Tax Planning

Into Thin Air

Last week marked the solemn anniversary of one of the most notorious mountain climbing tragedies in history when eight people lost their lives on Mount Everest in 1996.  Books have been written chronicling the tragedy with perhaps the best-known being Jon Krakauer’s Into Thin Air.  Various causes led to the deaths of those who perished, but they all had one thing in common – they were on the descent, not the ascent.  This is a reminder that climbing to the peak of a mountain can be very challenging, but it can be just as difficult to get back down off mountain. Retirement can be very much the same: saving for retirement during your working years is similar to scaling a mountain but is generally only half the battle. Challenges lie in replacing your paycheck in retirement by converting that savings into income while avoiding obstacles, such as paying too much in taxes.  

Equity markets were mostly lower last week with the major economic event being the release of the Consumer Price Index (CPI), which showed inflation pressures remain elevated but continue to slowly decline.  Headline inflation rose 4.9% over the prior year which was in-line with expectations and a slight decrease from the prior month’s 5% annual increase.  Headline CPI has dropped considerably from its peak last June when it hit 9%, however the rate of deceleration has slowed with the latest reading being nearly unchanged from the prior month.  The largest contributors to this inflation reading were shelter and food costs.  Price changes of other goods have moderated with energy components showing declines compared to a year ago. Core CPI, which excludes food and energy, was higher by 5.5%, changing little since December and remaining not too far off its recent peak of 6.6% last September.  The Producer Price Index (PPI), a measure of goods produced, came in much lower at 2.4%.  This is dramatically lower than its peak of 11.6% from March of last year.  Prices of goods are stabilizing but the cost of housing and services continue to rise causing overall consumer inflation to remain elevated and “sticky.”

The implications of this inflation report are that inflation remains elevated and above the Federal Reserve’s comfort zone but since it is declining, albeit rather slowly, the Fed is now expected to pause interest rate hikes at their next meeting in June.  And while they are probably not likely to lower rates in the near future, longer-term interest rates have dropped over the past two months leading to some credence we may have already experienced the peak in interest rates for this cycle.    

On the Precipice

The debate over the debt ceiling is now grabbing headlines and will likely continue to over the next few weeks. We would like to think that despite being at odds with each other, neither of the major political parties would want the U.S. federal government to default on its debt which is why we think it is very probable some sort of compromise will be reached.  The market seems to agree as it seemingly is not being impacted by the lack of compromise.  There is always a chance for a default and if we were to see one it could be catastrophic for the markets, especially in the short-term.  But our view is what is happening in Washington, D.C. is what would be considered “political theater” by both sides.  There is also a good chance of a short-term agreement to give more time to negotiate.  On a lighter note, as we have recently learned, many members of Congress trade stocks regularly so it would not be in their own personal interests to let a default occur which gives us further hope an agreement will be reached. 

Perhaps most concerning about the ongoing negotiations is the likely outcome of lifting the debt ceiling and associated increase in government spending.  Widely accepted economic thought says that increased government spending can lead to higher inflation, reducing corporate profits, and slowing job creation.  Further, empirical evidence overwhelmingly supports the view that a large amount of government debt has a negative impact on economic growth potential, and in many cases that impact gets more pronounced as debt increases. A large majority of studies on the debt-growth relationship find a threshold somewhere between 75 and 100 percent of GDP. As of the end of 2022, federal debt was 120% of GDP, already above the threshold where growth is inhibited.  Reduced economic growth and lower corporate profits are not good for the stock market, possibly making decent returns in the market harder to achieve in upcoming years.     

Looking Ahead

Debt ceiling negotiations and the associated political gamesmanship will likely continue to make headlines, but probably will not affect markets greatly.  The CBOE Volatility Index (“VIX”), popularly known as the “fear gauge” remains near historical lows, implying that volatility is limited, and markets are not expecting anything besides an agreement to raise the debt ceiling and avoid default.  But of course, as we have experienced in the past, markets can be incorrect and not fully price in risks.

On the economic front, consumer spending will be in focus this week with retail sales data set to be released as well as earnings reports from retail giants Wal-Mart and Target.  The most important data point may ultimately be the weekly jobless claims release given that last week’s reading was the highest since October 2021 and continuing jobless claims continue to inch higher.  Softening labor market trends support the Fed’s move to the sidelines and also play into concerns about the lagged effects of the tightening cycle.  This is why it seems increasingly probable the Fed will pause and take a “wait and see” approach for a few months to determine the full impact of rate hikes.  Stress in the banking sector is leading to tighter lending standards and therefore has become a de-facto tightening of monetary conditions, taking some pressure off the Fed to continue on the path of higher interest rates. 

Planning for retirement is a long, arduous task which involves substantial preparation, just like climbing a mountain.  Reaching the peak means working around the obstacles right in front of you, i.e. short term market moves, while not losing sight of the end goal.  And once you reach the summit, there can be just as much of a challenge to descend.  Let us be your guide to help ensure you successfully navigate the obstacles you may face on the downhill part of your retirement expedition and make sure your savings do not vanish into thin air. 

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

May the Fourth

For those who celebrate, we would like to wish you a happy belated Star Wars Day.  Last Thursday, May 4^th, is an informal commemorative day to celebrate the Star Wars media franchise.  The date originated from the pun, “May the Fourth be with you,”a variant of the Star Wars catchphrase “May the Force be with you.”  Many parallels can be drawn between Star Wars and the stock market with perhaps the largest being the battle between good and evil. In the movie the central conflict revolves around the battle between the light side (Jedi) and the dark side (Sith).  Similarly, the stock market can be seen as a battlefield between the forces of bullish optimism and bearish pessimism. 

Equities were mostly lower last week as the S&P 500 gave up the previous week’s gains while the Nasdaq edged out a slight gain.  (On a side note, as of the market close last Thursday the Dow Jones Industrial Average was negative on the year.)  Regional bank stocks experienced deep declines amidst ongoing fears around deposit and liquidity concerns. Fortunately, a sharp move higher by the indices Friday, including banking stocks making a big bounce back, helped avoid what was shaping up to be a difficult week.   

As expected, the Federal Reserve did raise interest rates a quarter point on Wednesday.  After the meeting Fed officials suggested the central bank could pause rate hikes but also did leave the door open for the possibility of more rate hikes in the future.  The market rally on Friday was in response to the employment report which surprised to the upside and showed the labor market remains strong with the unemployment rate falling to 3.4%, a fresh five-decade low.  However, average hourly earnings were also higher than expected, leading to the possibility of continued inflationary pressures from wage growth.  A report earlier in the week showed a larger-than-expected decline in job openings, suggesting some support for a soft landing since the labor market maybe be softening without any meaningful loss of jobs.  As is often the case, data in the employment report can be construed as either bullish or bearish, depending upon your perspective. 

The Empire Strikes Back

The ending of the Star Wars sequel The Empire Strikes Back contains what is arguably one of the greatest plot twists in cinematic history.  Spoiler alert: this is a reference to when Darth Vader reveals he is Luke Skywalker’s father.  Markets can, and often do, have many plot twists which is why it is best to have a plan in place for your retirement no matter what happens in the markets.  If everyone always knew exactly what was going to happen, there would not be opportunities for gains.  Outsized gains can be made from predicting events which are not widely anticipated, but with this comes the risk of being wrong and missing out on other opportunities or worse, losing large sums of money.  We position portfolios to weather all storms but do try to consider various scenarios that could occur.  One we are thinking about now is the possibility that inflation will remain stubbornly high. 

The inflation rate measured by the government is likely to be different than everyone’s individual rate of inflation;  it all depends upon how you spend your money.  The government has many ways of measuring inflation, such as Consumer Price Index (CPI), Producer Price Index (PPI), and Personal Consumption Expenditures (PCE) Price Index. All tend to be directionally accurate and have a magnitude close to what most of the population is experiencing.  Another measure of inflation to consider is the Trimmed Mean PCE Inflation Rate, which is produced by the Federal Reserve Bank of Dallas. This measure looks at the price changes for of the individual components and “trims” or eliminates the most extreme observations with the inflation rate calculated as a weighted average of the final – trimmed – observation list, giving a more “smoothed” set of data without large month-to-month changes.  This measure reached a multi-decade peak last August at 4.75% and has remained stubbornly high, only falling to 4.68% at the latest reading (March), which was a slight acceleration from January and February.  This data set, which is one of many, indicates inflation is not decelerating as hoped.  If truly the case, this has implications for investors and spenders alike. If accurate and soon to be reflected in other data, it increases the likelihood of the Fed continuing to raise rates, or at least not drop interest rates anytime soon. Hence why we think that even if the Fed does pause in June, it is unlikely they will drop rates before the end of the year unless we see an unexpected fast decrease in the pace of inflation. As a spender, which we all are as consumers, this also indicates inflation remains stubborn and you need to plan accordingly. 

Looking Ahead

This coming week is a big week for economic releases and could provide the largest market swings of any week for the next month.  The Consumer Price Index (CPI) will be released on Wednesday and is expected to show year-over-year core (not including food and energy) inflation of 5.5%. This would be lowest since December 2021 but still slightly ahead of the current Fed Funds rate.  A report higher than expected may be impetus for the Fed to continue raising rates at their next meeting while a lighter than expected reading might be enough to convince them to pause.  Producer Price Index (PPI) will follow on Thursday.  There will also be attention on the banking sector to determine if there is further fallout or if the worst of the current crisis is behind us.  Our guess is that we have not heard the end of it yet.

The struggle for freedom and justice in Star Wars extends over multiple generations.  Likewise, successful investing often requires a long-term vision.  Investors who adopt a strategic approach and focus on long-term goals are more likely to withstand short-term market volatility and benefit from the compounding growth of their investments.  While there are many similarities between Star Wars and the stock market, it is essential to remember that the stock market is a complex financial system, influenced by economic fundamentals and the actions of millions of market participants, whereas Star Wars is a fictional universe designed for storytelling and entertainment. 

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

Mall Rats

The 1995 film Mall Rats depicts two buddies who decide to hang out at the local mall after both being dumped by their respective girlfriends on the same day.  (Interestingly, the movie happened to have been filmed at Eden Prairie Center, which at the time had a large number of vacant storefronts making it easy for the producers to set up fake stores; not the case today as the mall appears to be flourishing.)  Very much a box office failure upon release, it later became a cult classic as many teenagers from that time could relate to hanging out at their local mall.  Brick and mortar retailers were thought to be something of a bygone era when the Covid pandemic hit, however retail sales, both online and in-store, are thriving today thanks to the strength in consumer spending.  And with consumer spending now making up over two-thirds of GDP, this strength continues to surprise most forecasters and has helped keep the economy out of a recession.

There seems to be a disconnect between “Main Street” and “Wall Street.”  The general American public seem to have no problem continuing to spend money, largely ignoring Wall Street’s predictions of an impending recession and the threat of layoffs.  Main street seems to now be giving less credence to many Wall Street predictions, which is probably fortunate since it is consumer spending helping buoy the economy and enable it to continue growing. 

The initial reading of first quarter GDP showed growth of 1.1%, well under consensus estimates of 1.9% and the 2.6% growth seen the previous quarter.  On the positive side, this indicates the economy continues to grow.  But on the negative side, growth is slowing faster than anticipated and we are likely teetering on the brink of a recession.  With the economy continuing to expand, the Fed is expected to raise short-term interest rates another quarter of a percent at this week’s meeting.  Analysts are currently projecting the Fed will begin lowering rates in the fall but if the economy continues to perform well, inflation may not recede and they could be forced to hold rates high, if not continue to raise them.

Clerks

Prior to making Mall Rats, writer and director Kevin Smith produced a movie titled Clerks. This film was shot at convenience and video stores where Smith worked in real life and had a total cost to produce of $25,575.  Clerks also became a cult classic and is regarded as a landmark in independent filmmaking.  The film went on to gross over 4.4 million dollars internationally, not to mention VHS (for those of you who remember what that is) sales beyond that, to give a hefty return on investment.  It is this type of success many people try to achieve in the stock market, but it is extremely rare when such outsized gains occur.  It is much more prudent to remain patient and disciplined with a long-term investment strategy instead of trying for fast, outsized gains.   

April closed out with a bit of a roller coaster in the markets last week.  The major indices were able to shake off declines early in the week to end the week slightly higher.  This helped propel the S&P 500 to a small gain for the month while the Nasdaq was near unchanged.  The month was marked by a fairly muted trading range without much movement in either direction.  Markets were supported by positive themes from earnings season especially better-than-feared results from regional banks and large-cap tech stocks.  Healthy household spending and a resilient labor market are also themes helping provide tailwinds to earnings and the markets.  However, these positive aspects of the market also support the Federal Reserve’s higher-for-longer messaging. 

Banking fears resurfaced last week and concern is growing about weakness in other regional banks due to the drop in value of their investment portfolios, fewer deposits and rising delinquencies with commercial real estate loans.  There are calls for the Fed to stop raising interest rates since higher rates are negatively impacting the price of bonds held at banks, which reduces the amount of capital available to back deposits.  But the Fed finds itself in a difficult position since inflation, while slowly receding, continues to be higher than desired for long-term price stability.  With prices rising more than 4% year-over-year combined with GDP only growing at about 1% a year, we once again hear the “s” word – stagflation. 

Looking Ahead

The major event of the week will be the Fed meeting and its policy statement release on Wednesday with the expectation of another quarter percent increase followed by a potential signal of a pause to its hiking campaign.  There will also be a flood of earnings reports and it remains to be seen if they will continue to surprise to the upside.  Friday will bring the monthly labor reports which are expected to show a slowing in job growth.  A slowing labor market could help persuade the Fed to put future interest rate hikes on hold, assuming inflation continues to moderate and decrease.

As an observation, the S&P 500 is enjoying a decent year with the index already higher by 9% year-to-date.  Digging into the index, the seven largest growth stocks, which comprise almost 25% of the benchmark, account for a little more than 100% of this gain; meaning the remaining stocks in the index have a combined return of nearly zero, even slightly negative.  Generally, this is not healthy breadth in the market and when this has occurred in the past, it was an ominous sign.  This leads us to remain cautious but also makes us think if there are further gains they are likely to come from some of the lesser thought-of names.  Something we will be keeping an eye on going forward.  

Between stress in the financial system, a Fed meeting, and key economic reports, the next couple of weeks are shaping up to be interesting but it is likely to calm down after that.  This is the time of year when the weather starts to warm up and many people in this part of the country leave shopping malls to head outdoors.  We would not take the advice to “sell in May and go away” literally, but the idea of a quieter summer in the markets may very play out this year. 

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

LSD

The world’s oldest marathon and one of the world’s best-known road racing events, the Boston Marathon, was held last week.  For dedicated runners it is often considered the apex of a running career as those who enter the race need to first qualify, which often takes years of dedicated training and practice.  As with any sport, runners have different types of training regiments to build stamina, endurance, and speed.  These include tempo (or fast) runs, interval runs and of course long, slow distance runs, commonly known as LSD for short; not to be confused with the psychedelic drug used by the counterculture movement of the 1960s.  Investing, especially for retirement, is very similar to long endurance races – they are not a short sprint and require stamina and patience to be successful. 

The most widely anticipated recession in history has yet to occur, so should investors be nervous?  Is it building to be bigger than expected or were we able to avoid disaster?  If you are a long-term investor, you should not be overly concerned either way.  Money invested in the stock market should be able to withstand short-term volatility and only intended to be used several years down the road – generally over the duration of an entire market cycle which tend to last at least 5-7 years. 

Investors often want to know what the market is going to do over the next 3-6 months and then try to time it, but patience is warranted. Perhaps it was best said by legendary investor Warren Buffett, who stated “I never attempt to make money on the stock market.  I buy on the assumption that they could close the market the next day and not reopen it for five years.” The point he was making is that he has found success by owning high quality stocks that perform well over longer periods of time and does not worry about short-term fluctuations. 

Fartlek

Fartlek, a funny name which comes from Sweden and means “speed play,” is a runner’s training approach whereby long slow distance, or steady-state running, and higher speed training is blended together at various intervals.  More simply, it involves alternating periods of fast and slow running.  The markets tend to behave in this manner quite frequently.  There are times when the market is very volatile and moves up or down quite quickly, while other times it tends to be calmer and move little.  Last week would fit into the latter; it was a fairly quiet and calm week in the markets despite earnings season fully kicking into gear. 

The major U.S. average were slightly lower as the S&P 500 changed by less than 1% for a third-straight week, the longest stretch since August of 2021.  Treasury bond yields did move slightly higher but the magnitude of the moves was much less than recent weeks.  Earnings reports showed cautious guidance and profit margins hit by recent price cuts, but they also reflected resilient consumer spending.  Thus far, earnings have come in about as expected with few big surprises, but still show some contraction from a year ago. 

As has recently been the case, there continues to be arguments for both bullish and bearish narratives in the markets.  The Fed overhang remains the key downside risk, with officials continuing to message “higher for longer” policy given persistent inflation.  The recent release of the Purchasing Managers Index (PMI) data indicates manufacturing and employment are increasing faster than expected, but so are prices, leading to little reprieve on the inflation front. 

Earnings growth is expected to grow in the third quarter as companies step up their cost-cutting and efficiency initiatives, however risk remains to estimates from margin contraction and wage pressures.  Also on the bearish front, money supply growth is collapsing with tightening in the money supply for six straight months.  The post-pandemic money supply expansion from the Federal Reserve’s Quantitative Easing (QE) program and near zero interest rates helped fuel the fast recovery but also were major contributors to the highest levels of inflation in four decades.  A contraction in money supply should help stymie inflation but will also hinder economic growth. 

Looking Ahead

Economic data to be released this week includes Consumer Confidence, first quarter Gross Domestic Product (GDP), and Personal Consumption Expenditures (PCE). GDP is expected to show expansion, so no recession (yet).  The PCE price deflator is the Fed’s preferred measure of inflation and is expected to remain above 4%, which is still outside the Fed’s comfort zone and therefore will provide them with further validation to raise interest rates another quarter point at their upcoming meeting on May 2-3.  As of now, the markets are expecting this to be the last rate hike in this cycle with the possibility of at least one rate cuts by the end of the year.  However, the Fed continues to be at odds with these expectations and officials have insisted they will maintain interest rates higher and longer in their fight against inflation. 

Big tech earnings will receive the most attention this week with Alphabet (Google), Microsoft, META (Facebook) and Amazon all reporting.  This group has significantly outperformed the broader market so far this year, but analysts have noted their valuations are high with some of the best-case scenarios priced into shares.  But it is worth remembering these are some of the names that could be among the better performers in an economic slowdown given strong cash generation and falling interest rates. 

While we wait for a recession that may, or may not, ever happen it is important to remember the economy and stock market are not one in the same. It is more important to focus on the stock market as a long-term proposition where patience is required. Investing in the markets should be viewed as a marathon and not a sprint.  There are often times the market is volatile and prices fluctuate wildly in the short-term, but keep your eye on the long term to match your time horizon with your goals.  Do not hesitate to call us if you would like to discuss your portfolio and the strategies we can help you implement for long-term success throughout retirement. 

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

Spring Thaw?

Here in the Upper Midwest temperatures were at or near record highs, in some cases near 90 degrees.  While it did give us an early taste of summer, it also seemed surreal as some of the piles of snow that accumulated after a winter of abnormally high snowfall remained. The multiple warm days quickly melted the snow and while the calendar tells us we are now in the midst of spring, and summer is right around the corner, over the weekend Mother Nature did provide another shot of snow to remind us we are not completely over winter yet.  With rather strong gains in the both the stock and bond markets so far in 2023 and inflation seemingly dissipating, are we finally thawing from the market “winter” of 2022?

Despite pulling back on Friday after disappointing retail sales data, the markets did manage to show gains last week with the Dow Jones Industrial Average jumping 1.2% and being higher for a fourth consecutive week while the S&P 500 gained 0.8% and the Nasdaq added 0.3%.  Initial quarterly earnings reports on Friday did come in better than expected, most notably the largest U.S. banks.  Inflation showed signs of moderating in March with the Consumer Price Index (CPI) climbing 5% compared to a year ago, slowing from the 6% annual page seen in February.  However, core CPI, which excludes food and energy, rose 5.6% year-over-year, higher than the 5.5% reported the previous month.

Inflation is showing signs of moderating but remains above the Federal Reserve’s comfort level and odds are increasing the Fed will raise rates another quarter point at their next meeting the first week in May, only two short weeks away.  The question now is whether inflation, which is a measure of price changes from the previous year, will continue to fall or remain at elevated levels.  Looking deeper into the components of the inflation measure, housing costs are moderating with the cost of rent leveling off, but energy costs are on the rise.  It is too early for the Fed to declare victory in their fight against inflation, but progress has been made.  As of now, it appears an interest rate hike in May is likely to be the finale to an aggressive hiking cycle that has rocked markets for much of the past year.  At a minimum it seems the Fed will pause after the next meeting to fully assess economic conditions and give previous monetary tightening action a chance to fully work through the system.

April Showers

The stock market is generally affected most by two factors – interest rates and earnings.  With the current interest rate hiking cycle possibly nearing its end, the focus is likely to shift to corporate profitability.  Analysts are currently expecting aggregate earnings of the S&P 500 to drop roughly 6% from the first quarter of last year.  If this comes to pass, it would be the second straight quarterly decline in year-over-year earnings growth, the first such “earnings recession” since the pandemic.  But shrinking earnings may not be a tragedy and in fact might be a sign of cooling inflation. Current expectations are that corporate earnings will be pressured by shrinking profit margins and not by a drop in top-line sales.  As a matter of fact, most companies are reporting continued growth in sales.  During 2021-2022 when inflation was taking off, companies were able to raise prices with ease, resulting in record high profits.  As price increases have slowed, companies have had a more difficult time passing along price increases to consumers, meaning profit margins are being squeezed. 

Even at the “earnings recession” levels predicted by analysts, earnings per share would still be noticeably greater than any quarter in the pre-pandemic era.  However, big surprise losses, or profits, that trounce expectations can affect individual stock prices and set the mood for the markets.  Analyst expectations are frequently, and almost always, too pessimistic since their estimates are driven by conversations with corporate executives who typically like to underpromise on earnings and then over-deliver with a better-than-expected number, generating a nice pop in the share price. 

Looking Ahead

Earnings season picks up serious steam this week with a host of bank earnings, in particular the beleaguered regional banks. On the economic front, housing data will be the focal point a week after inflation and retail sales took center stage.  Housing index data, housing starts, and existing home sales, coupled with mortgage rate and application data will offer a picture of the housing market amid a rising rate environment. 

Much like a late spring snowstorm, returns in the market this year have been a bit of a surprise.  But unlike a snowstorm, the positive movement has been welcomed.  Many analysts and investors have remained cautious since a widely anticipated recession still seems to loom on the horizon.  However, the “impending” recession continues to be pushed back further into the future, leaving many to wonder if it will indeed occur.  Even the most pessimistic analysts seem to be changing their tone a bit, becoming a little more sanguine.  Earlier predictions about a significant drop in the stock market have not (yet) played out and with passing time it is may be less likely.  The market has been trading in a range over the past 12 months, but those people sitting on the sidelines have missed out on potential gains in certain sectors and asset classes, another reminder how “time in the market” tends to trump “timing the market.” 

If the Fed is indeed near the end of the interest rate hiking cycle, the peak in interest rates may already be behind us.  For fixed income investors thinking they will remain on the sidelines and wait for higher interest rates, it might be advisable to consider acting sooner rather than later. Yields on shorter duration fixed income instruments remains much greater than longer duration yields but if we see rates continue to fall this could quickly change and it would be advisable to lock in higher rates now.

As we transition into the warmer months, be sure your portfolio is also adapting to changes in the market.  Don’t let a surprise snowstorm catch you off-guard and also don’t miss the sunny, warm days when markets are good.  If you would like to review your portfolio to discuss options to protect yourself while ensuring you do not miss out on better markets do not hesitate to contact us to discuss strategies to help you remain secure throughout your retirement.   

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

Coming Out of Hibernation

One adaptation that has evolved in some mammals is hibernation, which is a state of dormancy that allows animals to avoid periods of famine, such as over the winter when food is scarce. As the weather warms up here in the Upper Midwest and we are able to be outdoors more, we ourselves might feel as if we are coming out of our own hibernation.  Bears are especially known to be animals that hibernate.  We experienced bear markets in 2022, but 2023 is off to a much better start. Are the bears going to return to hibernation and are the bulls finally taking charge?

The gains in the stock market year-to-date (YTD) have been driven primarily by the Technology and Communications Services sectors.  It is the companies in these sectors that are also driving the strong YTD performance of the Nasdaq, but still not enough to bring it out of its bear market as it remains some 25% off its all-time high.  The forward price-to-earnings ratio of the tech sector remains elevated above long-term averages, but not yet reaching levels seen in 2020-2021, implying that either earnings need to improve or stock prices need to fall for prices to be more in-line with the historical norm.  There is no rule stating stocks must trade at a particular P/E ratio, but the sector again looks expensive, and we would remain cautious in this area until we see confirmation earnings are improving. 

Last week the S&P 500 and Nasdaq finishing slightly lower after three weeks of gains.  Concerns about growth moved back to the forefront during the holiday-shortened week amid a steady stream of weaker-than-expected economic reports.  While these seemingly firmed expectations for the Federal Reserve to pause its interest rate hikes at their next meeting in early May, at the same time they provided additional fuel for hard-landing and recessionary concerns.  Following recent stress in the banking sector, there have also been signs of weaker loan demand and tighter credit terms, which also are adding to the shift in sentiment. 

Despite those events, there are also advocates for a more bullish view.  Bank-crisis headlines appear to have stabilized and there are presently no indications of further contagion, but that does not mean we are out of the woods yet. The coming earnings season remains a big focus given expectations for a notable year-over-year drop in S&P earnings amid a softer economic backdrop and pressure from wage growth.  There is also a sense the bar for this earnings season has already been lowered. 

Goldilocks and the 3 Bears

Most everyone is familiar with the fairy tale “Goldilocks and the Three Bears” where a young girl, Goldilocks, enters the home of three bears, sits in their chairs, eats their porridge and sleeps in their beds. She tries the porridge of each, with the first being too hot, the second being too cold and the third being just right.

Last week’s jobs report could be considered a “Goldilocks” scenario that is “just right.”  Employers are adding jobs at a healthy, but more moderate pace. New workers are reentering the labor force, helping meet the demand for staff, resulting in wage gains normalizing.  If this is sustained in coming months this could lead to a not-too-hot or not-too-cold healthy labor market with steady job growth and low inflation.  The Fed has been looking for the labor force to come back into balance, helping subdue wage growth and inflationary pressure. 

After the employment reports were released, Treasury yields rose sharply, reflecting a sense that the continued robust job market implies tighter money supply. Stated another way, the jobs report provided further room for the Fed to continue raising interest rates and a rate hike in May now has a higher probability of occurring.  But we will caution many data points will be released prior to the next Fed meeting, including key inflation reports this coming week.  The central bank will be reluctant to back off its campaign to raise interest rates until there is clear evidence inflation is cooling significantly.

Looking Ahead

First quarter earnings season will get underway this week with big banks reporting results on Friday.  Investors are likely to turn their attention slightly away from Fed policy and towards the state of profitability in corporate America.  However, the most anticipated event of the week will be the latest inflation reading from the Consumer Price Index (CPI) on Wednesday, followed by the Producer Price Index (PPI) on Thursday.  CPI is expected to show prices being 5.2% higher than a year ago, a slowing in inflation from the 6% reported last month, but still much higher than the Fed’s 2% target.  The week wraps up with the monthly retail sales report on Friday, which will show the health of consumer spending. 

Current market expectations indicate about a 50/50 split in chances for a quarter point rate hike by the Fed in May, with odds of a hike increasing after last week’s jobs reports but very much subject to change as mentioned earlier.  Looking out further, markets are pricing in a pause at the June meeting with a quarter point drop in July.  Our thoughts are the market is not pricing probabilities correctly and absent a major unanticipated event, we highly doubt the Fed would raise rates and then begin to lower a few short months later. Not since the early 1980’s has the Fed not held rates at their peak for less than 6 months, often holding them for up to a year, before cutting.  And looking back to the early 1980’s when there were large swings in interest rate moves by the Fed, they made policy errors by not holding rates high enough for long enough, allowing inflation to quickly grow. The current Fed is aware of this past precedent and it is unlikely they will want to repeat the same type of errors. 

When bears hibernate, they store up enough food and liquid in their bodies to survive the long winter.  Their physiology and metabolism shift in rathe incredible ways to help them survive.  Investors should prepare themselves in much the same way when it comes to bear markets – by having an income stream available so they do not need to rely on their investments when markets are lower.  If you are concerned about what a bear market could impact your retirement, contact us to discuss strategies to help you remain feeling secure.     

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