Secured Retirement

Weekly Insights 12/20/21 – 12/24/21

December 19, 2021 by Josie Hodges

You’ll Shoot Your Eye Out

As you progress through life, the things you desire most will most likely change. A child with few worries about the outside world may want nothing more than receiving a special toy as a gift. Perhaps this toy would be a Red Ryder BB Gun, as was longed for by a young Ralphie Parker in the classic film, “A Christmas Story.” When you get older into adulthood, you are likely to concern yourself with bigger issues and certain “toys,” which instead of BB guns might be hunting rifles, golf clubs or even a boat, may still be wanted but in the big picture they often become less important than items of greater significance in your life. For those saving for retirement, one of their greatest wishes, if not the greatest, may be to ensure they have accumulated enough money to continue to support their income and lifestyle. Regardless of what you might yearn for most, anyone reading this is most likely wanting a stock market to continue the upward trajectory it has generally been on over the past decade.

Unfortunately, this was not the case last week with the stock markets moving lower, which was primarily attributed to the Federal Reserve (the Fed) meeting in the middle of the week. Markets traded lower early in the week in anticipation of this meeting and as expected the Fed announced they were going to reduce their monthly bond buying program faster than when this taper was announced last month. It is now forecasted the program will be wrapped up in March, setting the stage for an interest rate hike in June, or possibly sooner, with projections for three total rate hikes in the year. The stock markets reacted positively to this announcement on Wednesday, even though it was widely anticipated, because there was some concern the Fed would take more drastic measures to combat inflation such as further speeding up the taper of the bond buying program or even raising rates immediately.

Many stocks, specifically many technology companies, were hit particularly hard later in the week due to worries over higher interest rates and slowing economic activity. This might mark the beginning of a shift from momentum stocks, which have performed very well over the past few years, and into more of the value sectors as the markets pay more attention to valuations in a rising interest rate environment. There was relatively little change in the narrative surrounding the Omicron variant, but it does remain an overhang and therefore causes continued headwinds to the market.

The Biden Administration’s Build Back Better spending bill had its tongue stuck to a frozen flagpole over the weekend with Sen. Joe Manchin announcing he would not be supporting the bill, effectively killing it. If this bill would have passed it could have produced a short-term catalyst to push markets higher since it introduces a high level of government spending, but in the long-term it was likely to cause even more inflation and potentially be a drag on economic growth from higher levels of government debt. There is always a chance the parties will continue talks and come to an agreement which would resurrect the bill, but chances are minimal and if that were to occur it would not be until sometime in 2022.

The Soft Glow…

A soft glow is a stark contrast to burning bright with the former a reference to the “major award” (aka leg lamp) won in a contest by the Old Man (Ralphie’s father) in the aforementioned movie while the latter could be used to describe the current state of inflation. The Producer Price Index (PPI), a measure of wholesale prices of goods before they are sold to consumers, last month rose more than analysts’ estimates at a record high pace of 9.6% compared to a year ago. These price increases are generally passed along to consumers and with PPI increases accelerating it is very likely consumer prices will continue to move higher in coming months. We expect inflation to remain a large threat to investors’ returns in 2022 and beyond.

Last week retail sales for the month of November were reported and came in less than expectations, but still showed a monthly increase in spending by consumers. Previously October retail sales were reported noticeably stronger than expectations, so the thought is the most recent numbers reflect consumers pulling forward holiday shopping because of concerns about product availability due to supply chain issues. Indications remain that holiday spending this year will surpass previous years and be the highest on record, which can be attributed to greater personal wealth and higher household incomes thanks to a strong stock market, solid labor market and stimulus payments. We monitor consumer spending closely since it comprises over two-thirds of GDP and we will remain especially watchful going into the new year when spending traditionally slows down and now that the stimulus payments have ended but remain optimistic for continued strength in spending from increasing wages and a robust employment situation.

Looking Ahead

With the year winding down and major holidays approaching, we would expect the markets to get quieter. Trading volumes are decreasing, as tends to be the case this time of year. On the economic front, there are some key data releases coming up this week including consumer confidence, durable goods orders, and personal consumption expenditure (PCE) price index, which happens to be the Fed’s preferred measure of inflation. Given the holiday and lower trading activity we do not expect any of these to have a major impact on the markets unless there is a major surprise, either to the downside or upside. We follow these numbers closely since they provide signals about the health of the economy and can impact how the stock market reacts. With recent market events, we will also be keeping a vigilant eye on how various sectors perform over the next few weeks to look for indications on which direction the market might be headed and what we think the new year will bring so we can best position our clients’ portfolios to protect against risk and capitalize on opportunities.

We remain hopeful for a year-end Santa Claus rally in the stock market, which would satisfy the author’s Christmas wish. If this does not come to fruition, settling for a leg lamp might not be so bad since the market has already provided another great year of returns. As always, we remain available to discuss market events and portfolio positioning. With 2021 winding down, it is time to start looking ahead to 2022 and consider how the world might be different going forward. But for this week, hopefully you are able to spend time with family or friends to celebrate the holiday. If Santa does bring you a Red Ryder BB gun, don’t shoot your eye out.

Wishing you all a very Merry Christmas!

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 12/13/21 – 12/17/21

December 10, 2021 by Josie Hodges

Let it Snow, Let it Snow, Let it Snow

A relatively mild start to the winter season came to a rather abrupt end last week with colder temperatures and measurable snow. On its own, snow can provide pretty scenery, however for those taking part in a daily commute the snow can cause headaches. When taken individually, snow and commuting are independent events, however one can have a major bearing on the other. While it could be argued the stock market itself can impact outside events, the stock market is very susceptible to being influenced by outside events.

The stock market began last week on some very high notes, putting together the best two-day streak in over a year. The uplift in the market was attributed to the realization the Omicron variant is more mild than previous COVID variants and therefore not expected to lead to further restrictions which could dampen economic growth. The re-opening stocks, such as travel companies and restaurants, led the rally to rebound from their losses the prior week. The markets finished the week quieter on the heels of a hot inflation report and now sit at the same levels where they were trading prior to Thanksgiving and the latest COVID scare. This provides another example of the importance of maintaining a long-term view and not getting caught up in the short-term noise.

After the excitement in the markets the past couple of weeks, we are starting to experience lower trading volumes which we expect to continue to decrease through the end of the year. Much of the portfolio positioning from large institutional investors and tax harvesting from individual investors is winding down. Preliminary reports of holiday consumer spending have been positive with some reports of supply chain and inventory issues, but many retailers remain optimistic that conditions are improving and shelves are well stocked.

Rising Prices

Consumers are fully aware that prices are rising even without data releases from the government. This is especially true during the holiday season when spending for gifts and food is generally at higher levels than at other times during the year. The monthly data release on inflation, Consumer Price Index (CPI), showed that consumer prices have risen by 6.8% compared to a year ago; the highest level since 1982. This report was slightly higher than analysts’ expectations and continues to trend higher. What is alarming is that inflation seems to be gaining momentum with the amount of change from month to month growing larger. Barring an unanticipated event, the rate of increases will need to abate before inflation moderates. We anticipate elevated levels of inflation for the foreseeable future, further cutting into the buying power of consumers as well as the real rates of returns for investors. We will be watching the Producer Price Index (PPI) release this coming week since producer prices tend to be a forerunner of consumer prices.

Job openings remain at the highest levels in history, as was reported last week. The employment reports have shown that unemployment remains low and continues to improve, evidenced last week when the number of continuing unemployment claims hit its lowest level since 1969. Despite this low level of unemployment, there remains some slack in the labor market as we are not yet at what is considered full employment. Labor costs, which have been rising at a rate markedly above the long-term average since the beginning of this year and contributing to inflation, with signals this will continue and could accelerate. Having abundant jobs available, which companies need to fill, coupled with low rates of unemployment are very likely to lead to higher wage pressure.

Looking Ahead

The focus this week will be on the Federal Reserve (the “Fed”) meeting. Recent comments from Fed Chair Jerome Powell and other members of the committee indicate there will be discussion about speeding up the taper of asset purchases with the expectation being the program will wind down faster than previously anticipated. This will set the stage for multiple interest rate hikes in 2022. At the conclusion of their meeting, the Fed will also release the results of their quarterly internal survey of interest rate expectations going forward, commonly referred to as the Dot Plot. It is projected this will show two rate hikes next year with increasing odds of a third. This is a change from the previous quarter which showed only one rate hike next year. Over the past couple of decades the Fed has strived for transparency, minimizing the impact their actions have on the stock market. However, given the current inflation situation and rapidly changing dynamics in the economy they now have to act faster than in the past, allowing less time to telegraph their intentions. Market reactions, both stock and bond, are most likely to be limited since the markets responded, somewhat sharply, to Chairman Powell’s comments two weeks ago when he provided a preview of discussions at this meeting, unless there is a major deviation from prior comments which would come as a surprise.

The onset of snow does guarantee winter has arrived but unfortunately does not guarantee a year-end Santa Claus rally in the stock market, for which we remain hopeful. For the time being enjoy the scenery the snow provides as it should help get us all in the holiday spirit. We remain available to discuss market events, how they impact your portfolio and strategies to protect against downturns while taking advantage of opportunities. Do not hesitate to give us a call to discuss your individual situation and any year-end strategies.

Wishing you all a happy and joyous 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

Weekly Insights 12/6/21 – 12/10/21

December 6, 2021 by Josie Hodges

Switch to Decaf

Coffee has been prevalent around the globe for centuries with increased popularity over the past few decades from the surge of large coffee chains and the jolt of caffeine the beverage provides. Specialty drinks based upon coffee have come into vogue and helped propel this ascension. In the current time of year, aficionados are likely to point out that Thanksgiving marks the transition from pumpkin spice latte to peppermint mocha. If the stock market drank coffee, the volatility of the past week might have many of us wish it would switch to decaf and settle down.

Picking up from where it left off from the holiday shortened previous week, the market continued with volatility – to the upside and the downside, and in some cases both on the same day. The latest covid variant, Omicron, continued to be at the forefront but comments from Federal Reserve Chairman Jerome Powell also moved the markets, as did the monthly employment report. The equity markets ended the week lower, near levels last seen in mid-October, and bond yields retreated.

Our assessment is the market, particularly investors, are not afraid of the virus itself but rather how governments might react, with renewed fear of shutdowns or policy mistakes. Widespread restrictions have been announced in Europe but domestic governments have thus far indicated there will not be lockdowns or restrictions, with the exception of some foreign travel. The impact lockdowns could have on the global economy, especially ongoing supply chain issues, coupled with the possibility of additional stimulus would likely further fan the flames of inflation, which remains relatively high and continues to accelerate.

Fed Chairman Powell provided testimony to Congress last week in which he said it was time to retire the term “transitory” when referring to the current state of inflation; finally acknowledging that inflation truly is persistent. He also suggested the Fed would be discussing a possible acceleration to its asset-purchase taper at their upcoming meeting, which would then set the stage for interest rate hikes sooner than previously anticipated. These comments moved stock markets lower, but in our opinion this is the best course of action for the economy and needs to be done to fight inflation before it becomes out of control.

Workin’ For a Livin’

There was no shortage of economic releases last week, with the most notable being employment and payrolls which were lower than expected, leading to some downward pressure on the markets to end the week. While the report did not deliver up to expectations it was not classified as a disaster since it did reflect sustained growth in the labor market. The unemployment rate dropped to 4.2% which is the lowest since before the pandemic. With job openings remaining near historical highs, we would expect continued strength in the employment reports and the number of jobs created in the months ahead. It is worth mentioning we have seen lower than expected numbers numerous times in the past which then

are revised upwards in subsequent months, so it would not be a surprise if that occurred with this month’s numbers.

Our elected politicians in Washington continue their work on current legislative priorities, albeit with limited progress. To use a football analogy, Congress moved near the edge of a government shutdown before “punting” the issue by voting to continue funding until February. Discussions continue in the Senate around the Build Back Better bill which even if it does pass will need to be reconciled with the House version making the likelihood of it being passed by the end of the year now seemingly low. The passage, or inaction, of this bill will most likely have limited short-term impact on the stock market however some provisions, such as changes to the tax code, would impact individuals with increased government spending adding to the inflation fire.

Looking Ahead

Omicron looks to remain front and center in the coming week(s) as we find out more about the transmission of the virus, severity of its symptoms, and potential impacts on the economy. Early indications are this variant is more contagious than previous variants, however symptoms are mild. To reiterate what we mentioned last week, it appears there has been an overreaction to the news and we think the markets will eventually brush this off and get back on track.

This coming week brings reports of the Consumer Price Index (CPI) from last month, which is a measure of the change in consumer prices and the most commonly used gauge of inflation. Consensus estimates from analysts are for the year-over-year change in inflation to be higher than last month’s reading, indicating inflationary pressures continue to accelerate. Regardless of where this report comes in versus expectations, there is little doubt inflation remains elevated which is expected to continue for the immediate future.

Beyond news making headlines, the markets tend to experience added volatility this time of year from year-end portfolio positioning and tax harvesting. This year seems to be no exception and we would expect some swings in the market to continue over the next couple of weeks however it certainly would not come as a surprise if we see a “Santa Claus rally” to close out the year. For the time being, many investors would like the markets to settle down and get into the holiday spirit. We are not getting too wound up over recent events since we maintain a long-term view of the markets and underlying fundamentals remain strong. Hopefully all of you are able to enjoy your favorite holiday beverages, hot or cold, and remain healthy. As always, do not hesitate to contact us should you want to discuss your portfolio positioning or if you have last-minute tax planning you need to do prior to year-end.

Wishing you all a happy and joyous 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

Weekly Insights 11/29/21 – 12/3/21

November 28, 2021 by Josie Hodges

You’re a Mean One, Mr. Grinch

What was expected to be a happy and cheerful kick-off to the holiday season quickly turned nasty in the markets, leading many to now wonder if there is going to be a Grinch to play spoiler this year. Fears surrounding a new Covid variant, being dubbed “Omicron,” and potential lockdowns sent shockwaves through the markets on Friday with US equity markets having their worst day since February, on what was a shortened trading session following the Thanksgiving holiday. The impact was felt not only by stock markets but also commodity prices, namely oil, and the bond markets with a “flight to quality” from stocks into bonds, pushing yields lower and prices higher.

Prior to the coronavirus news, the markets were expected to be focused on retail sales and consumer spending as the holiday season officially kicked off. Indications are consumer spending remains strong, which was reflected in the Personal Consumption Expenditures (PCE) figures released last week. It has also been reported that retail sales in the month of November are very robust as many people started their holiday shopping early. This seems to have carried through to Black Friday with preliminary reports of solid spending, both in stores and online, at a pace 10% greater than last year. With supply chain constraints garnering headlines, some shoppers may be worried about inventory and higher prices so therefore are trying to get an early jump to ensure they can find what they want.

Earnings reports from numerous retailers last week showed strong sales and revenues in the third quarter but earnings were lower than expected due to higher expenses, especially elevated shipping costs related to higher fuel prices. There was also mention of limited inventory in some reports as a result not only of shipping issues but also factory output being limited, primarily overseas, due to shutdowns over concerns of virus spread as well as ongoing labor shortages. There have been early signs the worst of the supply chain bottlenecks, shipping issues, and labor shortages are behind us and conditions are improving, however that may now come into question with the coronavirus surge and continued shortages of raw materials.

We cannot go a week without mentioning inflation, especially since last week the PCE Deflator data was released, which measures the change in prices of goods and services included in Gross Domestic Product (GDP) and happens to be the Fed’s preferred measure of inflation. The Federal Reserve (“Fed”) has publicly stated they are targeting inflation of 2% and would be comfortable with inflation up to 3%, however the reading last week showed inflation being 5% on a year-over-year basis so well above their comfort zone. With recent gauges all showing sustained, and even accelerating, levels of inflation there is now intensified speculation the Fed will speed up the taper, or reduction, of their monthly bond buying program as well as increased chances of multiple interest rate hikes in 2022.

Coal in Your Stocking

It would be nearly impossible to not be aware of what energy prices have done over the past year with oil and natural gas prices spiking much higher, impacting the cost to operate motor vehicles and heat our homes. Given that energy is a large input cost for transported goods this

has been a major contributor to the rise in inflation over the past several months. Multiple forces remain at play within the energy markets as last week the Biden administration announced the release of 50 million barrels of oil from the Strategic Petroleum Reserve (SPR). On the day this was announced, oil prices moved higher, contrary to the expectation they would move lower when larger supply was going to be made available. Why is this? It could be the release was not as large as expected and new concern this will affect the actions of OPEC, whose members prefer higher prices. Previously it was widely expected that OPEC was going to increase production but now the thought is they might instead decrease production to counteract the SPR release which could possibly lead to a price war. As a point of reference, the U.S. consumes about 20 million barrels of oil per day so the 50 million barrels being released most likely will not have a significant impact on longer term energy prices.

Despite the SPR release announcement and price action earlier in the week, oil prices took a major hit on Friday trading about 12% lower from what was “panic” over reduced demand should shutdowns again occur. We remain anxious to see how oil prices react in the coming week since trading was very thin on Friday due to the holiday and the potential impact of the Omicron variant is more widely determined. Our guess is that prices will rebound, but maybe not all the way to where they were early last week. Also of note is that natural gas, which is less affected by shutdowns and driven more by demand for heating and power generation, traded 5% higher on Friday so notions of lower energy prices leading to lower levels of inflation are probably premature.

Looking Ahead

As this week kicks off attention will be on news about the new Covid variant and what impacts it might have. Over the weekend indications are that while perhaps more contagious than other strains, this variant is milder with symptoms similar to the common flu. Our thought is that we have been hit with the initial fear which will subside and the stock markets will quickly recover. The market’s reaction to the virus is not based directly on the virus itself but rather the prospect of shutdowns and what impacts those might have on the economy. While there have recently been full shutdowns in some European countries we find this high unlikely here in the U.S., especially given how politically unpopular lockdowns have become. Also, trading has historically been volatile with low volume on the day after Thanksgiving, so we would guess that cooler heads will prevail when the “adults” come back to work this week.

At this point we are not changing our market outlook but will maintain a vigilant watch on developments and potential impacts. Let us all hope this does not derail the economic recovery and play Grinch to this holiday season nor set us off on a bad foot to begin 2022; scenarios which we presently deem to be unlikely. If you would like to discuss portfolio positioning or ways to protect against a market downturn please give us a call to discuss your individual situation.

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 11/22/21 – 11/26/21

November 21, 2021 by Josie Hodges

Much to Be Thankful For

This is the time of year when we pause to give thanks for all that we have, which generally include family and friendships, freedoms we enjoy as Americans, and having the privilege of living in one of the most economically developed countries in the world. Here at Secured Retirement, we are especially thankful for our clients and the numerous relationships we have established over the years. We should be mostly thankful for the non-material items in our lives, but would be remiss if we did not give special thanks this year for the great stock market returns we have experienced. This is especially true now since we faced a worldwide pandemic last year which had the potential to devastate many economies and have since recovered with the markets roaring back to above pre-pandemic levels.

With these robust returns, it is imperative that investors take time to review their portfolio positioning and adjust if needed. Many portfolios are now out of alignment with their investment objectives since stocks have had such a vigorous run, subjecting them to excessive risk. It is also important to revisit your personal risk tolerance, including your appetite and ability for taking risk. Many investors have become complacent and feel the stock market will go up forever, but it is inevitable there will eventually be corrections and bear markets. If you are at or nearing retirement, a market downturn could have a significant impact on your savings and adversely affect your income which is why we remain committed to ensuring our clients’ portfolios are closely monitored and adjusted as needed.

The stock markets were generally flat last week, with the S&P 500 and Nasdaq squeezing out small gains while the Dow had a slight loss. The market moving events included retail sales numbers and earnings reports from major retailers, most of which was better than expected and provided a boost for the markets. Consumer spending makes up more than two-thirds of the GDP so the health of the consumer is watched carefully and thus far has held up well. A recent consumer sentiment report was a little weaker than expected so seeing solid retail sales numbers provided relief to the market.

Going into the holiday season, focus remains on retail sales and consumer spending. Indications are that spending will remain strong. One area of concern is that supply chain constraints could lead to a lack of inventory, in turn leading to less spending. Thus far this does not seem to be the case with retailers reporting higher inventory levels than past years but as the holiday season kicks into full gear, inventory levels will be closely watched. Inflation is another risk to spending since consumer prices have increased at a greater pace than wages, but with household wealth increasing as a result of a strong labor market, multiple stimulus payments, and decent market returns, consumers do not seem likely to curtail spending this year. However, higher costs of goods sold could have a negative impact on earnings for some retailers since often they cannot fully pass on higher costs to consumers. This was revealed in some of the recent earnings reports, so while spending may remain strong, corporate profitability growth may experience some pressure.

Elves in the Workshop

The term “stagflation” has been used more commonly in recent weeks with higher inflation readings and signs of the economy slowing. We feel the risks of entering a stagflation environment, characterized by high inflation and slow economic growth, remain low but have increased slightly. As mentioned above, consumer spending plays a major role in the economy and at this time remains brisk, but we also watch other indicators of economic growth such as the labor market, housing/construction data, and production of goods. Last week was heavy with data releases for the manufacturing sector which included capacity utilization and industrial production, which were much better than expected and show the manufacturing sector remains healthy. This reflects strong demand for end products and indicates supply chain issues, while causing some limited access to materials, may not be having as large of an impact as thought on manufacturing.

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, which if is as robust as expected could provide momentum for the markets next week and into early December, as it 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 have to be seen if we follow such patterns this year.

Time is running out to review your portfolio and income 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 of 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

Weekly Insights 11/15/21 – 11/19/21

November 12, 2021 by Josie Hodges

Fun While It Lasted

With winter quickly approaching, at least for those of us in the northern latitudes, we might feel some melancholy about the end of autumn, which is arguably the most pleasant season of the year here in Minnesota (notwithstanding the Vikings win-loss record in any given year.) But winter brings new opportunities – whether it is being outdoors for wintertime activities or being quite comfortable staying indoors and cozying up in front of a warm fireplace. Given the stock market volatility of last week, investors might have many of the same feelings. Disappointment around the strong run of the previous five weeks slowing should be followed with optimism for what lies ahead.

The S&P 500 ended the week slightly lower, experiencing its first weekly loss since the last week of September. The primary driver of last week’s market activity was inflation, which continues to be on the forefront of consumers’ and investors’ minds. The talk of higher prices has been accelerating for most of this year, akin to a low rumble quickly building in intensity. Now that rumble has grown considerably louder since consumers see higher prices in many, if not most, goods purchased, especially as the holiday season approaches.

The stock market unceremoniously snapped an eight-day winning streak after a surge in the Producer Price Index (PPI) was reported last Tuesday. The PPI, which measures the change in prices charged by producers for their goods and services, rose 8.6% from a year ago and remains at the highest levels recorded since this measure began in its current form 11 years ago. The markets were spooked even more on Wednesday by the Consumer Price Index (CPI), a measure of the change in prices paid by consumers, which showed a yearly increase of 6.2%. This was above analysts’ expectations and the largest year-over-year increase since December 1990 when the first Bush was in the White House. Core CPI, which excludes food and energy, was the highest it has been since 1982!

These high inflation readings have implications for the stock market, bond market and overall economy. Raw materials producers, such as energy and mining companies, that benefit from higher commodity prices traded higher while companies having to deal with higher input costs did not fare as well. Growth stocks, especially technology companies, also did not fare well since their share prices are based upon expectations for future earnings. With higher interest rates, the present value of those earnings are not worth as much, providing pressure on current stock prices.

Painted In a Corner

Not only do these higher levels of inflation potentially cause stress for consumers and headaches for certain investors, but this also places the Federal Reserve in a difficult position. The Fed has previously maintained that inflation is “transitory,” or short-term, as a result of the pandemic but in recent weeks has acknowledged it is “persistent.” The inflation readings last week led to speculation the Fed will taper the monthly bond buying program faster than announced two weeks ago, resulting in it completely ending earlier than currently expected. This might also prompt the Fed to take action with interest rates sooner than previously thought with the expectations now for multiple rate hikes next year. Frequently inflation is fueled by “easy money” (low interest rates lead to low borrowing costs for businesses and consumers) so increases in short term interest rates, which increase borrowing costs, reduce the supply of money and have the effect of controlling inflation. However, in addition to easy money, inflation is now being driven by supply chain constraints and higher input costs, namely commodity prices and labor costs, which are beyond the control of any action the Fed could take.

Looking Ahead

Since inflation, which has consistently been viewed at the top of the list of investors’ worries over the past several months, remains elevated there is some concern of a return to 1970s style “stagflation,” marked by prolonged inflation, stagnant economic growth and high unemployment rates. Whispers of stagflation have been gaining in intensity and the past week’s data releases have only added to this fear. With unemployment being relatively low and continuing to decrease we do not see this as being likely, but we are watching for a potential slowdown in economic activity. We are experiencing slowing growth, which is to be expected since it was at such lofty levels coming out of the pandemic, but the fact remains economic expansion continues. Next week’s key economic data releases include retail sales as well as capacity utilization and industrial production. We view current supply chain constraints as the largest threat to the economy so the last two data points just mentioned will provide clues regarding the state of production in the manufacturing sector. If production numbers are lower than expected or slow considerably there is a high probability overall economic growth will follow and slow also. Consumer spending comprises almost 70% of GDP so a slowdown in retail sales would also point towards slowing growth. At this point the economy seems to be (mostly) firing on all cylinders but this could change over the next several months, which would subsequently alter our investment outlook and portfolio positioning.

As we have mentioned in the past, the stretch from November until January is historically one of the strongest times of the year for the stock market. Despite the recent run-up, we do not foresee any reason for it to be different this year. Gains may be more muted than in past years, but we remain optimistic for a continuation of the upward trend. Holiday décor can be seen in stores and Thanksgiving will be upon us next week, reminders that the end of the year is approaching. If you have not yet had a year-end review of your portfolio and financial plan, be sure to give us a call to schedule one. Here in the Twin Cities we saw our first brush of snow last week, reminding us that winter truly is on its way, so best to embrace it, just as it is best to embrace whatever is happening in the markets and position yourself accordingly.

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

We’ve Moved! 6121 Excelsior Blvd. St. Louis Park, MN 55416

Want a Retirement Free From Financial Stress?
Book Your Free TaxSmart™ Financial Review Today.

We’ll review your finances and tell you what you can do immediately to get on the right track for retirement.

Download the Top 10 Mistakes That Increase Your Taxes

In this free report, you’ll learn…

Danielle Christensen

Paraplanner

We’ve Moved! 6121 Excelsior Blvd. St. Louis Park, MN 55416

Secured Retirement

Want a Retirement Free From Financial Stress? Book Your Free TaxSmart™ Financial Review Today.

We’ll review your finances and tell you what you can do immediately to get on the right track for retirement.

Download the Top 10 Mistakes That Increase Your Taxes

In this free report, you’ll learn…

Danielle Christensen

Paraplanner

Want a Retirement Free From Financial Stress?
Book Your Free TaxSmart™ Financial Review Today.