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.
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
Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.
Office phone # 952-460-3260