Top Gun
During the pandemic, it was thought many aspects of our previous “normal” lives may never return. Fortunately that has proven to be untrue which is why many people are excited to once again see movies in theaters. One of these happens to be “Top Gun: Maverick,” the widely anticipated sequel to the 1986 movie “Top Gun.” The premise of the original movie, besides being a great recruiting video for the U.S. Navy, is that an overly confident young pilot who is willing to take risks comes to realize he needs to make better decisions since those decisions tend to put himself and others around him in danger. As his call sign, Maverick, implies, he does not always follow orders and often does what he thinks is best. While very talented, his actions sometimes have undesirable results. Eventually he learns to make better decisions and be a better member of his squadron. Investors in the stock market often follow the same path – they take unnecessary risks in hopes of having outsized results. Wise people learn from this and become better investors, often taking less risk but seeing better long-term results.
The stock markets were not able to follow-through from the prior week’s strength and despite a decent rally on Thursday ended with slight losses for the holiday-shortened week. The major economic event was the employment report on Friday which showed that employment remains solid and job growth continues. It can be argued that much of the job growth is recovery from the pandemic versus new jobs being created as a result of economic expansion but regardless of the cause, it is a promising sign that employment remains strong and the unemployment rate remains low at 3.6%. Reported yearly wage growth for hourly workers, reported at a year-over-year increase of 5.2%, still lags inflation. This demonstrates why many families are having to cut back on discretionary spending since they need more of their paychecks to cover essentials such as food and energy.
Also of note last week was the Conference Board’s report on Consumer Confidence which surprised to the upside. This survey is slightly different than the University of Michigan Consumer Sentiment survey since the Conference Board’s survey is focused more on employment and business conditions while the University of Michigan survey covers personal finances and buying conditions. Therefore, the latter is more susceptible to higher gasoline prices and would explain why we are currently seeing a divergence between the two. Employment remains strong but consumer spending is changing, which will have ramifications for the economy in the months to come since consumer spending makes up roughly two-thirds of GDP.
Danger Zone
The market pullback which has occurred thus far in 2022 is now being referred to as a “reset” primarily because stock valuations have fallen from lofty levels and are now more in-line with longer-term averages. However, using the same metrics, stocks are not yet undervalued. With inflation remaining near mutli-decade highs and the Federal Reserve expected to continue to raise interest rates, while also reducing their balance sheet, headwinds continue to exist for the markets.
And since many risks remain, this is a good reminder there is generally more downside risk to markets when they are trading near highs versus when they pull back. However, there still is potential for markets to move even lower and even though an asset, such as a stock, falls in price, as many stocks have, that does not mean it cannot fall further. There are always risks in the market, some of which can be easily identified while others seem to come out of nowhere and surprise us, often referred to as “Black Swan” events. The best thing to do is provide some protection for your portfolio for such events. This can come in the form of diversification, not only for your assets but also for your income streams in retirement.
Looking Ahead
The coming week brings the Consumer Price Index (CPI) report which has perhaps become the most watched economic release given the current state of inflation. It is anticipated to show price increases of a little more than 8% over the previous year, remaining close to 40-year highs. The Federal Reserve meets again in two weeks where it is highly anticipated they will raise short-term interest rates by another half percent.
As we begin the summer months, we continue to look for a trend in the markets. Will it regain some stable footing and improve or are we destined for another leg lower? As we have been saying lately, there are just as many, if not more, reasons for the market to move higher than for it to move lower so we would not advise betting against it. Regardless of what happens, especially whether or not we enter a recession, there is little doubt that the economy and markets have changed and will be different over the next several years.
When it comes to meeting your goals, you don’t have to be the “Top Gun” or the best of the best. There is no need to try to time the market perfectly or feel the need, the need for speed (to steal a line from the movie). To be successful, you simply need the patience to execute a solid plan in a disciplined manner. Do not let emotions and short-term market fluctuations alter your long-term view and objectives. Please contact us should you feel continuing angst with the market or want to ensure you have a solid plan in place for a high probability of success.
Have a great week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
Secured Retirement
nzeller@securedretirements.com
Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.
info@securedretirements.com
Office phone # 952-460-3260
