Trust in God and Keep Your Powder Dry

Dear Reader,

The adage: “Trust in God and Keep Your Powder Dry” links back to Oliver Cromwell during the English Civil War and his campaign in Ireland.

The quote first appeared in William Blacker’s “Oliver’s Advice” poem in 1834. I’m not asking you to do the former…

That’s on you.

But the latter part of this quote is critical right now.

In the military, the term “keep your powder” dry centers on a soldier’s preparation to save resources until it’s time to fight (and to literally keep it dry, since you can’t fire wet gunpowder.)

That term has made its way to finance over the decades. The idea of “dry powder” refers to cash and liquid assets that can sit on the sideline – waiting to be deployed at any time.

This might be the most important time of the year to be liquid (NO, wait… dry). NOW I’M CONFUSING MY METAPHORS.

May Brings Flowers, Fear, and Fomo

I’m not much of a military history buff, though I did spend an entire course at Hopkins studying military strategy. I can look at a painting from the Napoleonic Era and tell you the rank of nearly every soldier. I’m not sure that’s much of a life skill…

But I did spend the better part of my time learning about the Federal Reserve (economic strategy) and anomalies in the market.

These anomalies include momentum – a measurement of capital inflows and outflows of the market weekly and daily. When momentum turns negative, we move heavily to cash.

We keep our powder dry.

Over the last year, we’ve been able to avoid significant selloffs linked to negative momentum cycles. Those include the June 8, 2022 collapse fueled by the largest selloff among hedge funds in 15 years.

It avoided the six-week-long decline from April 6 to May 24, 2022. It avoided the December 12 selloff fueled by tax harvesting.

When momentum turns positive again, we’re happy to buy back in with index funds and stocks with strong growth.

When momentum turns negative, we turn to cash or we use inverse funds as a hedge against any downturn. (We continue to hold a hedge in the Tactical Wealth Investor portfolio today.)

Time to Be Cautious?

A very busy calendar this week has many investors on edge.

First, the Federal Reserve will hold its Fed Open Market Committee (FOMC) meeting on Tuesday and Wednesday. Markets have priced in about an 89% probability of a rate hike of 25 basis points.

Most people believe this will be the last rate hike of the cycle. However, I have a hard time believing that the Fed will end its rate hikes if data suggests continued wage growth or concerns exist about a resurgence of household expenses in energy and housing.

Then on Thursday, Apple will report earnings. As I noted Friday, Apple is the market. It represents 7.2% of the weight on the S&P 500. It’s 12.6% of the Nasdaq 100. And it’s a leading component of more than 400 ETFs.

So, when Apple sneezes, the U.S. markets catch a cold.

But Apple and the Fed aren’t my focus this week.

My focus is Friday.

Beware the Wage Number

On Friday, we’ll receive the April jobs report. And it should be quite a development.

Remember, most of the tech jobs that have evaporated still won’t show up on this report. Most companies paid at least two to three months severance – and a lot of workers went out looking for work.

The unemployment rate itself is meaningless at the moment.

It’s the wage growth figure. That number has been increasingly sticky. It’s not falling – and Americans are still demanding higher salaries to keep up with the rise of inflation.

There’s an odd divide within the Fed around wage increases over the last month. Fed Chairman Jerome Powell has said that pay gains are fueling inflation.

Other leaders disagree. Fed dove Austen Goolsbee in Chicago, and hawk James Bullard in St. Louis have downplayed the threat.

Now, my nameplate isn’t on the door at the central bank, but I have enough common sense to disagree with Goolsbee and Bullard.

The wage issue IS a threat – a persistent one.

In fact, in Europe, wage growth remains a driving factor that has many economists on edge.

The Bank of England’s Chief Economist just publicly told Britons to stop demanding higher wages and understand that their economic plight will continue.

The Fed will not be able to reach its target of 2% without seeing wages cool. JPMorgan Chase & Co. economist Murat Tasci said that this Friday’s event is a “much-needed additional signal about the state of wage inflation a year into the Fed’s tightening cycle.”

If we want to know the Fed’s true plans, pay close attention to Powell’s statement on Wednesday. Expect the market to react to the wage growth figures at the same level that Powell stresses it during his speech.

To your wealth,

Garrett Baldwin

*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.

Market Momentum is YELLOW

Momentum is positive in S&P 500 right now, and it’s quietly squeezing a bit higher. It can be a challenge investing in this environment as we move toward Wednesday’s rate hike. We’re starting to get back to the point where we were in August. It feels like this market could fall very sharply on Wednesday. Keep your powder dry, and take gains as they come.

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