Secured Retirement

God Save the Queen

As the world mourns the passing of Queen Elizabeth II, we remember her legacy as the longest-serving monarch of the United Kingdom and look ahead to the new reign of her son, King Charles III, including what changes it could bring. Changes in leadership and regimes are common throughout history.  By studying history we can learn from the past, and while history has a tendency to repeat itself, it is very rarely exactly the same. This is also true in the financial markets.    

Unlike changes in leadership which often are measured in years or decades, financial markets change rather quickly and are affected by many variables, most notably the economy.  (As a quick reminder, the stock market and the economy are not one and the same.)  A mistake often made by investors is to think markets will behave in the same manner as they did in the past or that certain assets will maintain the same relationships, or cross-correlations, as they did previously. We are seeing a lot of this presently but caution this thinking can lead to costly investment mistakes.  For example, parallels are being drawn between this year’s stock market behavior and past downturns, most notably the tech bust of 2001-2002 and the financial crisis of 2007-2008, or for those that remember, the late 1970s and early 1980s.  But none of those are exactly the same as what we are experiencing now and therefore investment strategies which worked in the past may not work as well today. 

Looking back at the events listed previously, certain aspects of what we are dealing with in the present are similar, but there are also differences.  For example, we have seen a big pullback in the prices of technology stocks, especially those that are “profitless,” as we did in 2001-2002, but at that time most tech companies were not profitable whereas many tech companies are extremely profitable today.  So far, we are not experiencing a financial crisis, as we did in 2007-2008.  During both of those times unemployment was not as low  as it is now and we were not dealing with high inflation and rising interest rates. As a matter of fact, interest rates were falling so bonds provided some protection from a falling stock market; that is not the case today. 

The economy and markets have evolved since those events and with present-day technology, events happen much faster.  Information is disseminated much more quickly and so pricing in the markets has become more efficient.  Looking further back to the 1970s and early 1980s, the markets were not nearly as advanced and unemployment was considerably higher.  Inflation and interest rates were also higher and had been for some time.  The economic situation today may be most like that period of time, however even though interest rates were moving higher, they had been much higher than what we have experienced in recent years so the impact from rising interest rates was not nearly as dramatic as it is now. 

Mind the Gap

Last week was a good week for the stock market with each of the major averages up more than 2.5%, snapping a three-week losing streak in which the S&P 500 lost nearly 8.5%.  There was not much news to drive the bounce, except the possibility of what traders call “oversold” conditions and depressed investor sentiment, which often is a contrarian indicator for the markets.  In other words, at some point investors get tired of selling and start buying, pushing the market higher.  Positive drivers for the market include the possibility of reaching peak inflation, resilience in consumer spending and corporate profits, and solid macroeconomic data, particularly in the U.S. labor market.  However, there are also suggestions that last week’s mini-rally is nothing more than a bear market bounce since expectations remain the Fed will continue to aggressively raise interest rates, which increases the odds of a recession, bringing with it slowing global growth and risks to corporate earnings. 

With the almost certainty of higher interest rates and strong possibility of a recession on the horizon, we expect the markets to remain volatile.  This is why it is critical to have part of your portfolio protected to ensure your income remains intact.  Do not let a market downturn and deep loss in portfolio value have an adverse long-term effect on your income and lifestyle; make sure there is not a gap in your income and investment planning. 

Looking Ahead

This will be a busy week in terms of economic releases which have the potential to drive markets and contribute to further volatility.  The highlight will be the release of the Consumer Price Index (CPI) numbers on Tuesday.  Expectations are for an increase in prices of about 8% compared to a year ago.  There have been reports of used car prices dropping and we have seen energy prices fall recently so it may not come as a surprise if the price index drops in comparison to last month.  Prices remain much higher than they were a year ago so even if the headline number comes in lower than expected, inflation is very likely to remain well above the Fed’s comfort zone and it is doubtful anything in this report will derail the Fed from raising interest rates during their upcoming meeting next week.  Current expectations are for a three-quarter point (0.75%) hike but if CPI comes in considerably below expectations, showing a strong deceleration, that could end up being only a half-point (0.50%) rate hike. 

Other economic releases this week include Producer Price Index (PPI) and retail sales.  So far, consumer spending has remained fairly robust, helping prop up the economy.  Signs of weakness in consumer spending could be an ominous sign for the broader economy but since unemployment remains low and wages continue to increase, we do not view this as being likely over the next few months. 

Like changes in country’s leaders, markets change over time.  While there may be some similarities with past events, conditions today are very different than what has been experienced in the past so be sure your portfolio is invested appropriately, and your income plan remains intact. We expect volatility to continue so if you do not feel comfortable now, it is unlikely you will feel more comfortable anytime soon. This is a good time to visit with us about your goals and ensure you feel secure in your retirement. 

We would like to extend an exclusive invitation to our next TaxSmart™ Summit on Thursday, October 13^th with Becky Ruby Swansburg.  Becky spent her early career working in Washington, D.C. with members of Congress and the White House under the second Bush administration.  Her work on tax policy and America’s savings habits turned her attention to the urgent needs of today’s retirees.  With her policy background and extensive retirement planning knowledge, Becky provides a wealth of information.  If you want to learn ways to help protect and position your retirement assets for long-term success, no matter what future market and tax conditions may bring, you will not want to miss this event.  Call our office now to reserve your seat. 

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

Workin’ for a Livin’

Happy Labor Day!  With the holiday upon us it has most likely evoked thoughts regarding the end of summer, start of school, and the beginning of football season.  Even though Labor Day has its roots imbedded with organized labor when it became a federal holiday in 1894, the recognition of the day is about all working people. Therefore, what may also come to mind is the term “work” since spending time at jobs encompasses a large portion of waking hours for most American adults. 

Not only are jobs a vital part of our individual lives since they allow us to provide for ourselves and our families, overall employment is an integral part of the economy.  Other core drivers of economic growth, namely consumer spending, are also directly affected by employment.  This is why the central bank of the United States, the Federal Reserve, operates under a “Dual Mandate” – the goal of fostering economic conditions that achieve stable prices and maximum sustainable employment.  Because of the importance of the national employment situation, there is a great deal of attention paid to the monthly Payroll and Unemployment Reports released by the Bureau of Labor Statistics (BLS) on the first Friday of each month. However, as a result of the high levels of inflation currently being experienced here in the U.S. (as well as around the globe), the Fed has stated they are going to focus on fighting inflation even if it comes at the expense of hurting the labor market; in essence putting more emphasis on price stability than labor conditions.  They have openly expressed their plans to continue to raise interest rates for the foreseeable future and expect this to negatively impact employment since tighter monetary conditions, in the form of higher interest rates and less money supply, tend to slow economic growth. 

The monthly employment reports released last week were in many ways the best of both worlds.  Many referred to it as a “Goldilocks” report – not too hot and not too cold. If the reports had been too strong, it would imply that the labor market remains tight, putting pressure on wages and contributing to inflation.  If the reports were too weak, there would have been concern the economy was slowing faster than anticipated.  By coming in right at expectations, it shows employment continues to grow at a measured pace.  Further, the underlying components of the labor report did not indicate that employment is contributing to inflation.  This report gave credence to the thought the Fed will be able to engineer a “soft landing” and somehow avoid a recession.  However, since the Fed is committed to aggressively fighting inflation using the tools at their disposal, we still believe a recession will be nearly impossible to avoid and we are likely to see one in the latter part of next year or sometime in 2024. 

Punching the Clock (and Keeping Track of Time)

The major stock market indices were lower in August, peaking around the middle of the month and then giving back those gains.  The S&P 500 continued to rally during the first couple weeks of the month, rising some 17% off the lows set in June, only to retreat and end the month lower by 4%.  Bond yields moved higher, with the yield on the 2-year Treasury reaching its highest level since 2007.  Most commodities, including oil and precious metals, were lower for the month due to fears over weakening demand resulting from an economic slowdown.  The major theme in the markets for the month was shifting expectations from the Federal Reserve.  At the end of July the prevailing thought was that the Fed would continue to raise rates through the end of this year and then pivot and lower rates in mid-2023 as the economy slows or possibly even retracts.  These expectations were quickly tempered by comments from Fed officials who maintained much work remains to be done on inflation before any loosening on policy can be contemplated. 

For the year the S&P 500 is lower by more than 17% with the tech-heavy Nasdaq off by 25%.  This is the fourth worst start to a year in history for the S&P 500, as well as one of the most volatile.  But the biggest market story may be the bond market which has suffered losses nearly as bad as the equity markets.  No fixed income sectors have escaped the carnage as we’ve seen interest rates rise at one of the fastest paces in history.  With bond yields falling for 40 years and finally reaching near zero during the pandemic, there really was not anywhere to go but up. And now dealing with the highest levels of inflation experienced in 40 years, bond yields have moved up quickly, pushing bond prices lower.  This has been a harsh reminder there is risk in the bond market and while historically not as volatile as stocks, the risk of sizeable loss remains. 

Looking Ahead

The market volatility experienced this year will likely continue into September.  Historically speaking, September is not one of the better ones for the market but trying to time the market based on the calendar would be foolish.  Inflation and the Fed will be the major themes of the month and there will be increasing attention given to the upcoming elections in November including the impact those could have on the markets and economy going into 2023.  The Federal Reserve is slated to double the pace of their bond runoff program, known as quantitative tightening (“QT”) this month which will further reduce the money supply and should, in theory, work towards reducing inflation.  But looking back on past experience, reducing liquidity in the markets does not bode well for stocks.  We anticipate continued difficulty in the bond market in the face of rising interest rates. 

Here at Secured Retirement, we focus our efforts on helping people realize their financial goals as they transition from the workforce.  We also want to recognize that the work of Americans, such as yourselves, over the past several decades has contributed to the strongest economic growth in history.  The benefactors of our robust American economy and way of life, which is each and every one of us, thank you for your work. 

Labor Day is generally considered to be the unofficial end of summer, but this is not necessarily bad news since autumn is arguably the most favored season here in Minnesota.  This holiday is observed for all working people, past and present, so be sure to take time to enjoy it. 

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 ‘er Buck

The expression “Let ‘er Buck!” means to bring on a challenge and let it throw you around while you try to conquer it.  The origins of the phrase are from rodeos, where a cowboy sitting on top of a wild horse or bull, tightly contained in a pen, will give this command to open the gate so the animal can start bucking. The goal is to stay on the horse/bull as long as possible while the horse/bull tries to buck you off.  Rodeos have been, and remain, popular in the American West, especially in the state of Wyoming which long ago adopted a bucking horse as its symbol.  This past week the Federal Reserve held their annual economic symposium in Jackson, Wyoming where comments from Fed Chair Jerome Powell sent markets bucking. 

With inflation remaining persistent near 40-year highs, there was added attention and hype to this year’s gathering of central bankers.  Powell’s comments came at the end of the symposium and were unusually short, lasting less than 8 minutes.  But during this time he emphasized the Fed’s commitment to fighting inflation even if it comes at the cost of labor markets and overall growth.  He even went as far to explicitly say that the process of reducing inflation will not be painless to American families and there will be “unfortunate costs of reducing inflation.”  Despite Powell’s comments being highly expected, markets moved sharply lower with the stock markets recording their worst week since mid-June.  However, the markets remain 10% higher than the June year-to-date lows.  Not surprisingly interest rates moved higher on the week and the yield curve remains inverted with 2-year Treasuries yielding about 0.37% more than 10-year Treasuries, indicating a dimming outlook for economic growth prospects. 

The Fed’s pledge to fight inflation no matter the cost implies they are likely to continue to raise rates if inflation remains high with little regard to what else is happening in the economy.  The working theory from a few weeks ago that the Fed will raise rates through the end of this year and then start to reduce rates in 2023 as economic activity slowed has now largely been abandoned.  Odds of a “soft landing” in the economy are now diminishing. If the Fed continues to raise rates, as is now expected, eventually this will negatively impact consumer spending and employment, which is very likely to send us into a recession. 

8 Seconds

When the rodeo cowboy is riding atop the bucking horse or bull the goal is to stay on for 8 seconds.  It may not sound like much but ask anybody who has done it; trying to stay on such a powerful animal for that long is a very difficult task.  Not to mention the risk of injury should you get bucked off.  With all the market volatility experienced this year, the goal of any investor should be to emerge relatively unscathed.  Many investors have lost a great deal of money this year, but the amount of money lost only matters if it affects your overall financial plan and has an impact on your lifestyle.  The key to remaining in the game is to have a sound investment strategy and more importantly for retirees, having a solid income plan. 

We do not believe that we are in a recession, but signs are looming we will eventually encounter one.  What have you done to protect yourself from market volatility?  Historically bonds were a good hedge against stock market volatility.  When investors became fearful, they took money out of stocks and put them into bonds. The demand for bonds increased, pushing prices higher and yields lower. Such a strategy has not worked thus far in 2022 and is not likely to work going forward.  With interest rates rising, and likely to continue to as the Fed fights inflation, bond prices are falling so bonds do not provide the protection and diversification they once did.  It is time to look at other alternatives in your portfolio to provide protection, especially since it is unlikely this volatility will be going away anytime soon. 

Looking Ahead

This next week looks to be relatively quiet as we close out summer and head into the long Labor Day weekend.  Markets and investors will continue to digest the comments made in Jackson, including the implications they have for the markets going forward.  The monthly employment report is due out on Friday but since it is right before the long weekend any market response is expected to be somewhat muted, barring a major surprise.  There will be some housing data released early in the week which could receive added attention since nationally the housing market seems to be deteriorating quickly. 

The markets have been challenging this year and that is not likely to change. The goal is to hold on while you try to conquer it.  The definition of success is not be to have the best returns or outpace a particular benchmark but rather to be able to maintain your lifestyle. Be sure your portfolio is positioned appropriately so if the markets do start to buck you can hold on. 

If you would like to hear more about our thoughts regarding a potential recessions and ways to protect your portfolio, please join us for our monthly Lunch & Learn today, Monday, August 29^th at noon in our St. Louis Park office.  You can also watch via livestream or watch the replay on YouTube.  As always, we are here to help so do not hesitate to contact us. 

Have a wonderful week and a great Labor Day weekend!

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

Are We There Yet?

Road trips seem to be a common staple of American families during the summertime.  Despite higher gas prices, this summer seems to be no different.  I remember taking many road trips as a child.  We did not have DVD players nor most of the electronic gadgets available today to help occupy our time, plus most speed limits were only 55 miles per hour so the trips took longer.  Like most rather impatient children enduring a long ride in the car, my siblings and I would annoy our parents with the question of “Are We There Yet?”  The same question could be asked of the economy and markets today, especially as it relates to a recession. 

The answer may not be so simple and our thought is that we are not yet there.  With two consecutive quarters of negative economic growth being reported, an argument is being made that it meets the classical definition of a recession.  Besides negative GDP growth, a recession also generally entails a time when trade and industrial activity are reduced so it is difficult to justify we are in the midst of a recession with the labor market remaining strong, unemployment near historically low levels, and fairly resilient consumer spending.  As a matter of fact, some of the most watched economic releases regarding activity in the industrial sector, such as Capacity Utilization and Industrial Production, came in better than expectations last week and indicate there is not a slowdown.  Monthly retail sales also showed continued growth, although consumer spending is shifting from discretionary items to essential items such as food and clothing due to higher prices and monthly household budgets not going as far as they used to. 

Recessions are a natural part of the economic cycle and sooner or later we will experience one.  If we are not there yet, when should we expect to see one and what will be the cause?  Our estimates are that we won’t see a real recession until at least the latter half of next year or sometime in 2024.  With inflation remaining elevated above historical averages and the Federal Reserve’s comfort zone, it is expected the Fed will have to continue to raise interest rates.  Furthermore, they have not yet begun reducing their balance sheet by selling bonds, known as quantitative tightening (or simply “QT”), in earnest.  Coupled with raising interest rates, QT will lead to a lower supply of money and eventually should help lower inflation.  But it is very likely the Fed will push us into recession in doing so.  The spread, or difference in yields, between 2-year and 10-year U.S. Treasury notes remains negative, or inverted, which in the past has been a strong predictor of future recessions since it indicates anticipated weakness in future economic growth.  What may be an even more ominous sign of a future slowdown is the difference in yields between 3-month T-bills and 10-year Treasuries, which at one point did invert a few weeks ago. Shorter term bonds are much more susceptible to interest rate hikes by the Fed so when they raise rates next month, as widely anticipated, T-bill yields should be quick to follow and there will again be a negative spread between 3-month T-bills and 10-year bonds.  This time the inversion is likely to last much longer. 

When Can We Stop?

Besides wanting nothing more than to arrive at your destination, perhaps the second most asked question is “When are we going to stop?” Whether it is to go to the bathroom or get something to eat, everyone seems happy to get out of the car for a few minutes.  In the same vein, investors may want to know when market volatility will end.  It seems everyone is happy when the markets are moving in a positive direction and they are making money but when the market drops they may want to stop and take a break and may even ask themselves why they are invested in the market. There are two answers – 1) because at some point they expect the market to again perform well, which historically it has done or 2) maybe they should not be invested in the stock market.  Over long periods of time the stock market has performed very well and provided the best means to beat inflation but over shorter time periods it can be more challenging.  You should not invest money you cannot afford to lose, or that by losing your lifestyle would be negatively impacted.  As a very general rule of thumb, any money you plan on spending in the next five years should not be invested in the stock market.  Also, any money invested in the stock market should only be done once your monthly income needs are taken care of over the aforementioned time period.   

What should you do with money you need to spend in the next few years to keep it safe?  The 40 year bull run in bonds seems to be over and with rising interest rates bonds are no longer the safe haven they once were.  Do not let the recent rally in longer-term bonds fool you, it is doubtful bond yields will drop significantly from here in the near term. This means bond prices are unlikely to move higher anytime soon and any income earned will not overcome what could be lost with falling bond prices. It is different for shorter-term bonds, where we now do see yields that are enough to beat price decreases since their duration, a measure of price sensitivity to changes in interest rates, is lower.  However, shorter-term bonds are not keeping up with inflation and you are slowly losing purchasing power.  It might be time to consider other alternatives that keep your money safe yet might provide for better returns to keep pace with rising prices.  This trip has already gotten long, so we will save those ideas for another time. 

Looking Ahead

Last week was the first negative week for the stock market in four weeks so it would seem the recent stock market rally is cooling off.  We are at a crossroads; will momentum remain positive and we see further gains or with the recent run-up will the market take a break and level off?  The worst-case scenario is this was a bear market rally and we will again see the market drop to the lows experienced in June.  This coming week will bring some interesting economic releases, including Personal Consumption Expenditures (PCE) and an update to second quarter GDP.  We do not expect a significant change to the previously reported GDP number but given the recession arguments it will no doubt we debated.  PCE tends to be the Fed’s preferred measure of inflation and the year-over-year change is expected to drop slightly from last month but at over 6% remains well above the Fed’s comfort level of 2-3%.  Barring any major surprise this will most likely continue to add fuel to expectations of the Fed continuing to raise rates at their next meeting in September.  We may hear some clues about this later in the week from members of the Federal Reserve during their annual symposium in Jackson, Wyoming. 

Remember, getting to retirement is a destination but living in retirement is a journey.  Invest accordingly and make sure you are comfortable.  You will have to contend with challenges such as inflation, recessions, and market downturns throughout your journey.  Hopefully it is a long enjoyable trip, and you won’t have to stop and ask if you have arrived.  Please let us know if you would like our help in this important journey. 

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

Still in the Middle of the Desert

It may be difficult to find a movie with characters as cool and slick as those in the 2001 version of Ocean’s Eleven.  The movie is fun to watch, not just for the cast of characters but also for the sharp visual aspects and snappy dialogue.  In the early part of the movie, Danny (played by George Clooney) and Rusty (played by Brad Pitt) are recruiting members to join their gang to rob a marquee Las Vegas casino, the Bellagio. One such target is Reuben (played by Elliott Gould), who happens to be a former casino mogul and could provide the funding for their scheme.  After Danny and Rusty explain their plan, Reuben shows skepticism by telling them he has full confidence they can rob the casino but then offers a reminder that once they are outside the casino they are still in the middle of the desert, therefore making a getaway difficult.  In similar fashion, markets celebrated lower than expected inflation readings last week, but we need to not lose sight of the fact we are still experiencing the highest levels of inflation in 40 years. 

The Consumer Price Index rose by 8.5% year-over-year, which was lower than the 8.7% expected and 9.1% reported the previous months.  Similarly, the Producer Price Index increased by 9.8% compared to a year ago, less than expectations of 10.4% and last month’s reading of 11.3%.  Month to month, the CPI was flat and did not show a gain while the PPI showed a decrease in prices of 0.5%.  These numbers were greeted with enthusiasm from the markets, leading the S&P 500 to a gain of over 3% for the week. Year over year inflation remains high but appears to be slowing, especially given there was not an increase from a month ago.  But does this mean we have reached peak inflation?

The month-to-month numbers can be volatile, so it remains to be seen if this is the beginning of a trend lower or a single month anomaly.  Back in April, inflation was reported as being lower than March, just to reverse course and increase in subsequent months.  Energy prices are leading the way lower and are very much attributable to the lower inflation readings. We are nearing the end of the summer driving season and have already seen a reduction in energy demand but short supplies remain and we would expect energy prices, especially natural gas, to rise over the cold winter months.  There have been encouraging reports regarding the situation in Ukraine, but even if we were to see a pullout of the Russian troops the damage that has been done, not only to Ukraine’s infrastructure but also with Russia’s standing in the world and trade partners. This could take many years, if not decades to mend.  In the meantime, food and energy prices are expected to remain high. 

You Need a Dozen Guys

Every person has their own rate of inflation based upon how they spend their money and there are many different components, so while energy is a major factor we also need to consider all that contribute to overall inflation.  On a macro-scale, supply chain issues seem to be improving and energy prices are moderating, if not slowly easing, but inflationary pressures remain, especially with food and housing.  Housing costs, which in CPI is measured by the cost to rent and not home prices, remain elevated and tend to be sticky so it is doubtful they will fall.  However, they seem to be stabilizing as the real estate market cools off.  Our expectation is that inflation, more specifically year-over-year price increases, will moderate and we will continue to see lower readings than what we’ve seen over the past several months.  But we also expect inflation to remain at levels higher than what we’ve experienced over the past two decades.  Even if inflation were to drop to the 5-6% range over the next year, it would continue to have a profound effect on retirement savings and future purchasing power. 

Despite lower readings last week and because inflation remains elevated, the Fed is expected to continue raising interest rates.  Their next meeting is in September and current expectations are for either a half point or three-quarter point increase with additional increases at their November and December meetings.  The Fed remains somewhat behind the curve since inflation remains stubbornly high but with softening inflation numbers, the odds of a soft landing seem to be increasing.  This is reflected in the stock market as the S&P 500 has rallied nearly 18% since it’s low in mid-June.  If we look back at history, after inflation peaked in 1974 and 1980, stock markets rallied and presented very robust returns over following years. 

Looking Ahead

Even if pricing pressures are diminishing and inflation is rolling over, it remains elevated and continues to eat away at the purchasing power of consumers.  Fortunately, there has been a recent reprieve for investors and savers in the form of better market returns and higher interest rates.  We expect inflation to remain above average for at least the next couple of years so while we welcome a better outlook with open arms, it is premature to declare victory.  The last few weeks of August tend to be relatively quiet in terms of the markets.  There are still some companies to report earnings and economic releases will be closely watching, including updates to GDP and Personal Consumption Expenditures (PCE) in a couple of weeks. 

Most people think that a market downturn is the greatest risk when preparing for retirement, but there are many other things to consider such as taxes and inflation.  For the first time in several decades, the latter continues to take center stage.  And while recent reports are encouraging, we need to remember that inflation has not yet been tamed.  When preparing for retirement, it is vital to have a sound financial plan which includes multiple sources of income and assets to overcome inflation so you can maintain your lifestyle. This is a long game, so don’t declare victory early just to find yourself stuck in the desert later in life. 

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 One Thing

In the hit 1991 movie City Slickers the city-dwelling main character, Mitch, played by Billy Crystal, is on a cattle drive with two friends trying to find deeper meanings in their lives while out on the range.  A gritty cowboy, Curly, played by Jack Palance, tells Mitch the secret to life is simply “one thing.”  It is up to Mitch to figure out the one thing most important in his life since it is different for everyone.  Focusing on one thing may be good advice for most individuals, however for larger institutions, such as the Federal Reserve, it is decidedly more complicated.

The primary goal of a central bank is to provide price stability for their country’s currency by controlling inflation.  Integral components of this are to manage the money supply and foster steady economic growth.  The central bank of the United States, the Federal Reserve, has a dual mandate: price stability and maximize employment.  But in the current environment these seem to be at odds with each other.  Low unemployment is causing wages to increase at a quick pace, creating upward pressure to the prices of goods and services.  The Fed has been on a path of increasing short-term interest rates throughout 2022 in an effort to bring inflation down to a level more conducive to promoting economic growth.  If they continue to raise rates, conventional thought is it will cause a slowdown in economic growth and perhaps lead us into recession, likely having an adverse impact on employment.  The Fed has explicitly stated they are willing to do this if it means they can get a handle on inflation.  But based upon the latest employment report, the Fed’s efforts are not working when it comes to the labor market. 

The larger than expected payroll and unemployment reports last Friday show that the labor market remains very resilient and the Fed’s interest rate hikes have had limited, if any, impact on employment.  Wages also increased year-over-year by a larger than expected amount, showing wage pressures are not yet moderating.  This gives the Fed ammunition to continue their current path of rate hikes with at least a half point rate hike likely in September, with increasing odds of another three-quarter point hike.  This is why the stock market reacted negatively to the employment reports and bond yields spiked.  A week ago we were talking about the probability of the Fed reversing course in 2023 and beginning to lower interest rates. That scenario remains a possibility but if economic reports show inflation continuing at elevated levels over coming months it will force the Fed to continue raising interest rates. 

Keep them dogies movin’

It seems a foregone conclusion the Fed will raise interest rates at their next meeting in September, but there are still economic reports, namely inflation and employment, in the interim so there will very likely be changes in expectations for the magnitude of the interest rate hike.  However, monetary policy can also work without central bankers doing anything. After the jobs reports, short-term and long-term bond yields surged with expectations of future interest rate increases.  These higher rates will filter through to rates on mortgages, auto loans, and other forms of credit, having an immediate effect on demand. 

We continue to closely monitor the bond markets, where we have seen a great deal of volatility recently.  The spread, or difference in yields, between the 2-year and 10-year U.S. Treasury remains “inverted” with the 2-year yielding about 40 basis points, or 0.40%, more than the 10-year bond.  Historically this has been a forewarning of a recession, especially when the inversion is this deep and prolonged. But it is difficult to see a recession occurring anytime soon with such strong job growth and a low unemployment rate. 

Earnings reports continued in earnest last week with somewhat mixed results but overall could be considered resilient in the face of recent economic data.  Companies continue to report revenue and earnings above previously lowered expectations.  The market sold off last Tuesday, just to reverse course on Wednesday with the S&P 500 ending the week nearly flat, while the Dow Jones Industrial Average had a small loss and the Nasdaq enjoyed about a 2% gain.  We continue to see strength in technology, which had been the most beaten-up sector this year.  Oil prices continued to pullback on fears of slowing demand. Prices at the pump have been declining since mid-June with demand falling to levels not seen since the early days of the pandemic.  This is what is known as demand destruction, which occurs when high prices cause consumers to change behavior and purchase less of a good, leading to lower demand and lower prices.  It is unlikely that demand will continue to fall markedly past current levels, especially on a sustained basis, we doubt oil and gas prices will drop significantly from here unless ongoing supply constraints are eased.  Lower energy prices could be reflected in upcoming inflation reports, possibly giving some reprieve to the Fed, but not appreciably enough to give them pause. 

Looking Ahead

Over the past couple of decades when we experienced relatively benign inflation, arguably the most watched monthly economic report each month was the Nonfarm Payrolls report since job growth is generally accepted as a strong indicator of the health of the overall economy.  Now with inflation running at 40-year highs, the inflation reports are also taking center stage.  Consumer Price Index (CPI) and Producer Price Index (PPI) numbers will be released this week with the CPI and PPI expected to show year-over-year price increases of 8.7% and 10.4%, respectively.  If they came in at these levels it would be lower than the previous month and could lend credence to the notion we have reached “peak inflation” with price increases slowing.  This would be welcomed news from the Fed, but inflation remains at very elevated levels and the Fed would have further work to do.   

While the spotlight remains on the Fed and inflation, stock markets are driven over the long term by corporate earnings. Profits are affected by higher prices since input costs tend to be higher and demand is generally weakened.  A reduction in the pace of inflation would likely lead to some tailwinds for the stock market.  From an investing perspective, quality of earnings is once again in vogue and we will continue to watch earnings reports over the next couple of weeks.  When it comes to retirement, your focus should be on one thing – feeling secure.  If you would like to discuss your retirement financial plans in detail, 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