The Federal Reserve has raised interest rates at six consecutive Federal Open Market Committee meetings June 30 to Feb. 2, having raised the Fed Fund rate from 1.00 percent to 2.50 percent.
In the six Fed tightening cycles since 1970, one year after the first tightening, the S & P; 500 index has fallen on average 6 percent. On June 30, 2004, the S & P; 500 Index closed at 1140.84. Hence, we expect a 6 percent decline from 1140.84, which would take the S & P; 500 index to 1072.39 between now and the end of the year.
As a result, we have sold short 100 shares of the Standard & Poor’s Depositary Receipts, or Spiders, which trade at about one-tenth of the value of the S & P; 500 Index. We hold no other positions in equities or bonds at this time.
Consumer spending accounts for two-thirds of all economic activity. Here in San Diego County, the median price of an existing home sold has fallen from an all-time high of $525,000 in August to $478,000 in January, according to DataQuick. If one’s home were to become merely their home and not their cash box, could it mean that consumer spending could slow down? Could some kind of economic slowdown in the U.S. economy emanate from the southwest-most region of the continental United States?
We respect the power of the Federal Reserve and its effect on the U.S. economy and its markets. We believe that the Fed recognizes the buildup in commodities inflation. We believe now is not the time to be dissin’ the Fed by holding U.S. equities and bonds as the Fed continues in tightening mode.