Tax Planning

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.   

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