Secured Retirement

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.   

info@securedretirements.com
Office phone # 952-460-3260

Looney Tunes

When I was growing up, which was before internet and cell phones, children would often watch cartoons on TV, especially on Saturday mornings.  One of my personal favorites was Looney Tunes since I was amused by the improbable gags, especially falling anvils and pianos.  Sure, sometimes I felt bad for Wile E. Coyote but I was always entertained (and amazed) how Bugs Bunny could brush it off and carry on, almost as if nothing had happened.  Over the past year many people might feel as if a heavy object has been dropped on their retirement savings.  You might be asking yourself what you can do to protect yourself from such events.

Last week the major averages were higher for a second consecutive week, with the S&P 500 and Nasdaq reaching their highest levels in a month. Year-to-date these two indices are higher by about 4% and 6%, respectively. This is a sharp contrast to a year ago when markets began their precipitous fall.  The stock market received support from increasing odds of a soft landing after last week’s Consumer Price Index (CPI) report showed a sixth-straight monthly decline with the annual increase of 6.5% being the lowest in 14 months. 

On the heels of the CPI report, odds have now increased that the Fed will raise interest rates by a quarter of a percent at their next meeting in two weeks versus raising a half percent as had been the expectation immediately following their last meeting in December.  Lowering the magnitude of interest rate hikes and lowered expectations mark a shift from the somewhat unprecedented path of accelerated rate hikes we saw last year and show we are likely nearing the top of the interest rate cycle.  A divergence on the path of short-term interest rates continues between investors and the Fed.  Markets are predicting the Fed will pivot and lower rates by year-end, while Fed officials remain steadfast with their messaging, insisting they plan to continue to raise rates but will eventually pause. Our thought is that despite moderating and moving lower, inflation remains elevated and above the Federal Reserve’s comfort level so there is little reason to think they will reverse course anytime soon.

Since we seem to be nearing the top of the interest rate cycle, the outstanding questions are how long will we remain here and what events could lead to current intentions being altered?  Our thoughts are that if there is risk to what was just mentioned, it might be to the upside – rates are more likely to move higher than expected, not lower.  

What’s Up, Doc?

The upcoming recession seems to be the most anticipated and predicted recession in history, or at least in our memory.  Despite these predictions and the seemingly foregone conclusion from many economists, the economy shows signs of resilience and continues to grow, for now.  Employment conditions remain quite robust and wages are growing, albeit not at a pace to keep up with inflation.  But since inflation is slowly subsiding and showing some indications we might see much lower readings later in the year, the probability of a soft landing for the economy seemingly are increasing. This does not necessarily mean we will avoid a recession completely, and that scenario is certainly a possibility, and as of now any recession looks to be relatively mild. 

Undoubtedly the Fed and interest rates will still garner larger than usual attention going forward, at least over the next few months, but we are likely to see a shift to earnings being the primary driver of the direction of the stock market.  Earnings season kicked-off last Friday with major banks reporting strong earnings but with cautious outlooks and most signaling they were building reserves in anticipation of deteriorating credit conditions and a recession later this year.   More earnings reports are on deck for this coming week before they really begin in earnest the week after.  It is likely earnings from the last quarter will end up being decent, but we will be watching for future guidance and whether analysts continue to reduce forward-looking estimates.   

Looking Ahead

This coming week brings retail sales numbers from December, the Producer Price Index (PPI), and various housing reports.  Retail sales are expected to show a decrease in activity from November since the holiday shopping season had a very strong start, but these numbers have the potential to move the market if they come in better or worse than expected.  PPI tends to have much less of an impact on the markets than CPI but is still watched as a gauge of inflation and can foreshadow future months’ CPI.  However, this relationship is not currently as strong as it has been in the past given current drivers of economic conditions.  If we do indeed experience a soft landing and manage to avoid a recession, we are very likely to experience an increase in overall demand for products and PPI could be the first place this will show up but that likely won’t happen for at least a few months.   

The strength of the markets, both stock and bond, over the past few weeks have given investors hope that better days are ahead.  But this is not a time to be complacent, but rather maintain patience and a disciplined investment approach.  The fact remains that risks still remain and returns are likely going to be much harder to come by in the next few years than they were in the previous decade.  Be sure your portfolio is protected from heavy falling objects;  your retirement savings is not a cartoon where characters can simply walk away.  Please give us a call if you would like help identifying what risks may lie ahead and what you can do to protect yourself. 

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

Fence or Ladder

We see the scene often play out in movies – the hero is being chased by bad guys or maybe a pack of wild animals and then comes to a fence.  Does the hero see the fence as being the end of the line and simply give up?  Or is the fence used as a ladder to escape danger?  In life we often are faced with difficult situations and can choose whether we view such as a fence or ladder.  And right now, investors can look at the markets and make a similar decision the same. 

Equities finished last week higher, capped by a big rally on Friday after the monthly employment report.  The jobs report came in slightly better than expected but there were downward revisions to the previous two months’ reports.  What moved markets most was that average hourly earnings posted a smaller than expected monthly increase and the previous month’s surprisingly large spike was revised downward, helping ease concern wages will contribute to higher inflation.  The strength of the labor market and continuing upward movement in wages has been bolstering the Federal Reserve’s case for continuing to raise interest rates.    

Treasury bond yields moved lower after the employment report with the 10-year US Treasury bond yield now 30 basis points, or 0.30%, below where it was at the end of year. This may not sound like much but since prices move inversely with yields, longer dated bonds, which had a horrible year last year, have enjoyed a slight rally to begin the year.  We are not optimistic this is going to last and think inflation will remain elevated with bond yields continuing to move higher, but at a slower pace.  The minutes from the last Federal Reserve meeting in December were also released last week.  These showed that while policymakers felt it was an appropriate time to dial back the pace of rate increases, they did not want to be seen as wavering in their commitment to the inflation fight.  And there were no indications any of the committee members felt a pivot to rate cuts in 2023 would be appropriate.  Our expectation is the Fed will raise rates at least twice and then is likely to pause for the remainder of the year to assess the impact rate hikes have had.     

Balloon or Rock

There is little doubt economic growth is slowing but the biggest question remains to what extent.  Last week’s jobs reports reflected a slight softening in labor conditions but overall the employment situation remains fairly strong.  The less than expected wage growth which helped propel the market higher will likely not be enough on its own to convince the Fed to change course.  The question remains whether the Fed has tightened too much or not enough.  Either case is very likely to lead to more challenges for the stock market. There is the third, “Goldilocks”, option where they have tightened just the right amount and we see what is being termed a “soft landing” in the economy.  Odds of this occurring seem to be increasing but are still much lower than the odds of the other two scenarios. 

But it isn’t just the Fed that is causing concern, it is also what is happening in Congress.  The passage of large spending bills last year could very well lead to more inflation this year.  (Yes, there are consequences for actions, for example the inflation that was caused largely in part by pandemic era stimulus payments.)  The drama in the House last week electing a Speaker demonstrated the broader discourse between members of Congress, even within parties.  This does not bode well for the debt-ceiling debate occurring later this year.  And now there is even justified speculation there may be austerity measures, including lower levels of government spending. This could help with the inflation situation but may be harmful if we were to experience a recession, as is being widely anticipated, since government spending generally works to provide stimulus during slow economic times.     

Looking Ahead

The markets continue to be attuned to the same themes that drove it in 2022, including the path of inflation, the state of the labor market, and the Fed’s policy response. The Consumer Price Index (CPI) report for December will be released on Thursday.  Current consensus expectations are for a flat reading month-to-month and a drop on the yearly number firmly below 7% for the first time since November 2021.  This is still an elevated rate of inflation and well above the Fed’s comfort zone so it is not expected this report will change the expected course of Fed action at their next meeting, unless it happens to surprise strongly to either the downside or upside. 

While inflation and the Fed will remain an underlying theme driving markets in 2023, we think the focus is going to shift more towards corporate earnings.  Earnings reports for the fourth quarter of last year kick off on Friday with the major banks reporting, along with locally watched heavyweights Delta Airlines and UnitedHealth Group. Markets anxiously await the coming wave of earnings reports for Q4, with thoughts being that current consensus estimates will need to come down.  However, the strength of the market last week seemed to possibly indicate there is some comfort in hopes for earnings resilience amid cost cuts and workforce restructuring.   

If the up and down string of market sessions over the past few weeks are an early indication, we are likely to see a continuation of challenges in the market this year.  Some may view these conditions are being an obstacle, or a fence, standing in their way on the path to a comfortable retirement.  We are here to help you in any market conditions so you can turn this into an opportunity, or a ladder, towards realizing your retirement goals.   

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

Glad It’s Over

It is probably a safe assumption that most anyone has had at least one experience they are glad when it is over.  Often the experience may not necessarily be bad, such as a long vacation, and you might simply be glad to be back home.  However, the majority of the time when this phrase is uttered it is because somebody is truly happy that something is finished.  When it comes to the markets, few would not agree they are glad 2022 is over. 

The most widely followed stock index, the S&P 500, finished with a loss of 19.4%; its worst loss since 2008 when we were in the midst of the financial crisis.  This was a painful reversal after a gain of nearly 27% in 2021.  It was even worse for the tech-heavy Nasdaq composite which dropped 33.1%.  The Dow Jones Industrial Average fared better with “only” an 8.8% loss.  From a historical perspective this was the 7^th worst year for the S&P 500 going back to 1926. 

Stocks began their descent early and generally struggled all year, save for a few rallies which failed to materialize into longer term upward trends.  Inflation put increasing pressure on consumers and the Federal Reserve quickly raised interest rates to fight higher prices. Concerns were raised about global economies slipping into a recession as a result of higher interest rates.  The Fed continues to walk a thin line between raising rates enough to cool inflation but not so much they stall the U.S. economy.  Russia’s invasion of Ukraine in February worsened inflationary pressure by making oil, gas, and food commodity prices even more volatile amid existing supply chain issues. 

Growth stocks, especially those with inflated valuations, fared worse than value stocks since growth stocks tend to be more sensitive to interest rates.  A stock’s price is generally predicated on prospects for future earnings.  Discounting future cash flows to present value using higher rates leads to lower current stock values.  Energy was the lone bright spot in the market as the sector returned nearly 60% for the year.  Technology, consumer discretionary, communications and real estate were laggards.  

It Won’t End Fast Enough

It was a rough year for the stock market, but it was equally bad for the bond market which suffered its worst losses in history, by a wide margin.  The Bloomberg Barclays U.S. Bond Aggregate Index lost 13% and longer term (20+ year maturity) Treasuries lost a whopping 30%.  For many years we’ve been taught about the advantages of diversification and how bonds can protect against stock market loss;  a strategy that has historically worked well – until it did not.  This really should not come as a big surprise since interest rates were near zero a year ago so the only direction to go was up. Bond prices move inversely to bond yields, so prices will fall as yields move higher.  The only surprise may have been the stubbornness of inflation which led to interest rates moving much higher than most anyone imagined or anticipated. 

The Federal Reserve moved the Fed Funds rate from near zero to over 4% during the year; the fastest rate hikes since the late 1970’s.  Indications are they are not finished yet.  Inflation is moderating but remains well above the Fed’s comfort zone, as well as the comfort level of most consumers as monthly household budgets continue to be strained.  We anticipate rates to move higher over the next year; albeit not at the same pace or to the same magnitude we experienced in 2022.  Therefore, we continue to remain cautious on the bond market.  For those investors holding fixed income funds in hopes of a recovery, even if the bond market stabilizes and we do happen to see a drop in interest rates, it seems highly unlikely losses will be quickly recouped.  We would encourage investors to consider other strategies for protecting their wealth or providing income. 

Looking Ahead

With 2022 now behind us, we look ahead to 2023.  Prospects of a recession loom large, perhaps the most widely anticipated recession in history judging by the current consensus of economists.  The stock market was driven by action from the Federal Reserve in 2022, with many strategists believing this will continue to be the case in 2023.  However, we think the stock market will be driven more by earnings.  We anticipate the Fed to continue to raise rates, although at a slightly slower pace, during the early parts of this year.  But earnings growth (or lack thereof) is likely to be a larger market driver since if we do enter a recession, earnings are likely to drop. We may see some indicators of this when earnings reports for the fourth quarter begin to be released towards the middle of this month.

Inflation and interest rates will continue to be monitored closely and we see a possibility of the pace of reported inflation to drop quickly given how it is currently measured.  Also, recessions tend to be deflationary since reduction in demand occurs.  But even if this were to happen, we would not expect a quick pivot from the Fed and we anticipate inflation to remain elevated above historical levels for many months, if not years, to come.  With the prospects of a recession and further Fed action, we will likely see continued volatility in the markets, especially during the first half of the year.  This may prove to be a very good buying opportunity.  As we saw in 2022, sector and stock selection had a large impact on returns and many active strategies outperformed passive strategies. We anticipate this to continue into 2023. 

It seems premature to make predictions about the second half of the year, especially given all the variables, but we are cautiously optimistic that better times are ahead.  We think it is unlikely we will again experience the double-digit growth that we did over the past decade, but any sustained move higher would be welcomed.  If you are fully invested, we would encourage you to remain so, being patient and not losing sight of your long-term goals.  Timing the market well has proven nearly impossible and by jumping out now, you would risk a possible rebound.  With a recession being so highly anticipated, there is a likelihood it has already been priced into the market.  But if one were not to occur, we could see a positive reversal in the markets. 

Here at Secured Retirement, we remain committed to doing what we always have – ensuring you feel confident in your retirement regardless of what happens in the markets.  If you, or anyone you know, would like to discuss your individual situation in depth do not hesitate to contact us.  We want to ensure you are well prepared for what lies ahead. 

Best wishes for a happy, healthy, and prosperous 2023!

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

Holiday Miracles

While it seems extremely doubtful markets will end the year in positive territory, holiday miracles do happen. And we are not just talking about a certain football team pulling out an improbable win after trailing by 33 points late in the game.  Many children may be wondering if Santa will be making a visit to their house this year and similarly, investors might be wondering if we will see a “Santa Claus” rally to end this difficult year on a high note.    

The past week was another series of ups and downs with the stock market rallying to begin the week as the monthly Consumer Price Index (CPI) report came in better than expected and showed inflation is cooling.  However, inflation remains elevated well above the comfort zone of the Federal Reserve and certainly most consumers. The Fed did shift down its pace of interest rate hikes last week when they raised rates by 50 basis points, or one-half of one percent; the first step down after four consecutive 75 basis point (three-quarters of a percent) rate hikes this year.  Markets reacted negatively to the comments made by Fed Chair Jerome Powell after the meeting in which he stated that the Fed now anticipates that interest rates will need to remain higher for longer. Powell’s comments also indicated the Fed has more work to do (i.e. will continue to raise rates) and would like to see further evidence that inflation is on a sustained downward path.

The Fed also released their quarterly “Dot Plot” showing estimates by policymakers on where they forecast interest rates will be over the next several years.  It should be cautioned these forecasts are frequently updated as economic conditions change and these dot plots are rarely accurate over longer periods of time.  The latest release shows the Fed expects short-term interest rates to continue moving higher over the next year and remain there, hence the “higher for longer” message given by Powell post-meeting.  With the stock market being so dependent upon Fed action at this time, this was the catalyst, along with a disappointing retail sales report, that sent markets sharply lower in the second half of the week.  The S&P 500 ended the week about 2% lower, following similar losses the previous week. 

Will Santa Come to Town?

A Santa Claus rally generally occurs within the last five trading days of the year and spills over into the first two trading days of the new year.  Often it is the result of institutional buying to position portfolios prior to year-end for a favorable set-up going into the new year.  In years where there is a down market, optimism for prospects in the new year lead to buying. Given the market action of this past year, conventional wisdom might say this would be the case now but unfortunately we do not share that same enthusiasm given the current headwinds in the markets and economy.  We certainly would not complain about a nice rally to end the year, but these types of rallies tend to be short-lived and we again want to emphasis that investors should look past what happens over the next couple of weeks and maintain a longer-term approach to the markets.    

It is time to consider what we think might happen in the upcoming new year.  Inflationary risks appear to be subsiding, but there is a risk they could return, similar to what happened during the 1970s.  We do expect the Fed to continue to raise interest rates, albeit at a slower pace than they did this past year and to a much smaller extent.  They will eventually need to pause to assess the impact of their monetary policy.  Interest rates are likely to remain elevated relative to where they have been the past several years.  Wage growth is most likely the largest ongoing inflationary pressure given the current state of the labor market; something the Fed is monitoring closely.  The markets are likely to shift their primary attention from inflation to earnings.  Companies are expected to continue to unload their glut of inventory at discounted prices, which will help alleviate inflationary pressures but will also lead to lower earnings.  Expect the markets to react negatively to disappointing earnings and downward estimates during the first half of the year.  We are of the belief there will be a recession in 2023, but it will be mild.  The stock market will likely drift lower, but not too significantly from where it is now. The second half of next year brings more optimism.  We will provide further detail on our thoughts for the upcoming year in weeks to come. 

Looking Ahead

Following the CPI report and the Fed meeting last week, the rest of the year should feel rather anti-climactic.  Retail sales reports last week were disappointing so retail sales from the holiday season will maintain a higher than usual emphasis, but we will not have a clear assessment of those until after the first of the year.  With so many economists and business leaders expecting a recession, the markets seem to already be factoring one in.  But the question will be to what extent.  If the Fed is able to engineer a soft landing and avoid a recession or if the recession is mild, the stock market could react quite positively.   So while remaining cautious, we continue to urge investors to remain mostly invested and perhaps keeping a little bit of cash available.  We still believe we are much closer to the bottom of the market than the top and the greatest risk in 2023 might be missing out on a recovery.  But we are also cautioning that decent returns over the next several years are likely to be much more difficult to come by than they were during the past decade. 

The markets of today are very different than markets of the past.  Fortunately there are also various strategies available to help people who have saved a lifetime to protect their wealth while not missing out on earning interest or participating in the market.  When it comes to retirement planning, do not leave your hopes on a miracle; have a plan in place where you can feel confident.  If Santa does come to visit, we hope you receive something special in your stocking and not a lump of coal. 

From all of us at Secured Retirement, we would like to wish you and yours the very Merriest of Christmases and a happy holiday season!

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

Ghost of Christmas Present

In Charles Dickens’ classic novella, A Christmas Carol, the miserly Ebenezer Scrooge is visited by three Christmas spirits who offer him a chance of redemption – the ghosts of Christmas Past, Present and Yet to Come.  Each spirit attempts to show Scrooge the errors of his ways and how treating everyone with kindness, generosity and compassion embodies the spirit of Christmas.  When it comes to the markets, the events of the past year have been different than any we have experienced in recent memory.  As we look back at 2022 and assess the current situation, will we see more of the same in 2023 or will the markets change their ways?

Stocks wrapped up their worst week since September after a worse than expected report on wholesale prices Friday.  This comes on the eve of this week’s Federal Reserve policy meeting where expectations are for an increase in the fed funds rate of 50-basis points, or one-half of one percent. For the week the S&P 500 fell 3.3%, while the Dow Jones Industrial Average sank 2.7% and the Nasdaq dropped 4%.  Bond markets endured a bumpy week with the yield on 10-year U.S. Treasury bond ending marginally higher.  However, longer term yields remain more than a half percent lower than they were in just a month ago.

Falling long- term rates pushed bond prices higher, as prices move inverse to interest rates. November was the best month for U.S. bonds since December 2008. Unfortunately, the US bond market is still lower by double digits year-to-date and remains on pace for one of its worst years in history.  The traditional 60/40 stock/bond portfolio, which is supposed to provide diversification, has also suffered one of its worst years in history. Higher interest rates do mean better yields for fixed income investors but the volatility of the bond market, which we think will continue into 2023, has shown that bonds may no longer provide the diversification and protection they have in the past, making this an opportune time to consider alternative strategies for portfolio protection. 

Ghost of Christmas Yet to Come

With the volatility we have experienced and the precocious position of the markets and economy, we all might be wondering what the future might hold.  Consumer spending, which makes up about two-thirds of GDP, is being monitored closely, especially during this holiday season.  Indications are that spending remains strong, but consumers are seeking out more bargains and discounted items than they have in the past.  Inflation has outpaced wages for 20 consecutive months, so in order to support higher levels of spending, consumers are saving less and borrowing more.  This is a cause for concern, especially if we were to enter a recession and experience job losses, making payments on borrowing, especially credit cards, more difficult and unemployed people having less savings to rely upon.  Oddly, the continued strength in consumer spending contradicts the widely followed University of Michigan’s Consumer Sentiment Index, which has been negative for 8 consecutive months; the longest run of extreme negative sentiment that we’ve seen with data going back to 1952. 

Despite last week’s higher than expected Producer Price Index (PPI), inflation does seem to be moderating and even falling.  The PPI increased 7.40% over the last year, the smallest increase since May 2021.  For reference, PPI peaked at 11.66% back in March. (Note this coincides with when the Fed began to raise interest rates, as mentioned earlier.)  Supply chain backlogs have improved dramatically and there have been large drops in the prices of lumber, used cars, and rents. Lumber prices are often viewed as a forward indicator of economic conditions since they reflect demand for construction materials.  These price drops will eventually be reflected in inflation numbers and we should see at least a pause from the Fed, providing some relief and a tailwind for the stock market.

Currently the stock market is very much dependent upon Fed action, which in turn is dependent upon inflation.  With prices of many raw materials dropping, many economists are predicting inflation will fall rapidly back to the Fed’s 2% target.  But we remain skeptical since these same economists have been predicting lower levels of inflation over the past two years and historically when inflation reaches the levels it has recently, it takes on average ten (yes, 10!) years for inflation to fall back to the Fed’s comfort zone of 2%.  Just as this year has been different than many years in the past, we are not of the belief it will take that long for inflation to subside to that level, but we think it will still take a long time, perhaps years and not months. 

Looking Ahead

The main event of this week will be Wednesday’s Fed meeting and rate decision.  As we’ve seen in the past, since the interest rate decision is widely telegraphed beforehand, it often is not the actual rate decision but rather the comments from the Fed afterwards that move the market.  The Consumer Price Index (CPI) report on Tuesday is also likely to have an impact on the markets since the focus remains on inflation.  After the excitement around these two events in the middle of the week, we are apt to see a much quieter stretch for the markets going into the end of the year.  However, we do caution that many institutions and fund managers make big moves at year-end to position portfolios, which may especially be the case this year given the amount of volatility.  We may see some moves in the market but we would not put much credence into large market moves since they are likely to be short-lived. 

As always, we encourage investors to ignore short-term moves in the market and maintain a long-term perspective.  Remember the objective and goals of your investing.  For most people this would be to provide protection of purchasing power to maintain your lifestyle and standard of living in retirement.  If you are worried about visits from spirits of the past and future and what they might reveal to you, please give us a call to ensure your portfolio is positioned appropriately so you can avoid needing your own chance for redemption. 

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