April 10-14, 2023

Although it was a four-day week, major markets for both stocks and bonds gained momentum in expectations the Fed will pause on interest rates tightening, with all economic releases the past week pointing to a slowdown. Sowell’s technical signals remain neutral (60/40), awaiting this week’s muchanticipated inflation report and bank earnings. Getting ahead of this Fed is like playing with matches.

We saw the fourth resilient week of positive gains for U.S. equities on the heels of a regional banking crisis, a quarter percentage point rate hike by the Fed, the indictment of Former President Trump, and last week’s weakening economic report since March 10. Manufacturing, construction spending, factory orders, job openings, services, and jobless claims unanimously pointed to weaker-than-consensus estimates, and an economic slowdown is imminent. Investors’ 20/20 vision is now charted towards the FOMC’s posture towards interest rates, especially since we are closer rather than further from the Fed’s resistance level of price stability. The bond market posted another week of gains as yields in longer-maturities continued to narrow in fears of a recession. As the Fed jostles with interest rates, it must balance the need to slow the “current” inflation environment while having a long-term position of economic growth and prosperity – a normal upward-sloping yield curve. This presents inherent indecision and duration risk in bonds.

This week will certainly be all about the core inflation report in anticipation of the Fed’s next move and highly anticipated bank earnings being released. Other key economic indicators indicative of Sowell’s strategic positioning include Industrial Production, Business Inventories, and Retail Sales. Besieged First Republic Bank is expected to announce this Wednesday, followed by the nation’s largest banks like JP Morgan, Citigroup, and Wells Fargo, announcing on Friday.

“By making things smaller, everything gets better at the same time. The transistors get faster, the reliability goes up, the cost goes down, a unique violation of Murphy’s Law.” – Gordon Moore, co-founder of Intel, ASML interview, December 18, 2014. Source.

Electricity Tax is Around the Corner

According to Goldman Sachs Research, half of all vehicle sales are forecast to be electric vehicles by 2035, which is great for the environment and lower greenhouse gas emissions. They further forecast that global E.V. sales will reach 73 million units by 2040, with the U.S. accounting for 14 million units. Tesla’s current estimates are that a Tesla Model 3 Long Range with a 75kWh battery pack costs approximately $21 for a full charge ($0.28/kWh) at a Supercharging station – an annual savings of $700 estimated by Tesla. That is a huge cost saving relative to the price of gas, “fueling” the adoption of E.V.s even sooner. But consumers beware, “If it’s too good to be true, it probably is.”

Currently, California tacks on an additional $1.40 “per gallon” in fuel taxes and fees; the $1.40 per gallon includes 54 cents in state excise tax, 18.4 cents in federal excise taxes, 23 cents for California’s cap-and-trade program to lower greenhouse gas emissions, 18 cents for the state’s low-carbon fuel programs, 2 cents for underground gas storage fees, and an average of 3.7% in state and local sales taxes. California expects to raise $7.4 billion in budget revenue from its state excise tax to pay for road infrastructure and other government infrastructure projects. As the consumption of gas declines, so will the state and federal revenue to fund our transportation system. In 2020, Statista.com reported U.S. states and local governments collected $53 billion in gas tax revenue, and some of the top states are PA, CA, WA, IL, and NJ. Where’s the shortfall in gas tax revenue going to come from? Policymakers are already spinning their wheels, but rest assured it will likely come from an increase in the cost of your annual vehicle registration, driver’s license renewal, auto insurance, and last but not least, a tax on the energy that charges your E.V. battery and home, electricity! If E.V. savings now is too good to be true, it only means that you may consider buying an E.V. sooner rather than later to enjoy the benefits now before they disappear

Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.


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