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Weekly Insights 10/24/22 – 10/28/22

Spooky and Scary

Halloween is based upon traditional celebrations of remembering the dead, hence the symbolism of spooky ghosts, zombies, and skeletons.  This event, despite rather dark undertones, now tends to be a time of fun, especially for children.  The markets, both stock and bond, have been scary this entire year and for most savers and investors, have been devoid of fun.  Will this end soon and will we return to better days?

Equities were higher last week with the major indices more than rebounding from the previous week’s declines, which saw the markets fall to their lowest levels since 2020.  It was the strongest weekly performance for the S&P 500 and Nasdaq since June and one of the best weeks of the year. These gains came on the heels of decent earnings reports.  Given the current economic backdrop, analysts have lowered earnings estimates for the quarter so positive price movements last week may indicate that much of the bad news had already been baked into the markets.  Key themes from earnings included elevated labor and freight costs as well as mixed signals on consumer demand.  Goods producers reported weakening demand while service companies, including travel and hospitality, showed consumers remaining resilient.    

Bond markets made relatively large moves last week with interest rates continuing to move sharply higher.  Yields on short-term debt instruments look very compelling for the first time in over 15 years.  But yields are still less than inflation, meaning that investors will not maintain purchasing power. Also, while providing relative safety and being an option for short-term investments, long-term investors allocating to bonds could mean missing out on a stock market rebound.  Many market prognosticators are predicting the markets will drop further, which may very well end up being the case, but even if it is, we still feel that we are much closer to the bottom than the top and investors will eventually be rewarded for their perseverance.  A quick market rebound seems unlikely, but our view remains that stocks maintain an attractive risk/return profile over a longer time horizon. 

Trick or Treat

Currently markets are primarily focused on monetary policy action from the Federal Reserve so what may have provided the most thrust for the markets last week were comments from Fed officials stating that we are likely to see a “step-down” in interest rate increases, beginning in December where current expectations are now for a 50-basis point (one-half of one percent) rate hike.  While not the “pivot” wanted by some, this is still viewed positively by the stock markets since it would be the first step towards ending interest rate increases and eventually leading to the pivot of lowering rates.  Looking past December, as of now, market expectations are for a 25-basis point (one-quarter of one percent) rate hike next February and then the Fed will pause, waiting until December 2023 to begin lowering interest rates, continuing into 2024.  However, much will happen between now and then and it is all but guaranteed these forecasts will change as we see shifts in inflation and economic growth. 

Also helping push markets higher is the removal of uncertainty.  With CPI being recently reported and an all-but foregone conclusion the Fed will raise interest rates by another 75 basis points in November, the only major uncertainty in the short-term are the upcoming elections.  The mere fact that we will soon know the outcomes should provide tailwinds for the markets and there is a real possibility we could see a “melt-up” in the markets during the last two months of the year.  While a reprieve from this year’s selling would be most welcomed, moves higher may only be temporary. With a recession looming on the horizon, 2023 is setting up to be another difficult year and we can certainly expect continued volatility.  However, looking out longer term, into 2024 and beyond, we remain very optimistic and still believe the stock market will provide ample opportunity for increasing wealth of investors. 

Looking Ahead

The week ahead represents the peak of this earnings cycle since it will be the busiest, including the mega cap tech names.  As always, the focus may not be on the earnings themselves, which are backward-looking, but rather the outlook and future guidance provided.   Investor optimism remains historically low but may improve if earnings remain solid and we continue to see gains in the markets.  The major economic report of the week will be Q3 advance GDP. Will it be a third quarter in a row with negative real GDP growth?  Analysts estimates say not and expectations are for a positive number, but these same analysts have been inaccurate in the past.  We do not feel the reported GDP number will be very meaningful since there are so many other indicators of economic growth which presently do not point toward this being a recession.  However, if the GDP report comes in better than expected, it could be a catalyst to push the stock market higher, at least on a short-term basis. A worse than expected report will likely be discounted and have minimal impact. 

Perhaps one of the most recognizable symbols associated with Halloween is the jack-o-lantern, which was traditionally thought to scare evil spirits.   While no jack-o-lantern can scare away bad markets, there are steps you can take to protect your portfolio and retirement.  If you are spooked by the markets, we are here to help you develop a worry-free retirement plan. 

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

Weekly Insights 10/17/22 – 10/21/22

A Body in Motion…

…stays in motion.  This is the beginning of Sir Isaac Newton’s First Law of Motion and is the basic premise of inertia.  Even though economic events and the stock market are not subject to the laws of physics, it may seem as if they still apply. The example that readily comes to mind is inflation.  It is the second part of Newton’s First Law that may be most fitting – …except as compelled to change that state by external forces impressed upon it.  The Federal Reserve is trying to be this force; raising interest rates aggressively and decreasing the money supply in an effort to slow inflation.

Last week’s inflation readings, the Consumer Price Index (CPI) and Producer Price Index (PPI), both contained a good deal of underlying data and can be interpreted various ways. Overall they were viewed as being slightly hotter than expected and looking at the headline numbers, it appears inflation remains persistently high.  The readings are slowly receding and it may appear as if we have already experienced “peak” inflation.  But what is concerning is that as we dig into the numbers further, core inflation, which excludes food and energy, was higher than expected, and remains higher than we have seen it in 40 years, exceeding previous levels seen this year when headline inflation was higher than it is now.  Despite the Fed’s efforts, inflation is not slowing as much as hoped, but we also need to acknowledge there is generally a considerable lag time between Fed action and the impact it has on the economy. This lag is what leads to general concern the Fed will overshoot and raise rates higher than needed to tame inflation, pushing the economy into a recession. At some point we expect the Fed to stop raising rates and pause for an extended period of time to determine the effects, before taking further action.       

The CPI report not only bolstered expectations that the Fed will raise rates by 75 basis points (0.75%) at their November meeting and at least another 50 basis points (0.50%) at their December meeting, but now the terminal Fed Funds rate is expected to be close to 5%.  For reference, it is currently at 3.25% so this implies further rate hikes into 2023.  The prediction of the peak in the Fed Funds rate continues to be revised higher, indicating just how stubborn inflation has become as well as how slow it may be for it to substantively abate.  But even if inflation is beginning to slow, it will most likely be a long time before we see it within the 2-3% comfort zone of the Fed and to a point where it is no longer front and center in everyday life. 

Equal and Opposite Reaction

After the CPI report was released last Thursday, the markets began to plummet but quickly recovered and closed higher, having one of their best days in over two years.  There really is no explanation for this except it may be that the CPI report was not a complete disaster or simply that after five days of losses bargain hunters took over and the buyers stepped in.  The S&P 500 did drop below the YTD lows seen in June before the sharp reversal and recovery.  The lows may be providing some support and we could see the markets bounce around these same levels until we begin to see a larger, more sustained move in either direction. 

Current market sentiment is at some of the lowest levels ever. Historically this has been a contrarian indicator and a signal that a market bottom is near.  But as we have experienced so far this year, this market cycle is different than most others.  Since we think interest rates are going to continue marching higher and we will see a recession in the next year, we do not yet think the stock markets have seen the bottom.  Surprisingly, many individual stocks are still trading above their June lows, signaling some strength.  Given the amount of negative sentiment and short-selling in the market, once things turn around we could see a rather fast rebound as short-sellers are forced to cover and the markets gain momentum in a positive direction.

Looking Ahead

The focus of the markets now will shift to third quarter earnings.  This week we will see earnings reports ramp up and the majority of S&P 500 companies will report earnings over the next few weeks.  With lowered expectations for growth, we do not expect strong earnings to be a catalyst for a move upwards in the market as we have seen most quarters over the past several years.  Further, markets do not like uncertainty and the upcoming elections are providing a bit of an overhang on the market.  Once we get past the elections, regardless of the outcome, and remove the uncertainty we would not be surprised to see a rally into the end of the year. 

It is worth noting that the Social Security Administration announced last week that retirement benefits will increase by 8.7% in 2023, the largest cost-of-living adjustment since 1981.  There have only been three times since the start of automatic adjustments in 1975 that it has been higher, all of which were during the high inflation years of 1975 through 1981.   This increase will be welcomed by many as it helps maintain purchasing power.  But this is also a reminder that any source of income, especially in retirement, should be viewed on a real, or inflation-adjusted, basis. 

We would like to thank those of you who came out to hear Becky Swansburg provide her insights into the current tax situation and how it is likely to affect your retirement.  If you would like to discuss your individual situation in more detail and implement some of the strategies discussed, please call our office to schedule a time to meet with one of our advisors.  Be confident your retirement plan is not adversely affected by external forces and remains in positive motion. 

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

Weekly Insights 10/10/22 – 10/14/22

Pivot, Pivot, Pivot!

Perhaps one of the most memorable scenes of the 1990s sitcom “Friends” is when Ross enlists the help of Chandler and Rachel to help carry a couch up to his apartment so he does not have to pay a delivery fee.  When moving the couch up the stairs and having to make turns, Ross yells “Pivot!” numerous times as the three of them try to maneuver around the turns of the narrow staircase.  This term has become part of pop culture lexicon and a catchphrase, particularly amongst those who are moving furniture with the help of another person.  Coincidentally, “pivot” has also recently become a bit of a buzzword for the markets and economy.

In the year 2020, the buzzword was “unprecedented” as referred to global events having to do with the Covid pandemic and especially lockdowns. Last year’s buzzword was “transitory”, a reference to how inflation was supposed to be short-lived and price increases would soon level off. (Obviously we have found this was not the case and now inflation is being referred to as “persistent.”)  This year’s buzzword seems to be “pivot,” which is a reference to the Federal Reserve changing course by reconsidering its monetary tightening policy and no longer raising interest rates.  It was the belief that the Fed would pivot sooner than expected that led to the market rally we experienced from late June until mid-August, when comments from Fed officials dashed those hopes and the market began its slide anew. 

Last week the major stock market indices did show gains thanks to rallies early in the week based upon hopes, once again, that the Fed would pivot sooner than previously expected.  Those hopes had little basis and were all but abandoned, sending markets lower in the last half of the week but not enough to erase all of the gains.  The employment report on Friday showed that the labor market remains robust.  This provides further ammunition for the Fed to continue to raise interest rates since it appears actions taken thus far are not having a negative impact on the employment situation, something the Fed monitors closely since it is part of their mandate.    

How You Doin’?

Last week confirmed that markets, both stock and bond, remain volatile with much of the movement remaining hinged upon anticipated Fed action and interest rates.  In order for the Fed to quickly pivot and start lowering interest rates, something is likely to have to break which could cause a very undesirable chain of events.  Ideally the Fed will be able to engineer a soft landing and it is more realistic scenario that they will raise interest rates to a terminal level, where they will remain for some time while the Fed will pause to assess the impact.  Generally, it takes several months to determine the full impact of monetary policy decisions so it is likely once interest rates reach their peak for this cycle, it will be a while before they begin to retreat. 

We continue to believe that fundamentally the economy is holding up relatively well in the face of higher inflation and interest rates.  Employment remains strong as does manufacturing and overall consumer spending, but it seems there have been some changes in consumer attitudes and preferences plus we are seeing a real softening in the previously strong real estate sector.  We still believe we will experience a recession some time next year, but do not expect it to be very deep even though it could last several quarters.  The biggest questions on everyone’s minds are likely to be regarding how high interest rates will go and what the stock market will do.  We think interest rates will continue to move higher, at least through the end of this year.  The stock market will remain volatile, and we think it could go even lower, however we continue to believe that we are much closer to the bottom than the top and would not hesitate to add money at these levels.  And for those fully invested, we urge you to be patient as this is all part of normal market movements and historically patience has been rewarded. 

Looking Ahead

There is no dearth of economic data coming out this week, with the most notable being the Consumer Price Index (CPI) and Producer Price Index (PPI) reports. These will give us an idea of whether inflation is truly moderating and possibly starting to abate.  The focus will be on the “Core” which excludes food and energy. The Core CPI was higher than expected last month, indicating it was not only energy contributing to inflation. The stock market is likely to react adversely if there are not compelling signs of inflation moderating since it would bolster the Fed’s case for continuing to raise interest rates.  It is doubtful either inflation gauge will come in low enough to deter the Fed from raising interest rates by at least another 50 basis points, or one-half of one percent, at their November meeting.  We would also caution that these inflation readings may already be outdated since we have seen a move higher in energy prices since the beginning of the month, which will not be reflected in these reports. 

Earnings season kicks off this week.  Expectations have already been lowered, which has been factored into the stock market, so any positive news could provide a catalyst for markets to move higher.  Long-term we remain very optimistic on the stock market, but less so on the bond market.  This is a good time to reevaluate your goals to ensure you remain on track and adjust, or pivot, if warranted.    

If you have not already done so, this is the last chance to claim tickets to the TaxSmart™ Summit on Thursday, October 13th 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

Weekly Insights 10/3/22 – 10/7/22

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 13th 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

Weekly Insights 9/26/22 – 9/30/22

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 13th 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

Weekly Insights 9/19/22 – 9/26/22

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 13th 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

Ryan Keapproth

Ryan Keapproth

Retirement Planner

Ryan is dedicated to serving clients to achieve their retirement goals. Ryan’s holistic approach centers on wealth management strategies with a focus on income planning throughout retirement. As a Financial Advisor, Ryan is an Investment Adviser Representative (IAR), life and health insurance licensed and a Certified Tax Preparer. Ryan is a graduate of the University of Minnesota, with an Accounting and Finance major.

Ryan is a lifelong Minnesotan originally from Woodbury and currently residing in Bloomington with his wife, Riamae, and their rescue Terrier Beagle mix, Douglas. He and his family are avid travelers in their free time. Ryan enjoys playing golf and poker, and describes himself as a major foodie enjoying new restaurants around the cities whenever possible. He is a sports fan especially when the Vikings and Timberwolves are playing.