Tax Planning

Rough Seas Make Tough Sailors

Various people have been quoted saying “A smooth sea never made a skilled sailor,” with the antithesis being that rough seas make tough sailors.  Outside of sailing on the open seas, something similar could be said about investors and the stock market.  It has been relatively easy to make money in the markets over the past several years, especially since there was a “Fed put” where the Federal Reserve would lower interest rates or increase liquidity to help stabilize markets in times of turbulence.  With inflation stubbornly remaining near 40 years highs, the Fed is now forced to raise interest rates and no longer has the option of providing support for the markets making them much more difficult to navigate.

Investors should be glad the month of September is now behind us; a month in which we saw the S&P 500 and Dow Jones Industrial Average both fall by 9% and the Nasdaq drop by 10.5%.  The S&P 500 wrapped up the first three-quarter losing streak since 2009.  There was also continued pain in the bond markets with the Bloomberg Bond Aggregate losing 4.3%, as a result of interest rates quickly moving higher. 

The quarter began with sentiment that the Federal Reserve would not need to tighten monetary policy, or raise interest rates, much more and in fact would be able to begin lowering rates in the early part of next year.  Following economic releases showing inflation remains elevated and comments from Fed officials stating they will do whatever it takes to rein in inflation, it became apparent the Fed will need to continue to raise interest rates and keep them higher for longer, putting considerable pressure on the markets and leading to the recent pullback we have experienced. Further, interest rates have been rising so quickly throughout the year, this is the first time in history long-term Treasury bonds have lost more value than stocks during a time of an extreme drawdown in stock prices.   

The New World

The days of smooth sailing we experienced in the markets over the past decade seem to be over and we are entering a new paradigm, but not one we have not seen before.  Similarities continue to be drawn between now and the two previous bear markets of this century as well as the high inflation times of the 1970s.  Yet, there are also some notable differences between now and each of those times, hence why this is a new world where investors and savers alike need to adapt to be successful and achieve their goals.

Last week the Old World provided a glimpse into what could be in store for economies across the globe.  The Bank of England announced it would intervene in the Gilt market to restore orderly functioning in the wake of tax-cut plans announced by the government.  Currently the U.K. is experiencing inflation around 10% and cutting taxes is widely believed as being inflationary since it enables consumers to keep, and therefore spend, more of their money.  Conversely, many economists believe a tax hike would help reduce inflation, depending upon the type of taxes and how the tax money is spent.  No doubt the U.S. government is watching what is unfolding in the U.K., making it very unlikely taxes will be going down in the next several years with a higher probability they could move higher. 

Back on the home front, the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) report last week was hotter than expected.  Inflation may be moderating but despite optimistic hopes of investors and consumers, is not falling significantly and is not expected to for quite some time.  Interest rates are now projected to remain higher for longer.  Given the heightened volatility in the markets and possible slowdown in economic activity, some belief remains the Fed will come to the rescue by pivoting and lowering interest rates.  For that to happen, it is likely something must “break,” which could imply an even worse scenario in the markets.  Be careful what you wish for; you may not like it. 

Looking Ahead

At a full 8 months, this is now the longest bear market since the 2007-2009 financial crisis.  The average length of a bear market is 14 months but there is considerable variation around that number.  For the S&P 500 this is the fourth worst first three quarters of the year in history, but there is hope for brighter days ahead since in most instances where the market was down year-to-date, it rallied during the fourth quarter of the year, with the exceptions being during the Great Depression as well as in 2008.  Wall Street lore is that October is the most dangerous month for the stock market but when reviewing history, we find this is not the case.  That distinction goes to the month of September.

A couple of things to keep in mind: if you are a long-term investor, none of this discussion matters much.  Just maintain your normal allocation to stocks and don’t be shy about buying stocks at normal intervals.  That way you will be buying at low prices and stocks should be worth substantially more when you are spending down assets in the far away future.  During this time of volatility, it is critical to have help navigating the choppy seas and remember, storms do not last forever. 

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 us at 952-460-3290 to reserve your seat or click this link to register online. 

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 Equinox

Last week was the fall equinox, a time when the Earth’s rotation is directly perpendicular to the Sun-Earth line, tilting neither toward nor away from the sun. On the day of the equinox, daytime and nighttime are of approximately equal duration.  One of the Federal Reserve’s primary objectives is to maintain stability of prices, or find an equilibrium where prices are stable and economic growth is not hampered.  Conventional thought is that the Federal Funds Rate, needs to be equal, or close to equal, to the rate of inflation for prices to remain stable, but is that really the case?

The Fed has been widely criticized for not beginning to raise interest rates earlier, when inflation began to rear its ugly head back in 2021, which perhaps would have faster stymied inflation.  And now some economists are criticizing the Fed for raising interest rates too quickly, stating the Fed is likely to “overshoot” the target, causing undue harm to the economy. This is predicated on the thought that inflation is likely to fall rather quickly since supply chain issues appear to be improving and energy prices are falling, neither of which the Fed has any control over. Many global economies seem to be headed for a recession, which tend to bring about higher levels of unemployment and lower levels of spending, leading to lower demand for goods and services and therefore lower inflation, if not deflation. 

However, it is not interest rates that determine inflation, it is the amount of money in circulating in the economy. Leading back to the classic definition of inflation: too much money chasing too few goods.  We have seen the supply of money explode since the pandemic, due primarily to stimulus payments and cheap borrowing costs.  It will not be until the money supply shrinks that we will see substantially lower inflation. But in the meantime, the Fed seems determined to continue to raise interest rates with an increasing probability of causing a recession.  Inflation will eventually ease because of higher interest rates leading to higher borrowing costs and therefore less money in circulation, as well as supply chain issues abating and the Fed further reducing its balance sheet.  But working against this are high levels of government spending, which continue to add to the supply of money and cause sustained inflationary pressures.   

Changing Seasons

The fall equinox also marks the calendar change in seasons from summer to autumn.   But there has also been a change in market sentiment over the past several weeks.  Back in July it seemed the Fed was going to be able to tame inflation by the end of this year and then pivot to start lowering rates in 2023, but now it has become evident that inflation is even more stubborn than earlier thought and the Fed will raise rates even more than previously expected.  The 75-basis point (0.75%) interest rate hike by the Fed last week was not a surprise but the realization that the Fed is committed to remaining on a path of aggressive rate hikes sent stock markets reeling and pushed interest rates considerably higher, hitting levels not seen in over a decade across the yield curve. 

Updated forecasts from the Fed (the infamous dot plots), which were released in conjunction with their meeting last week, now show a more aggressive path of rate hikes through 2023.  The Federal Funds Rate is now forecast to end 2022 around 4.4%, a full percent above the June forecast of 3.4%. This suggests another 75-basis point rate hike in November and a 50-point hike in December, with a single 25-point hike in 2023, likely in the beginning of the year, before starting to ease policy in 2024.  But given how much forecasts have changed recently, we would not bet the farm it happens in that exact manner.

With the latest events and more “hawkish” tone from the Fed, stock markets are not likely to quickly rebound. Bear market rallies, like what we experienced in July and the first half of August, are bound to occur from time to time.  As a matter of fact, we would not be surprised to see a year-end rally after the elections this year.  The stock market may have already hit the bottom, but it is not likely to eclipse previous highs until after the Fed has finished raising interest rates and economic growth rebounds. At this time growth seems to be slowing and will likely continue to while the Fed is raising interest rates.  Since we expect rates to remain relatively high over at least the next couple of years, it very could be a somewhat prolonged period of challenges for the markets. 

Looking Ahead

We want to remind investors to retain a long-term perspective of the market.  Will stock markets be higher a year from now?  Maybe, or maybe not.  But we do have greater confidence they are likely to be higher 5 years from now as the economy adjusts to a new environment and again begins to expand.  This is not a time to panic, but rather a time to be patient.  And as we have been stressing over recent weeks, a good time to consider putting cash to work and perhaps adding non-traditional assets, besides stocks and bonds, for portfolio protection. There have been many bear markets throughout history and there are certain to be many more in the future.  In the past, all bear markets eventually come to an end and the markets move higher. We do not expect this time to be any different. Guessing the precise timing of a market bottom and rebound can be a fool’s game so it is best to remain invested so to not miss out when it does occur.  As always, if you would like to discuss your portfolio or have concerns over recent events, please do not hesitate to contact us.

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 us at 952-460-3290 to reserve your seat or click this link to register online. 

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

Riding High

The term “riding high” generally means to be successful and is often used when referring to individual people, especially politicians, as well as the markets and economy when they are doing well.  The term most likely originated in the Old West when a cowboy would ride high in the saddle of a horse to be imposing and show resolute.  Unfortunately, the markets are not riding high, but what does remain high is inflation as we found last week.

The stock and bond markets were smacked by the Consumer Price Index (CPI) report showing that inflation remains stubbornly high and is not showing signs of easing.  Core inflation, which strips out food and energy, unexpectedly reaccelerated from the previous month’s tamer pace.  The headline CPI, while easing from the previous two months’ reports amid falling gas prices, was higher than expected and rose month-over-month when economists had expected a decline, indicating prices overall continue to move higher.  Despite lower energy prices, the cost of food and shelter rose sharply.  Shelter is a large component of the CPI measure and is based largely upon the cost to rent, not home prices, so it is expected this will continue to add pressure to CPI readings in coming months as rental prices continue to increase. 

This CPI report, coupled with the stubbornly high PPI report, will keep pressure on the Federal Reserve to continue to raise short-term interest rates in an attempt to keep inflation in check and not accelerate further.  Prior to last week’s CPI release the markets had rallied in hopes that “peak” inflation had been reached and we were nearing the end of the Fed’s cycle of raising interest rates.  Previous expectations were that the Fed peak rate would be 4% (it is currently 2.50%), but after this report projections are now that it will reach 4.50% sometime in 2023.  We would caution against putting much confidence into current projections since previous forecasts for inflation and interest rates have continuously been adjusted higher throughout the past year; a trend that could very well continue given the trajectory we are seeing. 

Trying to Keep Low

After the CPI report last Tuesday, stocks suffered their largest losses of the year with the S&P 500 falling 4.3% and the Dow plunging more than 1,000 points.  However, the days leading up to the report saw the markets rally with the thought we had reached “peak” inflation and future Fed action would be more subdued.  Despite the pullback on Tuesday and a further pullback on Friday, on the heels of an earnings warning from FedEx amidst a deteriorating economic outlook, the major indices are now trading about where they were in mid-July and ahead of the recent lows set in June.  This should come as no surprise since interest rates had been steadily rising over recent weeks and spiked last week after the inflation report.  Interest rates are an almost invisible, but incredibly important, factor in determining stock prices since current stock prices are predicated on discounted future earnings.  However, to keep things in perspective during this time of enhanced volatility, the markets are still higher than they were two years ago.

Looking Ahead

With inflation remaining high and entrenched, the Federal Reserve is widely expected to raise interest rates by another 75 basis points (0.75%) for the third-straight meeting this week. There is a chance they could raise rates by a full percentage point, which would be the most at a single meeting in its modern history.  We do not expect the latter to occur, but it does not diminish the fact the Fed has an urgency to act to contain inflation and odds of sustained tightening for the remainder of the year are much higher than they were a week ago.  Hope of the U.S. gliding toward lower inflation without much economic distress has now been undermined.  And with that, expect stock markets to remain volatile for a prolonged period. On the bright side, a year-end rally after the November elections could be a real possibility but it may not be enough to bring stocks into positive territory for the year. 

It is easy to get discouraged and feel down when the market drops and can be especially unnerving to retirees who are relying upon their assets to fund their lifestyle. This is why we emphasize the importance of having a sound financial plan for retirement, which includes taking risk in the market at a level comfortable for you as well as taking advantage of opportunities.  If you have cash on the sidelines, it might make sense to look at the potential for dollar-cost averaging into the stock market or consider one of the many fixed income alternatives available which provide potential for growth but minimize the risk of loss.  If you would like to find out more about what is available, please give us a call.  We strive to ensure our clients feel like they are riding high in their retirement, regardless of how the markets are behaving.

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 us at 952-460-3290 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

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