Clint Eastwood said it memorably: “Do you feel lucky?” Now, superimpose Fed Chairman Jerome Powell’s stern visage squinting at the markets and asking that question.

It’s a message to stock market bulls who started out the year in euphoria, believing the Fed was about to declare victory over inflation — and might even be forced to pivot and cut rates mid-year in acknowledgment of a slowing economy. In January, the S&P 500 stock index gained over 6% in just one month (trimming some of its 18% loss from last year).

Bulls hoped the rate increases are nearly over and inflation has been tamed. But the economy isn’t rolling over. In fact, recent economic reports show that consumer spending is strong, although credit card balances have risen to a record of nearly $1 trillion. Housing prices have not collapsed, despite higher mortgage rates.

Unemployment remains low, despite layoffs starting in the tech industry. Employers are looking for workers. And now wage increases are starting to cut into profits of companies like Home Depot, worrying the market.

Most importantly, inflation is not coming down nearly as fast as the Fed was hoping it would. With every new inflation report — consumer prices, producer prices, personal consumption expenditures — inflation shows surprising strength.

The good news is bad news. If the economy stays strong, the Fed must keep fighting inflation. And their most visible method is to raise interest rates, while also draining some of the liquidity out of the system — money that was poured in during the pandemic.
Finally, the stock market is coming to recognize that the Fed — though late in getting started — remains very serious about squelching inflation.

Some might be asking why inflation is so scary, why the Fed is being so aggressive. For those who can earn extra money to keep up with higher prices, the impact is not so immediate. But over the long run, inflation can be devastating for your personal finances and for our country.

The best illustration of this long-term impact is the “Rule of 72.” It’s a financial “magic trick.” Divide any number into 72, and the result is the amount of time for that number to double — or in the case of inflation, to be cut in half. For example, if you have 3% inflation, the buying power of your dollar will be cut in half in about 25 years.

But if you have 7% inflation (about where we are now), your buying power will be cut in half in 10 years!

Anyone living on a fixed pension, or unable to negotiate a raise, will be devastated. And no foreign central bank or smart investor would lend money to the U.S. government to finance its $31 trillion deficit, knowing the dollars it gets back in 10 years would be worth 50% less. They’ll demand higher interest rates to compensate — destroying our economy and increasing our Federal deficits.

Your investment strategy
Higher rates are ahead. That’s good news for savers, who can now earn more than 5% on six-month Treasury bills. (See the article “How to Buy Treasury Bills” at TerrySavage.com.) But it’s bad news for the stock market. Why take the risk of owning stocks if you can get such high rates on safe investments?

That doesn’t mean you should sell your stocks. They are a great “hedge” against inflation — over the long run. According to the Ibbotson market historic statistics, there has never been a 20-year period in the last 100 years where a diversified portfolio of large American companies (with dividends reinvested) has lost money — even adjusted for inflation.

Still, higher rates do provide stiff competition for stocks. And since we are coming off a decade of historic overperformance, returns might be skimpier in coming years. That is no reason to panic every time the market has a dramatic one-day reaction to the latest inflation news. If you’re an investor, not a trader, stick with your balanced and appropriate plan.

These days, your “chicken money” hiding safely in Treasury bills is rewarding your self-discipline. But stocks are still best for the long run. And that’s The Savage Truth.