Tax Planning

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

Give Her All She’s Got

In Star Trek when asked by Captain James T. Kirk to push the starship Enterprise faster, Chief Engineer Montgomery “Scotty” Scott would sometimes respond, “I’m giving her all she’s got, Captain.” The Federal Reserve might feel as if they are in a similar situation with their fight against inflation. They are using all the tools at their disposal, but the American public may not feel it is enough. Despite promising developments, inflation remains stubbornly high and continues to impact many people’s lives.    

U.S. equities were higher last week with Wednesday’s rally following Federal Reserve Chairman Jerome Powell’s speech where he signaled the Fed would step-down the pace of interest rate hikes to 50 basis points, or one-half of one percent.  However, he also reiterated that the peak Fed Funds rate will need to be somewhat higher than was projected in September. His comments sparked a big equity and Treasury bond rally since they gave support to the narrative we may be nearing the peak interest rates for this cycle.  In addition to the tailwinds from the Fed, stocks may also have been boosted by month-end moves, mostly buying, from institutions and certain funds.  The Dow Jones Industrial Average has now exited bear market territory since it is 20% higher than the lows from a few months ago, but the index does remain negative on the year. 

The Fed’s preferred gauge of inflation, Personal Consumption Expenditures (PCE) deflator, was in-line with expectations of an annual increase of 5% and remains well above the Fed’s inflation comfort zone of around 2%.  Labor market strength was evident with the payroll and employment reports released on Friday.  A larger than expected increase in jobs surprised markets, especially when coupled with reports of wage growth exceeding projections.  Higher wages are thought to add to the continuing inflation situation and these reports could complicate the Fed’s policy path. These reports did not paint a picture of a labor market that is moderating in response to higher interest rates and it keeps pressure on the Fed to bring rates higher or hold them there for longer. 

Boldly Go…

As 2022 winds down we look ahead to 2023.  When it comes to investing in the market, it is vital to maintain a long-term perspective and we feel very optimistic about market prospects in the long-term, especially for 2024 and beyond.  But as we look to next year, we know it is going to be a very different market than we have faced in recent memory.  The yield curve remains deeply inverted, signaling market fears of an impending recession.  But recessions hurt demand and therefore tend to be deflationary.  It is doubtful we will see prices at the same level that we did pre-Covid, say in 2019, but a recession should help ease some of the inflationary pressures experienced over the past year.  However, we do not think inflation will fall to the 1-2% range the Fed would prefer; the same levels what we, as consumers, have come to expect over the past 10-12 years.  This is why it is vital to have a well thought-out, tested plan for dealing with higher inflation in retirement so you don’t leave it to chance. 

When it comes to the markets, we expect them to be anything but smooth next year.  The world may be experiencing major structural and secular changes that will outlast the current business cycle, driving further uncertainty and raising the probability of greater market volatility.  The Fed is faced with the dilemma of reducing inflation, protecting jobs and growth, and ensuring financial stability. This will be no easy feat and any miscue, even if beyond their control, could send us on a course none of us would like to experience.  The best way to prepare for this, is not to plan for one outcome but rather plan for multiple outcomes.  The actions you take now will have a major bearing on the success you realize when dealing with such situations.  Decision making can be difficult during times of turbulence, which is also when mistakes are often made, so it is best to prepare in advance and consider how different outcomes might affect your plans. 

Looking Ahead

This week should be relatively quiet for the stock and bond markets with few major economic reports.  The exception being the Producer Price Index (PPI) report on Friday, which shows changes in wholesale prices that are then passed along to consumers.  Moves in the PPI tend to foreshadow moves in the Consumer Price Index (CPI).  We are apt to see much more activity in the markets in the following week when the CPI report will be released and the Federal Reserve meets for the final time this year.  Indications are we will see some stock market strength going into the end of the year, commonly referred to as a “Santa Claus” rally.  While not always the case, we think the likelihood is high this year given the volatility experienced and year-end positioning by institutions and fund managers.  We are now looking into next year, which is only a few weeks away, where overhangs remain, including growth fears, earnings risk, job layoffs, and the unrelenting Fed “higher-for-longer” narrative. 

This is a reminder that very limited time remains before end of the year.  Please call us as soon as possible if you need to make moves before the calendar changes to 2023.  When it comes to retirement planning, be sure you are considering all aspects, not just investments, and “giving her all she’s got” to ensure you feel comfortable knowing you have a secure retirement.    

Have a wonderful week!

Nathan Zeller, CFA, CFP®

Chief Investment Strategist
Secured Retirement
nzeller@securedretirements.com

Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.   

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

Planes, Trains, and Automobiles

For many people the movie, Planes, Trains, and Automobiles has become a tradition to watch during this time of year.  This film stars Steve Martin as a high-strung marketing executive trying to get from New York City to his home and family in Chicago in time for the Thanksgiving holiday. During his travels he invariably keeps running into a goodhearted, but annoying, salesman played by John Candy.  The duo endures a series of misadventures, but despite numerous setbacks is unwavering and committed to doing whatever it takes to make it home for the holiday, utilizing various modes of transportation, hence the title of the movie.  This is very similar to saving for retirement – it may not be as smooth of a journey as you anticipate or hope for, but you need to remain steadfast and be able to adapt should you run into difficult situations.

The major U.S. stock market indices capped off a holiday-shortened week of gains with attention on a few key tailwinds.  Peak inflation remains a theme in the markets as does the hope for a change in monetary policy from the Federal Reserve.  Interest rates fell slightly and the yield curve remains largely inverted; an ominous sign for future economic growth.  Oil prices declined on the week on the heels of lower expected demand due to slowing economic growth and speculation OPEC will increase production next month.  It is worth noting that oil (and gasoline) prices have now fallen to roughly where they were at the beginning of the year. However, the Energy sector of the S&P 500 is higher by about 65% over the same time.  Some of this can be explained by higher natural gas prices, but this illustrates the current dichotomy between energy prices and stock prices in the energy industry.  Energy prices are based upon supply and demand while stock prices are based upon expected future cash flows.  These are generally intertwined with energy company profits being dependent upon energy prices.  We view this current disjunction as a sign that the stock market expects energy companies to remain profitable and energy prices to move higher. But in the meantime, lower energy prices should help ease some of the inflationary pressures and upcoming inflation data is likely to reflect this. 

Holiday Shopping

The peak holiday shopping season kicked off on Black Friday last week with consumer resilience and retail margins in focus.  Households pinched by inflation and higher energy prices are expected to spend less than they have in the past.  Bloomberg noted that seasonal sales are expected to fall 1.2% year over year on an inflation-adjusted basis; the first decline since 2009.  Overall spending in nominal (not inflation-adjusted) terms is expected to rise 2.5% year-over-year, down from 8.6% last year.  Online Black Friday sales were in-line with these projections as they came in 2.3% higher than a year ago but more consumers embraced flexible payment plans as they continue to deal with higher prices and inflation.  Healthy numbers from online sales over the long Thanksgiving weekend may be a promising indicator of coming weeks.    

Consumer spending is always watched closely by economists since it comprises over two-thirds of GDP.  At this juncture, there is even greater emphasis on spending since it will provide insights on the effectiveness of the action taken this year by the Federal Reserve.  If consumers are spending less because interest rates, and therefore the cost of borrowing, are higher then it would indicate action from the Fed has been effective.  This would also signal that inflation could be easing.  If consumers are buying fewer goods, it puts pressure on retailers to lower prices, helping reduce inflationary pressures.  Early indications are that spending is strongest on marked down merchandise, which could hit retailer profits, though at the same time help draw down bloated inventories.  Given uncertainty about current economic conditions, the markets may place greater emphasis on holiday sales than in years past, especially once we get past the upcoming inflation reports and Fed meeting in the middle of the month. 

Looking Ahead

This week marks the beginning of a stretch of high frequency economic data apt to move markets and provide some volatility.  It begins on Thursday when the Personal Consumption Expenditures (PCE) data is released, including the PCE Deflator which is the Fed’s preferred measure of inflation.  Expectations are for an annual increase of 6.0%, still well above the Fed’s “comfort zone” of around 2% inflation.   Friday brings the monthly jobs report which is being closely monitored by the Fed and economists since there is concern tighter monetary policy will lead to slowing economic conditions and eventually job losses.  Conversely, if the labor market remains strong there is concern higher wages will continue to contribute to higher inflation.  It is a bit of a no-win situation for the Fed right now and hence why many feel prospects for a “soft landing” are slim. 

As we enter December, it is a reminder that time in running out for 2022.  If you need to make adjustments to your retirement plan or portfolio prior to year-end, do not delay further.  This is a year many of us would rather forget when it comes to the markets but is also a reminder that often times we need to deal with unexpected events and be able to adjust.  Stay focused and committed to your goal, make adjustments if needed. For travelers, different modes of transportation may be used to arrive at a destination, just as there are different strategies that can help you reach your 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

Giving Thanks

Thanksgiving is a time to pause and give thanks.  Here at Secured Retirement, we are especially thankful for our clients and the numerous relationships we have established over the years.  Despite experiencing what has been a rather challenging year for investors in the markets, we can still be thankful for having the privilege of living in one of the most economically developed countries in the world and what is arguably the most economically prosperous, and undoubtedly the most technologically advanced, time in world history.  And even if the elections from a few weeks ago did not give the result you had hoped for, we can all be thankful for the opportunity to participate in free elections and all the freedoms we enjoy as Americans. 

Equities were slightly lower last week, giving back some of the gains from the previous week.  The Producer Price Index (PPI), a measure of wholesale inflation, came in below expectations, adding credence to the peak inflation narrative and consistent with the softer than expected Consumer Price Index (CPI) report from the previous week.  However, inflation still remains stubbornly high and indications remain that the Federal Reserve will continue to raise interest rates in the near term. But what has changed are expectations for peak rates this cycle and how long they will hold.  As of now, the expectation is the Fed will raise the Fed Funds rate to 5.00% (it is currently 4.00%) in the first quarter of 2023, where it will remain into at least the late part of the year and likely into the early part of 2024.  This will give the Fed time to assess how effective tighter monetary policy has been in the fight against inflation.  Obviously much will happen over this time and the chances are high the Fed will need to adjust, but this is what the market is currently pricing in and changes in Fed action will impact both stock and bond markets. 

Treasury bond yields have become even further inverted, meaning shorter maturities have a higher yield than longer maturities. Such inversions have historically been reliable predictors of recessions since longer term interest rates reflect expected economic growth.  But it was not all bad news last week. Oil prices dropped nearly 10% and this may provide some relief on the inflation-front.  But since we are entering the winter heating season and tensions remain on the geopolitical front, this may be a short-lived reprieve in the energy markets. 

Is Santa Coming to Town?

With signs pointing toward a recession sometime in the next year, a focus remains on consumer spending since it makes up two-thirds of GDP.  Consumers are being stretched with paychecks not going as far as they used to as we continue to deal with the highest levels of inflation seen in 40 years, but consumer spending seemingly remains resilient. This was evidenced by the stronger than expected October retail sales report.  The big question is whether this strength will continue through the holiday season against the somewhat demure economic backdrop. 

Last week was a big week for retail earnings, most notably Wal-Mart and Target.  Discounter Wal-Mart indicated good progress in selling off inventory and market share growth while Target’s earnings showed consumers becoming increasingly cautious in their discretionary spending given inflation and economic uncertainty.  Home improvement retailers Lowe’s and The Home Depot both highlighted resilient consumer demand and homeowners investing in their existing properties as a function of the housing market slowdown. 

Sales have slowed considerably in the housing market with higher mortgage rates causing monthly payments to increase substantially.  There is evidence of prices dropping in some areas, but overall, prices have remained rather steady.  Reasons for this include very limited inventory and homeowners are in a much stronger financial position than they were before the financial crisis of 2007-2008.  But with mortgage rates remaining at the highest levels seen in over 15 years, 2023 is shaping up to be a challenging year in the housing market. 

Looking Ahead

This week is a short one for the markets due to the holiday and there are no significant economic events.  The stock market is open for a shortened session on Friday.  Often in the past we have seen some market volatility on Black Friday, but generally on very low volume. Retailers are likely to share details of early holiday-related sales volume early next week, which if robust could provide momentum for the markets into early December, as it often has in years past.  We are long-term investors and do not concern ourselves with short-term market movements, but these are shared as historical reference to be mindful of in the days and weeks ahead.  It will be seen if we follow similar patterns.  This year is shaping up to be a little different than years past in the stock market since there will be extra emphasis on inflation reports and the Fed meeting in the middle of the month. 

Time is running out to review your portfolio and retirement plan, especially if you need to make modifications prior to year-end.  If you have not done so recently or would like a second opinion, please do not hesitate to contact us.  Take time this week to pause and think about all the things you are thankful for.

Have a very Happy Thanksgiving!

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