…is there a way to have both?

Yes, and ironically, it’s Eric Fry who gives us one idea for how.

Some of today’s leading technologies come from the green energy sector. For example, Luke is bullish on hydrogen.

But how do you combine cutting edge green technologies with the profits from “old school” fossil fuel oil and gas companies?

Well, one option is to look to one of Eric’s top picks for 2023 that integrates both – TotalEnergies (TTE).

From Eric:

This French multinational energy firm integrates “Old Energy” and “New Energy” to cover every major facet of the industry – from oil and gas to renewables like solar, wind, and green hydrogen.

This flexibility and its diverse revenue streams make TTE a standout among energy companies; its portfolio stands to make it a star in the entire energy sector.

Eric explains how TTE has exposure to solar power thanks to a stake in SunPower, which is a leading U.S. manufacturer of solar panels. Plus, earlier this year, it made a commitment to invest $50 billion in green hydrogen and other renewable energy sources, like wind power.

This gives it the tech exposure that Luke likes. But its traditional oil and gas revenues mean it will benefit from the fossil fuels bullishness that Louis likes.

For more of Eric’s research in Investment Reportclick here.

Coming full circle, we have two potential “poker face” moments for the Fed this week

The first one comes tomorrow, when Federal Reserve Chairman Jerome Powell delivers prepared remarks at a congressional hearing.

After that, the next opportunity comes in the wake of Thursday’s latest Consumer Price Index data.

Current estimates call for continued cooling, specifically, a monthly increase of just 0.1% and a yearly increase of in the mid-6% range.

If that happens or the data come in even softer, will we finally get some encouraging comments from presidents like Bostic and Kashkari? We’ll keep you up to speed.

In the meantime, if you’d like to sidestep the Fed drama completely while remaining in the market, check out Louis’ research on the energy sector.

Have a good evening,

Jeff Remsburg