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.
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.
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
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