retirementplanning

Great Expectations

Charles Dickens’ classic novel Great Expectations is a coming-of-age tale of a young man, Pip, who unexpectedly receives a large fortune and his ambitions to rise to a higher social class.  Throughout the story Pip desires to improve his life and this belief in the possibility of advancement provides great expectations for his future. He learns that as his life improves it is not always more satisfying.  Closer to home, last week’s winter storm did not meet forecasted expectations of being a historical meteorological event, despite receiving what otherwise would be considered a decent amount of snow.  What if forecasters had instead predicted an amount of snowfall that was much less than what was received?  Given the amount of snow we did receive, would this storm have then been viewed as being more impactful?  Perspective is dependent upon expectations and reasonable expectations tend to lead to better outcomes, especially when it comes to the markets.  Did the bull market of the past decade alter reasonable expectations of how markets might perform in the future?

To provide a historical perspective, the price return (not including dividends) of the S&P 500 has averaged 8.7% per year going back to 1958, when the index was expanded from 93 to 500 stocks.  An 8% return for the stock market is frequently used when doing very rudimentary financial planning assumptions, but the S&P 500 has experienced a positive return between 6 and 10% during a calendar year only six times in the past 95 years. This demonstrates how annual market returns are much more volatile than the average and based on historical probabilities, chances are very high of experiencing returns in any calendar year that are significantly different than 8%.  Also, do not overlook the sequence of returns risk, where the assumed average returns might be as expected over the long term, but the order and timing of investment returns can have a big impact on how long your retirement savings last. 

Looking back at the not-to-distant past, during the “Lost Decade” of the 2000s the S&P 500 was nearly flat for ten years, losing an average of 0.6% per year.  This includes four years of double-digit losses and three years of double-digit gains, both averaging more than 20% in their respective directions. But looking out further, the S&P 500 has nearly tripled since the end of 1999. 

A Tale of Two Cities

Another classic novel written by Dickens was A Tale of Two Cities” which underscored the differences between London and Paris during the 1780s; a time when England was relatively peaceful and prosperous while France was experiencing upheaval in the events leading to the French Revolution.  In terms of differences, there has been much talk recently about conflicting expectations between investors and signaling from the Federal Reserve when it comes to the path of interest rates.  Much of the strength in the markets during January was attributed to expectations the Fed might “pivot” later this year and begin to cut interest rates, contradicting the Fed’s view that they need to continue pushing interest rates higher to fight inflation. The last couple of weeks have proven to be a time of reckoning for the markets, largely due to the latest inflation reports. Last week the Personal Consumption Expenditures (PCE) came in higher than expected with the core rate moving higher for the first time since last September, further dampening the disinflation narrative.  The gap between market expectations for the path of interest rates and the Fed’s outlook has been narrowing with markets seemingly accepting that rates are going to stay higher for longer.  This resulted in the major stock indices suffering their third consecutive week of losses.

We can use history as a guide when it comes to market expectations, but as any investment professional will tell you, “past performance is no guarantee of future results.”  Stock market performance has been robust with average annual returns in the double digits over three out of the last four decades, with the 2000s being the sole outlier.  The environment we are experiencing today is different than what has been experienced in the past.  Technological innovation continues to provide what we view as outstanding investment opportunities and information can be disseminated almost instantaneously to a wide audience, making this the best of times.  But wages are not keeping pace with inflation and higher interest rates are leading to higher borrowing costs, impeding economic growth, making this the worst of times, at least in recent memory, for many people.  Higher input costs and slowed spending are affecting the bottom line for many companies, leading to negative earnings growth.  These headwinds for the market are not likely to dissipate quickly and we do not expect the next several years to be as prosperous for stock investors as the last decade was.  However, we still strongly believe that over the long-term, wisely investing in the stock market remains the best strategy for building wealth and maintaining purchasing power of your hard-earned savings. 

Looking Ahead

Earnings season is largely winding down with a few notable retailers set to report this week, including Target, Lowe’s, and Costco.  These earnings reports are likely to show consumer spending remains resilient, but shoppers seem to be more price conscious, pressuring bottom line profitability.   A slew of speeches from Federal Reserve officials are also scheduled and while their comments might garner a great deal of attention, they won’t mean much until the next Fed meeting at the end of the month.  Since inflation remains persistent, interest rate increases are expected to continue with current expectations for three more quarter-point interest rate hikes this year; one at each of the three meetings.  In light of recent inflation reports coming in hotter than expected, some Fed officials have publicly stated they may favor a half-point increase at their next meeting in late March.  The anticipated peak in interest rates for this Fed tightening cycle continues to move higher and is now 60 basis points (0.60%) above where it was just a month ago.    

We frequently discuss the importance of maintaining a long-term perspective on the markets and caution against focusing on short-term moves. This was perhaps well captured in Berkshire Hathaway’s most recent annual letter, in which Warren Buffett stated that he and long-time partner Charlie Munger, “…firmly believe that near-term economic and market forecasts are worse than useless.”    Also of interest in the letter was Buffett reflecting on his many decades of investing.  He admitted most of his capital-allocation (investment) decisions have been no better than so-so and there have been some bad moves.  He goes on to say, “Our satisfactory results have been the product of about a dozen truly good decisions and a sometimes-forgotten advantage that favors long-term investors…”  In other words, he is saying not all investment moves will be successful but remaining patiently invested in the markets and maintaining a long-term perspective leads to success.  If you would like to discuss your situation and ensure the expectations you have for your retirement remain reasonable please do not hesitate to contact us. 

  

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

Fool’s Spring

With the recent weather being warmer than usual, including a rare February rainstorm last week, ask anybody in the Upper Midwest what season we are in, and they may be apt to tell you it is Fool’s Spring – the season between Winter and Second Winter.   The change in sentiment over the past couple of weeks might have investors wondering something similar about the stock market – did we experience a bear market rally, sometimes referred to as a Sucker’s Rally, in January or was it the beginning of a longer-term trend?

Market strength early last week was whittled away later in the week by economic data and hawkish commentary from Federal Reserve officials.  The S&P 500 was marginally lower and logged its second consecutive weekly decline. The Dow Jones Industrial Average also fell slightly while the Nasdaq eked out a small gain, but none of the three major averages made significant moves and all remain near where they traded in late January.  Bond yields moved higher with Treasuries reaching their highest levels since November.  The difference in yields between 2-year and 10-year Treasuries remains at the deepest inversion since the early 1980s, which many economists continue to believe foretells a recession later this year.

The heavy schedule of economic releases last week gave pause to the disinflation narrative.  Analysts have stressed that the deceleration would likely be bumpy, but these reports nevertheless seemed to inject a note of caution into the debate.  The January Consumer Price Index (CPI) was largely in line with consensus expectations while the Producer Price Index (PPI) came in hotter than consensus expectations.  Retail sales from January surprisingly surged, showing consumers remain resilient but causing concern strong demand could lead to continued inflationary pressures.  Robust spending combined with stubbornly higher-than-expected price increases are likely to keep the Federal Reserve on a hawkish track, continuing to raise interest rates for the foreseeable future. 

Second Winter

The threat of a major winter storm impacting the Upper Midwest this coming week is a reminder that winter is not yet over and despite the reprieve felt the past couple of weeks, it may indeed be time to hunker down for Second Winter. Investors are trying to figure out if they should also be hunkering down or if the worst is behind us.  The debate continues whether we will see a “hard” landing, where the economy falls into a recession as the result of higher interest rates, or if we will experience a “soft” landing with the economy slowing but avoiding a recession.  Thanks to the U.S. economy outperforming expectations, as is evidenced by strong labor markets and consumer spending, investors are now contemplating a third outcome – a “no” landing scenario where the economy does not slow, and the stock market continues its upward trajectory. 

The fallacy with the no landing scenario is that if the economy continues to expand, inflation is not likely to abate and will remain above the Fed’s price stability targets, increasing odds they will continue to raise interest rates.  Higher rates lead to higher borrowing costs, which hinder economic growth and therefore would increase the risk of a hard landing.  This would also bring back uncertainty about inflation and Fed action, which markets do not like, likely leading to volatile market action as we saw in 2022. 

While the stock markets ended the week in nearly the same place they started, bond yields moved higher as did the probabilities of a higher terminal Fed Funds rate. The “higher for longer” mantra previously discounted by the markets is now gaining greater credibility.  Some Fed officials have now openly declared that a half-point interest rate hike may be a possibility at their next meeting in late March.  Looking back at history, stock markets tend to reach their low points about the same time the Fed pivots and begins to move rates lower.  If history is a guide, we have not yet seen the bottom of this cycle and are probably not likely to see it until sometime later this year.  We continue to be cautions when it comes to the markets in the short-term but remind investors to maintain a long-term perspective.    

Looking Ahead

The week ahead will be highlighted by earnings reports from retail giants Wal-Mart and Home Depot, which will offer further updates on the health of consumers, as well as the release of the Personal Consumption Expenditures (PCE) price index.  The PCE is the Fed’s most closely watched assessment of how quickly prices are rising.  If this report comes in as expected, slightly lower than a month ago, it will lend support to recent indications inflation is not falling at the pace and extent investors were hoping for.  Prices seem to have stabilized somewhat, as evidenced by inflation now growing at less than the rate it was during most of 2022, but they still are increasing at a pace above the comfort level of most consumers as well as the Federal Reserve. 

The strong returns of the stock market in January provided hope that better days are ahead, but the volatility of the past year remains fresh in investors’ minds.  The past 14 months have been a reminder markets do not always move in a positive direction in the short-term and do pull back from time-to-time as part of the normal market cycle.  Historically markets have performed better over longer time periods.  This is why it remains important to maintain a long-term perspective as well as have strategies in place to protect your hard-earned savings from short-term fluctuations.  The market often gives false signs and as we’ve emphasized in the past, trying to time the market rarely works in one’s favor.  Be sure to have a reliable income plan in place so you can weather all storms the markets might bring and sustain the lifestyle you desire during retirement   

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

Balloons

Somewhat ironically given recent events, unmanned hot air balloons are thought to have been first used in China nearly 1,800 years ago for military signaling. Soon after the first manned hot air balloon flight took place in 1783, balloons were used for reconnaissance during the War of the First Coalition in France.  Observation balloons were also used during the American Civil War in the 1860s and both World Wars.  As we have become aware in recent days, high altitude balloons continue to be in use today for surveillance.  Much smaller and more colorful balloons are commonly used for decoration or signaling, such as for birthday parties or graduation celebrations.  As we’ve mentioned over the past several weeks, we are seeing conflicting signals in the markets now.  What do they mean?  Have we gained clarity on what might lie ahead?

The three major stock indices suffered losses last week for the first time this year and experienced their worst week since mid-December.  It seems the January Effect is now fading, and the market will again start to trade on fundamentals. Interest rates moved higher, turning into a headwind for the stock market, amid a slight repricing of the interest rate path of the Federal Reserve with a higher peak in the fed funds rate now being anticipated.  The yield curve continues to cause fears of a recession with the spread between 2-year and 10-year U.S. Treasury bond yields hitting their lowest point since the early 1980s.  Historically when the yield curve is inverted, i.e. shorter term rates are higher than longer term rates, a recession has followed on average one year after the beginning of the inversion. The current inversion began in March, 2022 so if the bond market is an accurate indication, a recession may not be far off. 

The biggest event of the past week largely flew under the radar – revisions from recalculated seasonal adjustments to past Consumer Price Index inflation numbers.  The revisions were all to the upside for the prior three months, including a rise in consumer prices in December, instead of falling as previously reported.  These revisions show that inflation may not be falling as quickly as previously thought and may raise the risk of higher inflation readings in months ahead. 

Blimps

 Another type of airship used for observation is the blimp, which in modern times are most likely associated with observations for sporting events.  Blimps were used for patrols in World War I and are still in limited military use today for surveillance and airborne early- warning detection.  Similar to hot air balloons, blimps provide a high-level view of events on the ground.  When it comes to investing, people often get caught up in the short-term and forget to maintain a high-level view of what is going on in the economy and markets over the longer term. 

According to the stock market, the most widely expected outcome this year is for a slowing economy or a “soft landing,” but not a recession.  Conversely, the bond market is signaling there will be a recession.  Given past precedence, we tend to think the bond market is going to end up being the more accurate indicator.  Inflation, while falling, remains persistently high and well above the Fed’s comfort zone so the Fed may be forced to raise rates more than currently expected, pushing the economy into a recession. 

Stock market valuations remain high, or above historical averages. There is not a rule stating valuations must remain in a certain range but based on past market action, reversions to the mean generally occur.  For valuation we are referring to the price-to-earnings ratio, which can either be backward or forward looking.  Measures of both are showing the market is overvalued.  In order to be more in-line with historical averages, either stock prices would have to fall, or earnings need to increase.  Unfortunately, recent earnings reports have primarily shown negative growth compared to a year ago, a trend we think will continue for at least the next two quarters in the midst of slowing economic growth. A common theme this quarter is that higher input costs are leading to smaller profit margins. Unless there is an upside surprise to economic growth or inflationary pressures ease considerably, earnings are not likely to improve significantly and stock prices could adjust accordingly.  In the recent past, when interest rates were near zero, there were not alternatives to the stock market so investors would continue to pile in regardless of valuations. That is not true today as investors have other options for earning returns and therefore are much more sensitive to prices and valuations.

Looking Ahead

The coming week is a big one for economic data, most notably around inflation.  The Consumer Price Index (CPI) is expected to show a slight drop to 6.2% on a year-over-year basis but what is likely to be watched more closely is the month-over-month number which is expected to be an increase of 0.5%, an acceleration from previous months.  This report will be particularly meaningful given the growing doubts around a smooth disinflationary path and the recent revisions to previous months’ data.  Housing prices, and as a result, rents as measured for the CPI, remain stubbornly high compared to a year ago and there is evidence of higher food prices, not to mention a surprising rebound in auto prices, so we would not rule out a surprise to the upside. This could potentially shock the markets, especially the stock market which has been pricing in a healthy dose of disinflation.  Also of significance this week will be the Producer Price Index (PPI) and retail sales reports. 

Looking out further, we anticipate a strong recovery after a potential recession or re-adjustment of stock prices.  If you have cash on the sidelines, this is a good time to be cautious and you may want to consider alternatives to the stock market.  But if you are fully invested, we suggest remaining patient and warn against trying to time the market since that often ends up being a fool’s game.    

When it comes to the markets there are often mixed, and even conflicting, signals.  This has been especially true this year, as much as any time in recent memory.  Be sure no matter what the signals are, you are maintaining a high-level, or long-term, view and being keenly aware of how it applies to your own retirement planning.  You cannot control what the markets do, but you can control how your retirement plan and individualized strategy incorporate income and tax planning.  Please contact us if you would like to discuss your situation. 

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

Game of Chicken

The game of “Chicken” is a model of conflict for two players with the principle being that the ideal outcome is for one player to yield, which the involved parties try to avoid out of pride for not wanting to look like a “chicken” or coward.  This game has its origins in a game in which two drivers drive toward each other on a collision course: where one driver must swerve to avoid catastrophic consequences, at the expense of being called a chicken.  As of now, the outlook of the markets and the Federal Reserve are at odds, with future actions seemingly on a collision course.  In this case, neither needs to necessarily back down but can both be right?  Will one of the two need to change course?

Equities were higher last week with the major indices continuing to rally off their 2022 lows.  Big tech has a strong week despite blemishes late in the week from disappointing earnings reports from Apple, Amazon, and Alphabet (Google).  Continued evidence of disinflation, a resilient labor market, and the Fed nearing the end of its rate-hiking campaign served to bolster expectations for a soft landing ahead and provide continued thrust for the equity markets. 

The Fed raised interest rates by one-quarter of a percent as had been widely expected.   There were few changes to the post-meeting statement, including ongoing rate increases remaining appropriate but shifting reference to the future from discussing the “pace” of hikes to their “extent.” Fed Chairman Powell’s remarks post-meeting including using the term disinflationary multiple times and indicated the Fed’s base case is for a soft landing.  The meeting seemed to cement market expectations for rates to top out at their March meeting, with the markets staging a rally in its wake. But signals from the Fed indicate even if they do stop raising rates, they plan on keeping them where they are and not cutting rates anytime year. And this is what puts us on a collision course, as the markets are pricing in rate cuts in the latter half of the year.   

Hawk-Dove Game

When the term “The Fed” is used, it is generally in reference to the Federal Open Market Committee (FOMC), the entity within the Federal Reserve that sets monetary policy for the central bank, including interest rates.  Members of The Fed are often considered to be “hawkish” or “dovish”, either in favor of tighter or looser monetary policy, respectively.  In economics the game of chicken is often referred to as the hawk-dove game where each side can either be an aggressor (hawk) or more passive (dove).  If both sides are aggressive, or hawks, they will fight until one is injured and the other wins.  If only one side is hawkish and the other dovish, the hawkish side will win, but if both sides are dovish, there will be a tie and each player receives a payoff lower than the profit of a hawk defeating a dove.  Similarly, even though the message from the Fed of interest rates being higher for longer seems at odds with what the markets are currently pricing in, the outcome could be somewhere in the middle. 

The slightly more dovish tone from the Fed after their meeting may have been complicated by the Friday release of the employment numbers which were considerably better than expected with the unemployment rate falling to 3.4%, its lowest level since 1969.  The increase in payrolls seemed to take the market by surprise and did spark a vigorous conversation about how much of the deviation from expectations was due to seasonal adjustment factors.  Despite this debate, the report did provide evidence the labor market has remained resilient despite the Fed’s hiking campaign, which may be supportive of the soft-landing thesis.  But it also heightened market expectations for the Fed to raise interest rates even higher before pausing.   

The Fed meeting and employment reports overshadowed the fact that we are still in the midst of earnings season.  Some 70% of reports thus far have beaten analysts’ expectations, giving thrust to the markets.  However, the blended negative growth rate of an aggregate of S&P 500 companies’ earnings is well below what was expected at the end of the quarter.  The market has been rewarding earnings beats more than average, lending further support to the idea that despite recent worries about earnings resilience, the bar has already been lowered. 

Looking Ahead

There is likely to be added attention to remarks made by members of the Fed in coming weeks after the surprisingly robust January payrolls report.  Probabilities of quarter point rate increases at the upcoming March and May Fed meetings increased considerably after the report, but we will caution there is a significant amount of data to be released in the interim, so we are not counting on anything at this point.  The main driver of market action this coming week will most likely be the continuation of Q4 earnings releases.  It is not until next week that we will see a deluge of economic data, most notably the CPI and PPI reports.

Widely diverging forecasts for the market continue to be a common theme, with some thinking the worst is behind us and others being of the belief that we are on the precipice of a recession which will send markets lower.  We like to advise investors to be prepared to weather the storm, no matter what the markets bring, as well as maintain a long-term perspective.  The term “volatility” is being used frequently, but as a reminder volatility can either be to the downside or upside and therefore is not always a bad thing for those invested in the markets and able to tolerate price swings.  If you are playing a game of chicken with your retirement, you probably ought to rethink your strategy since this is something where you only get one chance, and the outcome will affect your lifestyle for the duration of your golden years.  Call us if you would like help feeling more confident and ensuring you are not on a collision course with disaster.

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

As January Goes…

Devised in 1972 by Yale Hirsch, the creator of the Stock Trader’s Almanac, the January Barometer states that as the S&P 500 goes in January, so goes the year.   We certainly hope that is the case this year, but is it reasonable to expect it to be?  Will recent strength continue, or will the headwinds of rising interest rates and a slowing economy prove to be too much to overcome? 

Equities finished higher last week with the S&P 500 rising 2.5% and the Nasdaq showing even better with a 4.3% gain. It seems the path of least resistance for the stock market, at least for now, remains to the upside.  Markets were able to shrug off a large volume of earnings releases which generally undershot expectations.  When it comes to earnings, the bar may already have been lowered, explaining why weaker than expected reports are doing little to jar markets.  Fortunately, while many earnings reports have been underwhelming, very few have been what we would consider to be catastrophic.

The economic releases of the past week did not contain any real surprises with the preliminary reading of fourth quarter GDP coming in at a seasonally adjusted annual growth rate of 2.9%, slightly higher than expectations.  Core Personal Consumption Expenditures (PCE) showed an annual price raise of 4.4%, the lowest reading since April 2020.  Inflation appears to be trending downward but remains above the Fed’s comfort level of 2% and therefore it is highly unlikely anything will derail the Fed from continuing to raise interest rates at their meeting this week.     

Many of the stocks that performed very poorly last year are leading the stock market to its best start since 2018.  Much of this strength is likely attributable to buying back positions sold in December to tax loss harvest, covering of short sales, as well as longer-term interest rates falling over the past several weeks. This may not last since many of these names are speculative with stock prices predicated upon the present value of future earnings projections, which are highly dependent upon interest rates.  It seems the market may have overshot expectations for future interest rate cuts and if rates do indeed stay higher for longer, as the Fed presently forecasts, then many of these stocks will continue to face headwinds. But we also feel there will be plenty of opportunity in the market over the coming year, especially for those companies with strong balance sheets and solid cash flows.  Quality names are likely to prevail.    

Calendar Effects

It is difficult to prove any market anomaly is related to the calendar.  Sure, there are historical statistics that might show a correlation between the two, but correlation certainly does not imply causation. One such example is the Super Bowl indicator, which supposedly says the stock market’s performance in a given year can be predicted based upon the outcome of the Super Bowl.  Obviously the stock market and Super Bowl are two unrelated events and any correlation drawn between the two is merely coincidental.  Calendar anomalies can be influenced by financial trends and based upon investor psychology and the business cycle.  Studying trends and understanding where we are in the business cycle are more likely to lead to investing success than a non-related indicator, or even historical data. 

The economic reports of the past week were not disappointing and, in some regards, could be viewed as being positive, especially the headline numbers.  But looking deeper into each, weaknesses are beginning to show. When adjusted for inflation, sales growth was actually lower than it was a year ago.  Household demand is decelerating with incomes and spending slowing.  Recent declines in inflation are likely in part being caused by lower demand, which is a sign of slowing economic growth.    

Most investors welcome the positive sentiment of the markets, but the bearish case still has not gone away.  Layoff news has now moved beyond tech with companies in other sectors, such as industrials and consumer goods, also announcing layoffs.  The yield curve remains profoundly inverted, continuing to signal a slowdown in economic growth, and most likely a recession.  A wide divergence remains between market expectations for interest rate cuts by the Fed in the second half of this year and consistent messaging from Fed officials advocating for a higher-for-longer approach.  Many economic indicators are showing signs of a slowdown; most notably the Conference Board Leading Indicator Index which has been negative for two consecutive months.  Over the past 50 plus years, two or more negative readings have preceded a recession 100% of the time.  We like to remind readers that the economy and stock market are not one in the same and generally the stock market is a leading indicator. The current strength very well could be an indication of better things to come, including increasing chances the Fed will be able to engineer a soft landing. 

Looking Ahead

The much-anticipated Fed meeting on Tuesday and Wednesday will drive market-related headlines this week and has the potential to cause large moves in the market.  Current expectations are for another quarter-point interest rate hike.  It is the statements after the meeting that are likely to move markets the most and it seems doubtful the Fed will back down from their current higher-for-longer stance.  With this move, the Fed Funds rate will be above the Fed’s favored measure of inflation, the Core PCE rate, for the first time since 2019.  Inflation reports the next few months will continue to garner larger than usual emphasis since they will drive future Fed action.  Surprises to the downside could be the signs the Fed needs to pause and possibly even pivot, but we view the latter as being unlikely in the near future.  The monthly employment reports will be released on Friday and are expected to show continued strength in the labor markets.  These continued to be monitored closely since the Fed will have little reason to alter course as long as the labor market remains strong.        

We genuinely hope the January Barometer does hold true, especially given how strongly markets have performed to begin the year. However, we caution there is much brewing under the surface and it seems inevitable there will be some undercurrents, with chances that even if markets continue with positive momentum there are bound to be speedbumps along the way.  If you would like to ensure your portfolio is positioned for whatever might happen, please contact us to discuss further.   

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

Let’s Make a Deal

In the television game show Let’s Make a Deal, contestants were offered something of value and given a choice whether to keep it or exchange it for a different item.  That other item, which may have a lower or higher value than the original item, remained hidden, often behind a door, until the choice was made.  People planning for retirement are also faced with choices but often have the luxury of generally knowing the potential outcomes of their decisions.  However, the markets are much less predictable and without a carefully planned strategy, investing can become a game of chance. 

The optimism present in the stock market to begin the year faded this past week.  Despite a Producer Price Index (PPI) report showing inflation slowing more than expected, Federal Reserve officials indicated they plan on continuing to raise interest rates, sending markets lower in the middle of the week. Retail sales for December were softer than expected, showing the holiday shopping season may not have been as robust as hoped.  Longer term bond yields moved lower on the weakness since this could be a signal of slowing economic activity, while shorter term rates moved slightly higher in anticipation of the Fed continuing to raise rates.   

Now that 2023 is well underway we have some idea of different scenarios which might play out in the markets this year.  Even though markets can be very unpredictable and unanticipated events are always bound to occur, the varying outcomes we are now facing seem to be broader and more differing than most years.  This year, not unlike most others, the focus is firmly on inflation, interest rates, a potential recession, and corporate earnings, all of which are very much intertwined and are likely to impact the others.  What are these scenarios?  What might it look like behind these doors?

Inflation has moderated considerably since reaching 40-year highs last year but remains well above the levels experienced over the past several decades.  Last week’s lower than expected PPI report, including a month-over-month decrease, is giving some credence that inflation is dropping faster than anticipated and perhaps the Federal Reserve has already achieved their objective of combating rising prices with seemingly increasing odds they will be able to pull off a soft landing.  But fear remains they have, or will, overshot the target with monetary policy that is too restrictive.  Another belief is that lower prices are the result of demand destruction, meaning the economy is slowing so there is less demand for goods and services. This would be a bad sign for the economy and may signal we are indeed headed for a recession, if we are not already in the midst of one. 

The Price is Right

Since a large number of economists are predicting a recession at some point this year or next, it seems hard to believe this has not already been priced into the market, but the question remains to what extent?  Markets tend to be forward looking, often pricing in future events quarters in advance.  An expected recession, even if it does not come to fruition, may ultimately have the same impact as a real recession. Recently we have seen the pace of layoffs accelerate with statements from companies conducting layoffs that workforce needs are shifting as a result of changing economic conditions, interpreted to mean they are seeing a slowdown in their businesses.  Consumer spending seems to be slowing, likely due to fears over deteriorating economic conditions including job insecurity and lower levels of household savings.  Despite signs of a softening in economic conditions, the Federal Reserve is expected to continue raising interest rates and statements from officials indicate they plan on keeping rates “higher for longer.”  Restrictive monetary policy makes borrowing more costly, stymying growth.

Now that we are in the middle of earnings season, one theme has prevailed – expectations are being lowered.  There has even been a change in analysts’ estimates over the past few weeks from year-over-year growth to year-over-year declines lasting throughout 2023.   This probably does not come as too large of a surprise since talk of a recession and economic slowdown have been prevalent over the past several months.  And similar to a recession, how much have lowered earnings expectations already been priced into the markets?  It probably depends upon the extent of the downward revisions.  A certain amount has likely already been priced in so if earnings do not fall as much as expected it could provide a positive catalyst for the stock market, and of course the opposite is also true – if earnings decrease by more than expected it could be a bad omen.  Currently, stock valuations, chiefly measured by price-to-earnings ratios, are near historical long-term averages.  If earnings decrease, stocks may be viewed as being expensive on a relative value basis, meaning the market could adjust and we see stock prices fall.  While there are a lot of questions in the market and the short-term outlook looks rather gloomy, we remain very optimistic on longer term market prospects.   

Looking Ahead

Some of the mega-cap names report earnings this coming week, putting us firmly into the heart of earnings season. These results will likely help set the tone for the remainder of the year.  The Fed’s preferred measure of inflation, Personal Consumption Expenditures (PCE) will be released on Friday, but we do not anticipate it change the action of the Fed at their upcoming meeting next week.  In addition to inflation, PCE also measures personal spending and with the weaker than expected report on retail sales, sluggishness in overall spending would be viewed as indication the economy is indeed slowing. 

Markets can be very unpredictable and unanticipated events are always bound to happen. We do not know exactly what the future will bring, but we can at least position for those scenarios most likely to occur.  Whatever appears behind each door should not cause concern but rather should be viewed as an opportunity.  Do not hesitate to call us to discuss your individual situation to ensure you are positioned appropriately and not leaving your retirement to chance. 

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.   

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