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Writer's pictureMatt Schreiber

Blistering Hot Q4 GDP will Force Fed to Stomp on the Brakes

The good news is fourth-quarter GDP set a blistering pace of 6.9% lifting 2021’s full-year growth to 5.7%. The bad news is the economy is running hot and exceeding growth expectations. Now the Fed has a clear path to boldly raise interest rates to fight inflation. Fed Chair Powell has indicated a drop in markets won’t cause him to reverse course this time. He believes this strong trending economy can withstand a rate hike cycle without falling into a recession. The Goldilocks scenario is called a soft landing.

A Word of Caution

Boy, that sounds good, doesn’t it? A word of caution. Under these circumstances, the Fed has never engineered a soft landing without pushing the economy into recession and cratering the markets. In the past, the Fed has raised rates too aggressively and for longer than necessary to curb inflation. Each rate hike takes about six months to work its way through the economy. Yet, the Fed will likely raise rates at each quarterly meeting at a minimum.

The compounding effect of serial rate hikes on the economy is like pumping the brakes harder and harder on a car to slow down. Each hike slows the economy until the combined effect stops growth altogether. And if the economy is not growing, it will likely be contracting. The robust consumer spending we have enjoyed over the past ten years has been built on the back of zero interest rate policy. It’s cheap to borrow. In addition, the Fed and the government have pumped cash into consumers’ pockets with QE and fiscal stimulus. SO not only is the Fed taking away the zero interest punch bowl, but they are putting a hard stop to their QE balance sheet expansion at the same time. The net effect will be a constrained consumer who normally drives 70% or more of our economy.

Investors Typically Seek Value in a Downward Trend

The direction the markets take as the Fed shifts from policy accommodation to tightening seems pretty obvious. Just in case you are still wondering — that would be down. The Fed is way behind on keeping inflation under control, and they will respond by playing catch up. I’d expect a 50 basis point rate hike in March with more to follow. Investors have already started to react by selling the most overvalued growth stocks and rotating to reasonably priced value stocks. We have found investors prefer high-yielding dividend stocks even more under these conditions. In the Dot.com bear market, higher-yielding dividend stocks defied the harsh 50% or 80% corrections by the S&P 500 and NASDAQ, respectively, by posting positive returns. Hold it, did you say positive returns?

At WBI, we are the “Dividend Guys”. We actually wrote the book on dividend investing for McGraw Hill. We also built Cash Hedge Pro™, a cash hedging management system to help investors stay comfortable by reducing loss and risk to capital in bear market cycles. Dividends and capital preservation are winning combinations to allow investors to have the dry powder/cash to reinvest when the next bull market trend emerges. Losing small in bear markets is also critical for retiring investors to prevent income portfolio failure. At WBI, we take our risk management role seriously. For four decades, investors have told us they are trusting us with the money they can’t afford to lose.

Unless otherwise indicated, the source for all price and index data used in charts, tables and commentary is Bloomberg.

The views presented are those of the authors and podcast participants, and should not be construed as investment advice. The authors, podcast participants, or clients of WBI Investments (WBI) may own stock discussed in these insights. WBI is an investment adviser in New Jersey. WBI is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. WBI only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of WBI’s current written disclosure brochure filed with the SEC which discusses among other things, WBI’s business practices, services and fees, is available through the SEC’s website at: http://www.adviserinfo.sec.gov. This site contains links to third-party websites. WBI does not endorse, approve, certify, or control these websites and does not assume responsibility for the accuracy, completeness, or timeliness of the information located there. Your access to and use of such websites is governed by the terms of use and privacy policies of those sites, and shall be at your own risk. WBI disclaims responsibility for the privacy policies and customer information practices of third-party internet websites.

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Unless otherwise indicated all performance is sourced from Bloomberg.

Disclosure

The views presented are those of the authors and webinar or podcast hosts/participants, and should not be construed as investment advice. The authors, podcast participants, webinar hosts, or clients of WBI Investments, LLC (WBI) may own stock discussed in these insights. WBl is an investment adviser in New Jersey. WBl is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. WBl only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of WBI's current written disclosure brochure filed with the SEC which discusses among other things, WBI's business practices, services and fees, is available through the SEC's website at: www.adviserinfo.sec.gov. This site contains links to third-party websites. WBl does not endorse, approve, certify, or control these websites and does not assume responsibility for the accuracy, completeness, or timeliness of the information located there. Your access to and use of such websites is governed by the terms of use and privacy policies of those sites, and shall be at your own risk. WBI disclaims responsibility for the privacy policies and customer information practices of third-party internet websites.

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