retirementplanning

Coming Out of Hibernation

One adaptation that has evolved in some mammals is hibernation, which is a state of dormancy that allows animals to avoid periods of famine, such as over the winter when food is scarce. As the weather warms up here in the Upper Midwest and we are able to be outdoors more, we ourselves might feel as if we are coming out of our own hibernation.  Bears are especially known to be animals that hibernate.  We experienced bear markets in 2022, but 2023 is off to a much better start. Are the bears going to return to hibernation and are the bulls finally taking charge?

The gains in the stock market year-to-date (YTD) have been driven primarily by the Technology and Communications Services sectors.  It is the companies in these sectors that are also driving the strong YTD performance of the Nasdaq, but still not enough to bring it out of its bear market as it remains some 25% off its all-time high.  The forward price-to-earnings ratio of the tech sector remains elevated above long-term averages, but not yet reaching levels seen in 2020-2021, implying that either earnings need to improve or stock prices need to fall for prices to be more in-line with the historical norm.  There is no rule stating stocks must trade at a particular P/E ratio, but the sector again looks expensive, and we would remain cautious in this area until we see confirmation earnings are improving. 

Last week the S&P 500 and Nasdaq finishing slightly lower after three weeks of gains.  Concerns about growth moved back to the forefront during the holiday-shortened week amid a steady stream of weaker-than-expected economic reports.  While these seemingly firmed expectations for the Federal Reserve to pause its interest rate hikes at their next meeting in early May, at the same time they provided additional fuel for hard-landing and recessionary concerns.  Following recent stress in the banking sector, there have also been signs of weaker loan demand and tighter credit terms, which also are adding to the shift in sentiment. 

Despite those events, there are also advocates for a more bullish view.  Bank-crisis headlines appear to have stabilized and there are presently no indications of further contagion, but that does not mean we are out of the woods yet. The coming earnings season remains a big focus given expectations for a notable year-over-year drop in S&P earnings amid a softer economic backdrop and pressure from wage growth.  There is also a sense the bar for this earnings season has already been lowered. 

Goldilocks and the 3 Bears

Most everyone is familiar with the fairy tale “Goldilocks and the Three Bears” where a young girl, Goldilocks, enters the home of three bears, sits in their chairs, eats their porridge and sleeps in their beds. She tries the porridge of each, with the first being too hot, the second being too cold and the third being just right.

Last week’s jobs report could be considered a “Goldilocks” scenario that is “just right.”  Employers are adding jobs at a healthy, but more moderate pace. New workers are reentering the labor force, helping meet the demand for staff, resulting in wage gains normalizing.  If this is sustained in coming months this could lead to a not-too-hot or not-too-cold healthy labor market with steady job growth and low inflation.  The Fed has been looking for the labor force to come back into balance, helping subdue wage growth and inflationary pressure. 

After the employment reports were released, Treasury yields rose sharply, reflecting a sense that the continued robust job market implies tighter money supply. Stated another way, the jobs report provided further room for the Fed to continue raising interest rates and a rate hike in May now has a higher probability of occurring.  But we will caution many data points will be released prior to the next Fed meeting, including key inflation reports this coming week.  The central bank will be reluctant to back off its campaign to raise interest rates until there is clear evidence inflation is cooling significantly.

Looking Ahead

First quarter earnings season will get underway this week with big banks reporting results on Friday.  Investors are likely to turn their attention slightly away from Fed policy and towards the state of profitability in corporate America.  However, the most anticipated event of the week will be the latest inflation reading from the Consumer Price Index (CPI) on Wednesday, followed by the Producer Price Index (PPI) on Thursday.  CPI is expected to show prices being 5.2% higher than a year ago, a slowing in inflation from the 6% reported last month, but still much higher than the Fed’s 2% target.  The week wraps up with the monthly retail sales report on Friday, which will show the health of consumer spending. 

Current market expectations indicate about a 50/50 split in chances for a quarter point rate hike by the Fed in May, with odds of a hike increasing after last week’s jobs reports but very much subject to change as mentioned earlier.  Looking out further, markets are pricing in a pause at the June meeting with a quarter point drop in July.  Our thoughts are the market is not pricing probabilities correctly and absent a major unanticipated event, we highly doubt the Fed would raise rates and then begin to lower a few short months later. Not since the early 1980’s has the Fed not held rates at their peak for less than 6 months, often holding them for up to a year, before cutting.  And looking back to the early 1980’s when there were large swings in interest rate moves by the Fed, they made policy errors by not holding rates high enough for long enough, allowing inflation to quickly grow. The current Fed is aware of this past precedent and it is unlikely they will want to repeat the same type of errors. 

When bears hibernate, they store up enough food and liquid in their bodies to survive the long winter.  Their physiology and metabolism shift in rathe incredible ways to help them survive.  Investors should prepare themselves in much the same way when it comes to bear markets – by having an income stream available so they do not need to rely on their investments when markets are lower.  If you are concerned about what a bear market could impact your retirement, contact us to discuss strategies to help you remain feeling secure.     

Have a wonderful 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

April Fools’

April Fools’ Day is an annual custom consisting of practical jokes and hoaxes.  The origins of this April 1^st tradition are unknown, but several theories exist. One such association comes from Middle English poet Geoffrey Chaucer’s The Canterbury Tales, where in the “Nun Priest’s Tale” the protagonist, Chauntecleer, a rooster, is tricked by a cunning fox on April 1. Markets have enjoyed a decent rebound in 2023 after a difficult 2022, but is this sustainable or are we being tricked into a false sense of optimism as we enter April?

Equities were mostly higher in the first quarter, with the Nasdaq being the standout, enjoying its biggest rally since the second quarter of 2020.  The S&P 500 gained for the second straight quarter.  Bonds, especially Treasuries, were also stronger with yields falling in March.  The strong start to the year is being attributed to positive macro-economic momentum and expectations for a soft landing in the economy.  The Federal Reserve slowed the pace of rate hikes in the face of moderating, yet persistently elevated, inflation.  However, the Fed also has signaled that further work needs to be done in the fight against inflation and they will not stop until it is near 2% on an annual basis.  Labor markets continue to show strength and retail data sales data indicates consumers are willing to continue spending money. 

Overhangs remain in the market with underwhelming earnings guidance while profit margins continue to be pressured by still elevated input costs, particularly from labor, and softening demand.  Banking sector turmoil resulting from the Fed’s aggressive interest rate tightening cycle impacting investment portfolios grabbed headlines over the past month, but seemingly have faded into the background as the Fed has announced a new emergency liquidity facility to cover uninsured deposits.  The turmoil still drove an increase in concerns over a hard landing given expectations for tighter credit conditions and risks of bank exposure to commercial real estate.  Stress in the banking sector did lead to a meaningful reprieve of interest rates with yields plunging significantly, as well as aggressive expectations for a Fed pivot. 

Not Fooling Around

With last week’s gains closing out March on a high note, the S&P 500 now sits where it did exactly two years ago, having dropped and rebounded in the interim.  The index has been range-bound over the past six months and we are now at the upper end of that range, which we saw back in September and again in December.  This time will the market be able to break through and continue a more sustained upward trajectory?  

As is usually the case, sector returns have diverged and in some cases are very different than the broader market.  Last year’s laggards – Technology, Communication Services, and Consumer Discretionary, have been the strongest performers this year with Financials, Energy, and Healthcare being laggards.  The case for a sustained bull market includes moderating inflation and the possibility of nearing the end of the interest rate cycle, continued strength in the labor market and consumer spending, as well as banking stabilization.  Arguments for a continued bear market are caution around stretched valuations, recession signaling from the yield curve inversion and concern about how long consumers can remain resilient given that wages are not keeping pace with inflation and savings rates are falling. 

A strong case could be made that a mild recession has already been priced into the market.  We remain cautiously optimistic that the Fed will be able to engineer a soft landing, however the likely outcomes are somewhat of a paradox.  If the economy can avoid a recession, it is likely inflation will linger and the Fed will need to continue raising rates, putting pressure on both the stock and bond markets.  If the Fed does not need to continue raising rates and can in fact pivot and begin to lower rates (which we do not think will occur until at least the last quarter of this year, barring any unanticipated events), it is likely the result of a slowing economy. This would likely also weigh on equities but would be bullish for bonds.  The easiest prediction at this point is that the markets will continue to muddle through and may not move significantly in either direction over the next several months.  Since the S&P 500 is already higher by 7% on the year and the Nasdaq has gained nearly 16%, many investors would even be quite content with those gains for the year. 

Looking Ahead

The new quarter will be ushered in with the March jobs report on Friday.  (As a side note, the markets will be closed on Friday in observance of Good Friday.)  The jobs report is anticipated to show continued growth in the labor market and the unemployment rate holding steady at 3.6%.  The Federal Reserve’s forecasts released in mid-March show unemployment rising to 4.5% by year-end.  Investors continue to look for signs the turmoil in the banking sector is weighing on broader economic activity but impacts from tighter credit conditions are not likely to impact economic readings for at least another month.  We may not know for several months if the banking crisis has been resolved or if it worsens.  Regardless of the outcome, there tends to be no middle ground in a banking crisis, it either happens or does not.  The bond market is likely pricing in too many rate cuts or not enough. 

With the first quarter behind us, attention will turn to earnings in a couple of weeks with expectations already having been lowered.  Valuations, which seemed to have been largely overlooked in the first quarter, are likely to again come into focus.  We will also be watching oil prices after OPEC+ producers announced surprise output cuts, which is expected to cause an immediate rise in prices.  After falling to their lowest levels in 15 months on concerns a global banking crisis would hit demand, oil prices have been rebounding as the crisis subsides, at least temporarily.  Production cuts may accelerate the move higher and higher energy costs could contribute to higher inflation in the months ahead.

As we have experienced over the past year, markets remain highly unpredictable.  Be sure the level of risk you are taking is commensurate with your risk tolerance and risk capacity. Do not let dramatic movements in the market fool you and sabotage your retirement.  Please contact us if you would like to discuss your situation in detail or learn about the strategies we are implementing to protect against market downturns while participating in rebounds.        

Have a wonderful 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

The Rate Hikes Will Continue…

Legend is that Lieutenant William Bligh was a strict disciplinarian aboard the Royal Naval vessel HMS Bounty. Despite there being no known written record of it, the statement “The beatings will continue until morale improves” is often attributed to Lt. Bligh during his tenure as the ship’s captain.  The crew of the Bounty eventually became fed up and staged a mutiny April of 1798, seizing control of the ship from Lt. Bligh, sending him and eighteen loyalists adrift in the South Pacific.  The Federal Reserve seems to be on a similar steadfast path of raising interest rates until inflation subsides. But with cracks appearing in the financial system the markets seem to be staging their own mutiny. 

The Fed raised its target interest rate by a quarter percentage point last Wednesday, continuing its campaign to fight inflation, which remains persistent and above the Fed’s proclaimed comfort zone.  Comments from Fed officials after the meeting also signaled that at least one more rate hike may be in store.  They also stated their current assumption is that other tools, such as emergency lending and deposit guarantees, will contain damage among U.S. banks.  It is quite possible stress from banks and the recent tightening of lending standards will curb economic activity, helping counter inflation and taking some of the pressure off the Fed to continue raising interest rates. 

Interest rates have continued their wild ride with longer term rates continuing to drop from recent highs, indicating markets expect economic activity to slow and the Fed to lower rates faster than previously thought.  The inversion between 2-year and 10-year Treasury bond yields continues to narrow.  Such inversions do not guarantee a recession but have been accurate predictors in the past, generally about 9-12 months in advance. An upcoming recession has been widely predicted by many economists, perhaps the most anticipated recession in history.  But it should be noted that the difference in yields tends to climb back above zero just before recessions begin, so one may be on the near horizon if this pattern repeats itself.  

Navigating the Rough Seas

In the face of volatility, equity markets finished last week higher with the S&P 500 and Nasdaq both posting gains for the second consecutive week, overcoming global banking turmoil which continues to weigh on financial stocks. Technology stocks have been the strongest performers as of late with the Nasdaq now higher by 13% on the year.  The financial sector continues to languish as major European banks have found themselves in trouble, pressuring stocks of foreign and domestic institutions.   Last week’s volatility was marked by the buyout (rescue) of Credit Suisse, pushing stocks higher, but they dropped mid-week on the heels of comments from Fed Chair Powell that the Fed plans to continue raising short-term rates, coupled with a statement from Treasury Secretary Janet Yellen that blanket deposit insurance is not something currently being considered. Stocks overcame concerns about the health of Deutsche Bank and the possibility of contagion spreading to life insurance companies on Friday to rebound and end the week on a positive note.     

Materials stocks and commodities are experiencing headwinds amid global recession fears and reduced demand but supplies of raw materials are tightening.  If a recession is avoided or supplies are further constrained there could be a sharp snap-back in commodities prices.  Throughout the recent financial upheaval, gold and Treasury bonds have been safe havens.  This behavior is reminiscent of asset price action during periods of market turmoil in the past, more so than what we experienced in 2022 when stocks, bonds, and precious metals all lost value.  Corporate bonds, especially non-investment grade or high-yield, have also come under pressure recently since a large majority of that market is comprised of financial firms.  Spreads, or the difference in yields between corporate and treasury bonds of similar maturities, have been widening; an indication that investors are requiring greater compensation for the additional risk.  However, spreads are not yet near what would be considered levels of stress, but this is something to watch in coming weeks.      

Looking Ahead

Attention will remain focused on the financial sector, with any major news likely to drive markets.  There have been reports and data showing a significant amount of deposits being moved from smaller banks into larger banks but that seems to have subsided, at least temporarily.  A great deal of money has also been moved into money market funds for safety.  This money can easily be invested in the market so if (when) we see a stock rebound it could quickly accelerate as there is plenty of money waiting on the sidelines.  The Fed’s preferred inflation gauge, the Personal Consumption Indicator (PCE) deflator will be released this coming week but since the Fed does not meet again until May this particular report may have limited importance with many other data points being released throughout April.  Market catalysts in April are likely to shift away from the Fed and toward first quarter earnings reports, barring any major events in the financial sector.   

At odds with signals from Fed officials that they plan to continue raising interest rates, the Fed Funds futures market is signaling the Fed is done raising rates and, in fact, not only currently predict the Fed will pivot and begin to lower rates in June but also rates will be lower by at least a full percentage point by the end of the year.  Over the past 25 years there have been three completed hiking cycles; when the current cycle eventually ends it will be the fourth.  During the three previous cycles rates were held at their terminal rate for a minimum of 7 months. Even if we are at the top of the current interest rate hiking cycle, history tells us the Fed probably will not drop rates until at least late in the year, if not 2024.  If they do indeed begin to lower rates in the next few months it would be because of something “breaking,” which now seems to be the banks.  That is not a good scenario for stocks.  A much more favorable scenario would be if the Fed does not have to do a quick pivot, though higher rates could weigh on growth stocks such as technology since their prices are predicated upon future cash flows which have a lower present value when interest rates are higher. 

If you are stressed about the current market environment, contact us if you would like to learn about strategies to protect your portfolio while not missing out on the possibility of a market rebound.  Avoid having a mutiny wreak havoc on your retirement plans.          

Have a wonderful 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

March Madness

The term “March Madness” was originally used in 1939 to commemorate a high school basketball tournament in Illinois.  It was not brought to the NCAA Basketball Tournament until 1982 when sportscaster Brent Musberger used the term while covering the event for CBS.  From there the term soon became synonymous with the national tournament, even though the NCAA did not take ownership of it until 2010.  When most people hear the term March Madness they probably think of the basketball tournament but the phrase has recently been thrown around when describing the markets. 

Equities were mixed in a week dominated by a blizzard of headlines around banking uncertainties.  Markets were whipsawed by evolving concerns about the banking industry following the regulatory shutdown of Silicon Valley Bank.  Many other banks thought to be at risk of deposit outflows also came under pressure, including many smaller and regional institutions.  Banks take deposits and use the money to make loans.  Due to the inherent risk in making loans, not all deposits are loaned out so banks are required to maintain a certain amount of capital, generally invested in bonds of government entities.  The sharp rise in interest rates over the past year has led to the value of many of the bonds, especially those that are longer dated, being worth much less than their face value.  If depositors withdraw deposits, the bank is forced to sell those bonds at a loss, reducing the bank’s capital. If the bank does not maintain a certain level of capital it is closed by regulators. 

The stress in the financial sector has caused interest rates to plunge with yields on 2-year U.S. Treasuries falling more than 1% in a week and a half. Yields on 10-year bonds also dropped, but the rate spread in yields between 2-year and 10-year bonds has narrowed considerably after hitting a fresh post-1981 record inversion a week ago.  In this atmosphere, expectations for the upcoming Federal Reserve meeting and further interest rate trajectory have become quite volatile.   

Bracket Busters

“Bracket Buster” is a term used when an underdog, or lower seeded team, unexpectedly defeats a higher seeded team in the tournament since the results often knocks out subsequent predictions of a fan’s (or bettor’s) bracket, which they filled out with game predictions.  Odds of interest rate hikes by the Federal Reserve have been gyrating since the beginning of the year, with odds having steadily increased for rates to move higher and stay there for longer. However, predictions of future rate increases have significantly changed over the past couple of weeks with the stress in the financial sector. 

Even with turmoil in the banking industry and uncertainty ahead, the Federal Reserve likely will approve a quarter-percentage-point interest rate increase, but for the first time in a very long time the action of the Fed is not a foregone conclusion.  Rate expectations have been on a rapidly swinging pendulum over the past two weeks, varying from a half-point hike to holding the line and even at one point some talk that the Fed could cut rates.  However, a consensus has emerged that Fed Chairman Jerome Powell and his fellow central bankers will want to signal that while they are attuned to the financial sector upheaval, it’s important to continue the fight to bring down inflation.  The interest rate increase will likely be accompanied by assurances that there’s no preset path ahead. The outlook could change depending on market behavior in the coming days, but the indication is for the Fed to hike, especially since last week’s Consumer Price Index (CPI) numbers indicated inflation remains sticky at an annual increase of 6%, still well above the Fed’s comfort zone.

Looking Ahead

The major event of the week will be the crucial two-day meeting of the Federal Reserve.  While there is much speculation regarding the outcome, it remains largely unknown, and it may be the post-meeting public comments from Jerome Powell that move markets the most.  Somewhat contrary to interest rate hikes, monetary conditions may be loosening with the new Bank Term Funding Program (BTFP) pushing bank borrowing and in some ways undoing the work of the Fed’s Quantitative Tightening (QT) program.  Also, bond yields have dropped dramatically over the past several days leading to lower borrowing costs and perhaps providing some economic stimulus.  There is a possibility this will provide a tailwind to risk assets, i.e. stocks. 

We continue to monitor the situation with the banking sector, but at this time do not think there will be further contagion and deeper economic strain.  However, the added stress coupled with continued tightening by the Fed seems to be increasing odds we will experience a hard landing and recession later this year.  Our biggest concern remains corporate profit growth.  First quarter earnings reports will begin in a few weeks, which is likely to set the tone for the remainder of the year. If earnings estimates were to drop further, it would not bode well for the markets.  By the time earnings begin we should also have further clarity and resolution regarding the banking sector.

If you would like to review your portfolio to ensure it is positioned to weather the current madness, do not hesitate to contact us.  Do not chance having your retirement dreams busted by unexpected events.      

Have a wonderful 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

Risky Business

Tom Cruise was catapulted into stardom for his portrayal of a teenager looking for fun while his parents were away in the movie Risky Business. Running around the house in his underwear while lip syncing Bob Seger was relatively benign, but that turned to greater mischief and Cruise’s character learned is that a little bit of fun can quickly get out of hand.  Are parts of our economic system getting out of hand?  What can you do to manage your risk and protect yourself?

The biggest story of last week was the volatility around Fed rate path expectations.  Equity markets suffered their worst week of the year with the S&P 500 shedding 4.6%, giving up almost all of 2023’s gains.  The Dow Jones Industrial Average is now negative on the year while the Nasdaq remains somewhat of a bright spot, being higher by 6.4% despite losing 4.7% last week.  The selloff began on Tuesday after Federal Reserve Chair Jerome Powell opened the door to a more rapid pace of rate hikes to reign in resurgent inflation.  His comments seemingly increased the odds of a half-point interest rate hike at the Fed meeting next week, versus the quarter point previously expected.  Losses deepened on Thursday after Silicon Valley Bank’s (SVB) sudden move to raise cash spooked investors and depositors, sending bank shares reeling.  Markets were stunned on Friday after the FDIC’s seizure of SVB, which raised questions about whether serious problems are developing in the financial sector. 

Odds of a half-point interest rate hike by the Fed fell sharply on Friday amid labor market data, as well as recession and financial system concerns.  The February jobs report showed that more jobs were created than expected, but the unemployment rate moved higher and average hourly earnings growth was cooler than expected, lessening fears of the labor market overheating. While expectations of the next rate hike are now for a quarter-point, risk remains to the upside pending this week’s Consumer Price Index (CPI) report.

The Color of Money

 In The Color of Money Cruise plays a young, arrogant pool player alongside a more experienced and wiser character played by Paul Newman.  Cruise’s character learns that he needs to curb his ego in order to succeed.  Investors often become arrogant, as they did prior to 2022, but markets tend to act very weirdly, which can be very humbling.  This perhaps was the case with SVB.  Banks “borrow” short-term cheap money – typically deposits – and invest the money at higher rates, either by making loans or buying safe government bonds.  SVB focused on venture capital companies and with the brutal sell-off in tech stocks and downturn in valuations of start-up companies, the flow of venture capital has slowed. This means money-losing tech companies are rapidly burning through cash that previously sat on deposit at SVB.  In order to cover the outflow of deposits, SVB had to come up with cash quick, or sell some of their government bond holdings.  Because interest rates have risen so much (bond prices fall when interest rates rise), these were sold at significant losses.  The bank attempted to raise money to cover the losses, but in doing so caused concern amongst depositors, exacerbating the situation since other depositors saw this as a warning and withdrew funds.  87% of the money on deposit at SVB was above the FDIC insurance limit of $250,000 per depositor but the FDIC, in conjunction with the Fed, have devised a plan to backstop all depositors in an effort to provide confidence in the banking system.

SVB was unique as it catered primarily to venture capital companies. Also, as we came to learn over the weekend, SVB did not hedge interest rate risk well. Other banks are likely to fail, but the chances of contagion, or the spread to other institutions, as we saw during the Great Financial Crisis in 2008 are unlikely.  This does not rule out other bank runs, especially since most banks are paying very little in interest and significant amounts of money are being moved to money market funds with much better interest rates.   There are lessons to be learned from the failure of SVB, including do not concentrate holdings in one sector and hedge primary risks. The easiest way to avoid these risks is to diversify holdings

Looking Ahead

In addition to a continued focus on the banking sector, this week brings key reports which are considered catalysts headed into the arch Fed meeting the following week.  The February CPI will be released on Tuesday with expectations it will remain above 6%; providing justification for the Fed to continue raising interest rates. Producer Price Index (PPI) and retail sales data will be released on Wednesday. 

If you would like to learn more different types of risk and how to manage it, join us for our monthly Market Huddle on Monday, March 20^th at noon.  You can register by clicking here.  We would also be happy to discuss ways to manage risk in your portfolio;  contact us to discuss your situation in detail.  Opportunities remain in the market, but do not risk your retirement and let things quickly get out of hand.

  

Have a wonderful 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

Cake Eaters

The term “Cake Eater,” which is a saying a person is so rich they can have their cake and eat it too, has long been known throughout Minnesota but it gained broader notoriety from the movie the Mighty Ducks, a story about a rag-tag youth hockey team.  Since we are currently in the midst of the state high school hockey tournaments, this term happened to come to mind but it can also apply to retirement.  Everyone should aspire to be a Cake Eater, having saved enough so they can fully enjoy their golden years.

Last week was rather uneventful for the markets with no major economic releases or catalysts.  The major stock indices did manage to post gains with the S&P 500 finally rising after three weeks of declines.  The market also continued to work through the tail-end of Q4 earnings season that seems to have cleared a lowered bar.  Retail was in focus with reports from many major retailers, including Costco, Lowe’s and Target. Well-worn themes tended to be solidified, including resilient consumer spending with some concerns about softening demand in the face of inflationary pressures.  In the end, the market narrative remained little change over the course of the week. 

Interest rates were marginally higher, likely in response to the rising expectations of peak rates.  Ongoing positive surprise momentum in economic data, including hints of continued inflationary pressures, have pushed market expectations for the Fed Funds terminal rate above 5.5%.  Shorter-term rates continue to rise and longer-term rates, while at their highest levels of the year, are slightly below the peaks seen in October.  Rates on one-year and two-year Treasuries are at their highest levels since 2007; much more movement higher and they will be at the highest levels since 2000.  For the first time in decades, investments in fixed income instruments appear to be attractive. This is especially the case for “idle” money not earning much interest. 

Baking a Cake

You are probably not likely to want to eat eggs, flour, sugar and butter individually until they are mixed together and baked to yield a cake.  The right amount of each ingredient is required or the cake may not turn out. Building an investment portfolio is very similar – your overall portfolio should consist of diversified strategies (ingredients).  A substantial allocation to a losing strategy can cause pain, just as a rotten egg can spoil a cake, which is why it is important to remain diversified and not be overly aggressive with holdings that can ruin your portfolio.

When you eat cake you notice the flavor of the finished product, the entire cake, not the individual ingredients.  Reviewing your investments should be done in much the same way; consider the entire portfolio and do not focus too much time on the individual parts. If your portfolio is built thoughtfully and strategically, the different strategies should work in conjunction with each other to deliver optimal outcomes. There may be times where one of the parts is not performing as well as might be hoped or expected, but the important thing is to consider the results of the overall portfolio, if it aligns with your risk objectives and if it is helping you achieve your goals. 

Just like how you might like one flavor of cake, for example chocolate, while other people prefer vanilla or strawberry, investment strategies that work well for other people may not be best suited for you since individual situations are different and everyone has their own unique needs.  There is nothing wrong with it being different; do what works best for you but be sure you have an overarching strategy that fits your unique situation.  Your portfolio should appropriately match your risk tolerance, risk capacity, and the amount of risk you need to take to achieve your goals.    

Looking Ahead

This week investors will be paying close attention to Fed ChairPowell’s congressional testimony before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday but the key highlight will be labor-market data on Friday. The Q4 earnings season is nearly complete, with only four S&P 500 constituents reporting this week.  Next week will bring keep inflation reports, including the Consumer Price Index (CPI) and Producer Price Index (PPI).  These are expected to help inform both the Fed’s rate trajectory, with the next meeting being held on March 21-22, and the prospects for soft-landing/no-landing scenarios.  The consensus is for a quarter-point rate hike at that Fed meeting, with the possibility of a half-point hike gaining some momentum.  Current market pricing now does not expect a pivot lower until March 2024.  This expectation continues to be pushed out further and further, so it may be foolhardy to attempt any predictions with much confidence at this time.

If you want to have your cake and be able to eat it during retirement, it is vital to have the proper level of planning so you can live comfortably, spend confidently, and pay taxes consciously.  Contact us if you would like to review your individual situation to ensure you have all the right ingredients to make this happen. 

  

Have a wonderful 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