Tax Planning

Ghost of Christmas Present

In Charles Dickens’ classic novella, A Christmas Carol, the miserly Ebenezer Scrooge is visited by three Christmas spirits who offer him a chance of redemption – the ghosts of Christmas Past, Present and Yet to Come.  Each spirit attempts to show Scrooge the errors of his ways and how treating everyone with kindness, generosity and compassion embodies the spirit of Christmas.  When it comes to the markets, the events of the past year have been different than any we have experienced in recent memory.  As we look back at 2022 and assess the current situation, will we see more of the same in 2023 or will the markets change their ways?

Stocks wrapped up their worst week since September after a worse than expected report on wholesale prices Friday.  This comes on the eve of this week’s Federal Reserve policy meeting where expectations are for an increase in the fed funds rate of 50-basis points, or one-half of one percent. For the week the S&P 500 fell 3.3%, while the Dow Jones Industrial Average sank 2.7% and the Nasdaq dropped 4%.  Bond markets endured a bumpy week with the yield on 10-year U.S. Treasury bond ending marginally higher.  However, longer term yields remain more than a half percent lower than they were in just a month ago.

Falling long- term rates pushed bond prices higher, as prices move inverse to interest rates. November was the best month for U.S. bonds since December 2008. Unfortunately, the US bond market is still lower by double digits year-to-date and remains on pace for one of its worst years in history.  The traditional 60/40 stock/bond portfolio, which is supposed to provide diversification, has also suffered one of its worst years in history. Higher interest rates do mean better yields for fixed income investors but the volatility of the bond market, which we think will continue into 2023, has shown that bonds may no longer provide the diversification and protection they have in the past, making this an opportune time to consider alternative strategies for portfolio protection. 

Ghost of Christmas Yet to Come

With the volatility we have experienced and the precocious position of the markets and economy, we all might be wondering what the future might hold.  Consumer spending, which makes up about two-thirds of GDP, is being monitored closely, especially during this holiday season.  Indications are that spending remains strong, but consumers are seeking out more bargains and discounted items than they have in the past.  Inflation has outpaced wages for 20 consecutive months, so in order to support higher levels of spending, consumers are saving less and borrowing more.  This is a cause for concern, especially if we were to enter a recession and experience job losses, making payments on borrowing, especially credit cards, more difficult and unemployed people having less savings to rely upon.  Oddly, the continued strength in consumer spending contradicts the widely followed University of Michigan’s Consumer Sentiment Index, which has been negative for 8 consecutive months; the longest run of extreme negative sentiment that we’ve seen with data going back to 1952. 

Despite last week’s higher than expected Producer Price Index (PPI), inflation does seem to be moderating and even falling.  The PPI increased 7.40% over the last year, the smallest increase since May 2021.  For reference, PPI peaked at 11.66% back in March. (Note this coincides with when the Fed began to raise interest rates, as mentioned earlier.)  Supply chain backlogs have improved dramatically and there have been large drops in the prices of lumber, used cars, and rents. Lumber prices are often viewed as a forward indicator of economic conditions since they reflect demand for construction materials.  These price drops will eventually be reflected in inflation numbers and we should see at least a pause from the Fed, providing some relief and a tailwind for the stock market.

Currently the stock market is very much dependent upon Fed action, which in turn is dependent upon inflation.  With prices of many raw materials dropping, many economists are predicting inflation will fall rapidly back to the Fed’s 2% target.  But we remain skeptical since these same economists have been predicting lower levels of inflation over the past two years and historically when inflation reaches the levels it has recently, it takes on average ten (yes, 10!) years for inflation to fall back to the Fed’s comfort zone of 2%.  Just as this year has been different than many years in the past, we are not of the belief it will take that long for inflation to subside to that level, but we think it will still take a long time, perhaps years and not months. 

Looking Ahead

The main event of this week will be Wednesday’s Fed meeting and rate decision.  As we’ve seen in the past, since the interest rate decision is widely telegraphed beforehand, it often is not the actual rate decision but rather the comments from the Fed afterwards that move the market.  The Consumer Price Index (CPI) report on Tuesday is also likely to have an impact on the markets since the focus remains on inflation.  After the excitement around these two events in the middle of the week, we are apt to see a much quieter stretch for the markets going into the end of the year.  However, we do caution that many institutions and fund managers make big moves at year-end to position portfolios, which may especially be the case this year given the amount of volatility.  We may see some moves in the market but we would not put much credence into large market moves since they are likely to be short-lived. 

As always, we encourage investors to ignore short-term moves in the market and maintain a long-term perspective.  Remember the objective and goals of your investing.  For most people this would be to provide protection of purchasing power to maintain your lifestyle and standard of living in retirement.  If you are worried about visits from spirits of the past and future and what they might reveal to you, please give us a call to ensure your portfolio is positioned appropriately so you can avoid needing your own chance for redemption. 

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

Give Her All She’s Got

In Star Trek when asked by Captain James T. Kirk to push the starship Enterprise faster, Chief Engineer Montgomery “Scotty” Scott would sometimes respond, “I’m giving her all she’s got, Captain.” The Federal Reserve might feel as if they are in a similar situation with their fight against inflation. They are using all the tools at their disposal, but the American public may not feel it is enough. Despite promising developments, inflation remains stubbornly high and continues to impact many people’s lives.    

U.S. equities were higher last week with Wednesday’s rally following Federal Reserve Chairman Jerome Powell’s speech where he signaled the Fed would step-down the pace of interest rate hikes to 50 basis points, or one-half of one percent.  However, he also reiterated that the peak Fed Funds rate will need to be somewhat higher than was projected in September. His comments sparked a big equity and Treasury bond rally since they gave support to the narrative we may be nearing the peak interest rates for this cycle.  In addition to the tailwinds from the Fed, stocks may also have been boosted by month-end moves, mostly buying, from institutions and certain funds.  The Dow Jones Industrial Average has now exited bear market territory since it is 20% higher than the lows from a few months ago, but the index does remain negative on the year. 

The Fed’s preferred gauge of inflation, Personal Consumption Expenditures (PCE) deflator, was in-line with expectations of an annual increase of 5% and remains well above the Fed’s inflation comfort zone of around 2%.  Labor market strength was evident with the payroll and employment reports released on Friday.  A larger than expected increase in jobs surprised markets, especially when coupled with reports of wage growth exceeding projections.  Higher wages are thought to add to the continuing inflation situation and these reports could complicate the Fed’s policy path. These reports did not paint a picture of a labor market that is moderating in response to higher interest rates and it keeps pressure on the Fed to bring rates higher or hold them there for longer. 

Boldly Go…

As 2022 winds down we look ahead to 2023.  When it comes to investing in the market, it is vital to maintain a long-term perspective and we feel very optimistic about market prospects in the long-term, especially for 2024 and beyond.  But as we look to next year, we know it is going to be a very different market than we have faced in recent memory.  The yield curve remains deeply inverted, signaling market fears of an impending recession.  But recessions hurt demand and therefore tend to be deflationary.  It is doubtful we will see prices at the same level that we did pre-Covid, say in 2019, but a recession should help ease some of the inflationary pressures experienced over the past year.  However, we do not think inflation will fall to the 1-2% range the Fed would prefer; the same levels what we, as consumers, have come to expect over the past 10-12 years.  This is why it is vital to have a well thought-out, tested plan for dealing with higher inflation in retirement so you don’t leave it to chance. 

When it comes to the markets, we expect them to be anything but smooth next year.  The world may be experiencing major structural and secular changes that will outlast the current business cycle, driving further uncertainty and raising the probability of greater market volatility.  The Fed is faced with the dilemma of reducing inflation, protecting jobs and growth, and ensuring financial stability. This will be no easy feat and any miscue, even if beyond their control, could send us on a course none of us would like to experience.  The best way to prepare for this, is not to plan for one outcome but rather plan for multiple outcomes.  The actions you take now will have a major bearing on the success you realize when dealing with such situations.  Decision making can be difficult during times of turbulence, which is also when mistakes are often made, so it is best to prepare in advance and consider how different outcomes might affect your plans. 

Looking Ahead

This week should be relatively quiet for the stock and bond markets with few major economic reports.  The exception being the Producer Price Index (PPI) report on Friday, which shows changes in wholesale prices that are then passed along to consumers.  Moves in the PPI tend to foreshadow moves in the Consumer Price Index (CPI).  We are apt to see much more activity in the markets in the following week when the CPI report will be released and the Federal Reserve meets for the final time this year.  Indications are we will see some stock market strength going into the end of the year, commonly referred to as a “Santa Claus” rally.  While not always the case, we think the likelihood is high this year given the volatility experienced and year-end positioning by institutions and fund managers.  We are now looking into next year, which is only a few weeks away, where overhangs remain, including growth fears, earnings risk, job layoffs, and the unrelenting Fed “higher-for-longer” narrative. 

This is a reminder that very limited time remains before end of the year.  Please call us as soon as possible if you need to make moves before the calendar changes to 2023.  When it comes to retirement planning, be sure you are considering all aspects, not just investments, and “giving her all she’s got” to ensure you feel comfortable knowing you have a secure retirement.    

Have a wonderful week!

Nathan Zeller, CFA, CFP®

Chief Investment Strategist
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

Planes, Trains, and Automobiles

For many people the movie, Planes, Trains, and Automobiles has become a tradition to watch during this time of year.  This film stars Steve Martin as a high-strung marketing executive trying to get from New York City to his home and family in Chicago in time for the Thanksgiving holiday. During his travels he invariably keeps running into a goodhearted, but annoying, salesman played by John Candy.  The duo endures a series of misadventures, but despite numerous setbacks is unwavering and committed to doing whatever it takes to make it home for the holiday, utilizing various modes of transportation, hence the title of the movie.  This is very similar to saving for retirement – it may not be as smooth of a journey as you anticipate or hope for, but you need to remain steadfast and be able to adapt should you run into difficult situations.

The major U.S. stock market indices capped off a holiday-shortened week of gains with attention on a few key tailwinds.  Peak inflation remains a theme in the markets as does the hope for a change in monetary policy from the Federal Reserve.  Interest rates fell slightly and the yield curve remains largely inverted; an ominous sign for future economic growth.  Oil prices declined on the week on the heels of lower expected demand due to slowing economic growth and speculation OPEC will increase production next month.  It is worth noting that oil (and gasoline) prices have now fallen to roughly where they were at the beginning of the year. However, the Energy sector of the S&P 500 is higher by about 65% over the same time.  Some of this can be explained by higher natural gas prices, but this illustrates the current dichotomy between energy prices and stock prices in the energy industry.  Energy prices are based upon supply and demand while stock prices are based upon expected future cash flows.  These are generally intertwined with energy company profits being dependent upon energy prices.  We view this current disjunction as a sign that the stock market expects energy companies to remain profitable and energy prices to move higher. But in the meantime, lower energy prices should help ease some of the inflationary pressures and upcoming inflation data is likely to reflect this. 

Holiday Shopping

The peak holiday shopping season kicked off on Black Friday last week with consumer resilience and retail margins in focus.  Households pinched by inflation and higher energy prices are expected to spend less than they have in the past.  Bloomberg noted that seasonal sales are expected to fall 1.2% year over year on an inflation-adjusted basis; the first decline since 2009.  Overall spending in nominal (not inflation-adjusted) terms is expected to rise 2.5% year-over-year, down from 8.6% last year.  Online Black Friday sales were in-line with these projections as they came in 2.3% higher than a year ago but more consumers embraced flexible payment plans as they continue to deal with higher prices and inflation.  Healthy numbers from online sales over the long Thanksgiving weekend may be a promising indicator of coming weeks.    

Consumer spending is always watched closely by economists since it comprises over two-thirds of GDP.  At this juncture, there is even greater emphasis on spending since it will provide insights on the effectiveness of the action taken this year by the Federal Reserve.  If consumers are spending less because interest rates, and therefore the cost of borrowing, are higher then it would indicate action from the Fed has been effective.  This would also signal that inflation could be easing.  If consumers are buying fewer goods, it puts pressure on retailers to lower prices, helping reduce inflationary pressures.  Early indications are that spending is strongest on marked down merchandise, which could hit retailer profits, though at the same time help draw down bloated inventories.  Given uncertainty about current economic conditions, the markets may place greater emphasis on holiday sales than in years past, especially once we get past the upcoming inflation reports and Fed meeting in the middle of the month. 

Looking Ahead

This week marks the beginning of a stretch of high frequency economic data apt to move markets and provide some volatility.  It begins on Thursday when the Personal Consumption Expenditures (PCE) data is released, including the PCE Deflator which is the Fed’s preferred measure of inflation.  Expectations are for an annual increase of 6.0%, still well above the Fed’s “comfort zone” of around 2% inflation.   Friday brings the monthly jobs report which is being closely monitored by the Fed and economists since there is concern tighter monetary policy will lead to slowing economic conditions and eventually job losses.  Conversely, if the labor market remains strong there is concern higher wages will continue to contribute to higher inflation.  It is a bit of a no-win situation for the Fed right now and hence why many feel prospects for a “soft landing” are slim. 

As we enter December, it is a reminder that time in running out for 2022.  If you need to make adjustments to your retirement plan or portfolio prior to year-end, do not delay further.  This is a year many of us would rather forget when it comes to the markets but is also a reminder that often times we need to deal with unexpected events and be able to adjust.  Stay focused and committed to your goal, make adjustments if needed. For travelers, different modes of transportation may be used to arrive at a destination, just as there are different strategies that can help you reach your goals. 

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

Giving Thanks

Thanksgiving is a time to pause and give thanks.  Here at Secured Retirement, we are especially thankful for our clients and the numerous relationships we have established over the years.  Despite experiencing what has been a rather challenging year for investors in the markets, we can still be thankful for having the privilege of living in one of the most economically developed countries in the world and what is arguably the most economically prosperous, and undoubtedly the most technologically advanced, time in world history.  And even if the elections from a few weeks ago did not give the result you had hoped for, we can all be thankful for the opportunity to participate in free elections and all the freedoms we enjoy as Americans. 

Equities were slightly lower last week, giving back some of the gains from the previous week.  The Producer Price Index (PPI), a measure of wholesale inflation, came in below expectations, adding credence to the peak inflation narrative and consistent with the softer than expected Consumer Price Index (CPI) report from the previous week.  However, inflation still remains stubbornly high and indications remain that the Federal Reserve will continue to raise interest rates in the near term. But what has changed are expectations for peak rates this cycle and how long they will hold.  As of now, the expectation is the Fed will raise the Fed Funds rate to 5.00% (it is currently 4.00%) in the first quarter of 2023, where it will remain into at least the late part of the year and likely into the early part of 2024.  This will give the Fed time to assess how effective tighter monetary policy has been in the fight against inflation.  Obviously much will happen over this time and the chances are high the Fed will need to adjust, but this is what the market is currently pricing in and changes in Fed action will impact both stock and bond markets. 

Treasury bond yields have become even further inverted, meaning shorter maturities have a higher yield than longer maturities. Such inversions have historically been reliable predictors of recessions since longer term interest rates reflect expected economic growth.  But it was not all bad news last week. Oil prices dropped nearly 10% and this may provide some relief on the inflation-front.  But since we are entering the winter heating season and tensions remain on the geopolitical front, this may be a short-lived reprieve in the energy markets. 

Is Santa Coming to Town?

With signs pointing toward a recession sometime in the next year, a focus remains on consumer spending since it makes up two-thirds of GDP.  Consumers are being stretched with paychecks not going as far as they used to as we continue to deal with the highest levels of inflation seen in 40 years, but consumer spending seemingly remains resilient. This was evidenced by the stronger than expected October retail sales report.  The big question is whether this strength will continue through the holiday season against the somewhat demure economic backdrop. 

Last week was a big week for retail earnings, most notably Wal-Mart and Target.  Discounter Wal-Mart indicated good progress in selling off inventory and market share growth while Target’s earnings showed consumers becoming increasingly cautious in their discretionary spending given inflation and economic uncertainty.  Home improvement retailers Lowe’s and The Home Depot both highlighted resilient consumer demand and homeowners investing in their existing properties as a function of the housing market slowdown. 

Sales have slowed considerably in the housing market with higher mortgage rates causing monthly payments to increase substantially.  There is evidence of prices dropping in some areas, but overall, prices have remained rather steady.  Reasons for this include very limited inventory and homeowners are in a much stronger financial position than they were before the financial crisis of 2007-2008.  But with mortgage rates remaining at the highest levels seen in over 15 years, 2023 is shaping up to be a challenging year in the housing market. 

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 early next week, which if robust could provide momentum for the markets into early December, as it often has in years past.  We are long-term investors and do not concern ourselves with short-term market movements, but these are shared as historical reference to be mindful of in the days and weeks ahead.  It will be seen if we follow similar patterns.  This year is shaping up to be a little different than years past in the stock market since there will be extra emphasis on inflation reports and the Fed meeting in the middle of the month. 

Time is running out to review your portfolio and retirement plan, especially if you need to make modifications prior to year-end.  If you have not done so recently or would like a second opinion, please do not hesitate to contact us.  Take time this week to pause and think about all the things you are thankful for.

Have a very Happy Thanksgiving!

Nathan Zeller, CFA, CFP®

Chief Investment Strategist
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

Powerball

Last week one lucky winner purchased a Powerball ticket worth over 2 billion dollars.  It is highly unlikely that person is reading this (but if you are, please call us right away as there are some urgent matters to discuss).  For people planning their retirement, winning the Powerball is not a viable option as the odds are extremely low.  It is up to each of us to save for retirement and then have a plan for spending wisely.  There are some things left to chance in retirement, such as hoping the stock market provides positive returns, but the odds of success are much greater.

Equities were higher last week, more than erasing the prior week’s declines.  The markets sold-off sharply on Wednesday following the results of the mid-term elections.  But this was followed by an outsized rally on Thursday in the wake of a softer-than-expected Consumer Price Index (CPI) report.  Growth was a big outperformer of value, most notably technology companies, with megacap tech enjoying an especially strong week.  Treasury bonds rallied and interest rates, especially longer term, fell significantly after the report. 

The CPI report was seen as an affirmation of the peak-inflation thesis and seems to provide evidence of a long-expected slowdown in price growth.  This report may alter the trajectory of future action by the Federal Reserve and it is now thought the Fed will pause interest rate hikes in the not-to-distant future and the terminal rate may not be far away.  The ensuing stock market rally is confirmation that the largest factors affecting stocks right now are interest rates and monetary policy from the Fed. 

Expectations for a rate hike at the December Fed meeting are now at 50 basis points, or one-half of one percent.  Indications are the Fed will step down the pace of rate hikes, but they plan to continue a path of raising interest rates.  CPI remains elevated and at levels similar to what we saw in the spring, which at the time were the highest levels seen in 40 years.  It will take a few months to confirm if inflation has indeed peaked.  At the pace it is dropping, it will still take years to return to the Fed’s annual inflation target of 2%. 

Lottery Winnings

The intent of this weekly update is to discuss the markets, but we feel it worthwhile to pause and touch on the Powerball drawing as it can be a lesson for anyone saving money.  The person who won last week’s drawing probably will not have to worry about replacing lost income or having enough money to live off for the remainder of their lives, assuming they seek the help of a knowledgeable team of advisors.  But will they walk away with over $2 billion and join the elite club of ultra-wealthy billionaires?  The answer is no.  They will be offered either a lump sum of just under one billion dollars or they can take 30 equal payments of about $67 million per year.  Federal and state taxes will take about half of all payments.  Unless the winner happens to live in a state without an income tax, in which case the federal government will still take nearly 40%.  If the winner elects the lump sum, they will receive less than $500 million of the stated prize of $2 billion; still plenty of money to live quite comfortably.  Retirees face a similar predicament, albeit with much smaller numbers.  You do not get to keep all that you win, save, or earn.  Uncle Sam and the IRS will want their share. 

Let’s assume you have saved $1 million dollars in an IRA for retirement and your plan is to withdraw 4% per year to fund your annual income needs.  Federal and state income taxes are likely to be around 20% of any withdrawal from a qualified plan (IRA, 401K, etc.) so you will have to withdraw 5% to fund your 4% income need and have enough to pay taxes on the distributions.  If you were to take out the entire account balance at one time, you would be subject to federal and state income taxes of about 50%, essentially making the one million dollars saved for retirement worth five-hundred thousand dollars.  That nest egg you have saved for retirement may not be worth as much as you think it is.  Many people subject themselves to a large tax burden that could have been avoided with some proactive planning. Also remember there may be future changes in the tax code and there is likely to be the need to take out larger amounts to keep up with inflation.   

Looking Ahead

We should soon receive further clarity around the balance of power in the House of Representatives as final votes are tallied.  Earnings are winding down with only a handful of names still reporting.  This coming week does bring another inflation report, the Producer Price Index (PPI), as well as retail sales.  The latter could receive larger than usual attention given that consumer sentiment came in weaker than expected last week.  Catalysts for the market may be somewhat limited over the next few weeks, especially with the Thanksgiving holiday.  Another inflation number, Personal Consumption Expenditures (PCE), which happens to be the Fed’s preferred gauge of inflation, is released at the end of the month.  Markets remain dependent upon action from the Fed and there are still numerous data points before their next meeting in December. 

Don’t chance your retirement on something with a very low probability of success, such as the lottery.  Planning for retirement should not be left to chance at all.  Be sure to have a solid plan for saving and, perhaps more importantly, withdrawing your money while limiting taxes.  Contact us if you feel the odds are not in your favor and we will help guide you toward the path of winning.

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

Switching Gears

When driving a car or riding a bike, you need to shift gears from time to time depending upon certain factors such as the speed you are traveling and the incline of the road.  A gear change generally happens quickly and multiple times throughout a trip.  If you are investing for the long-term, which you should be, there are going to be changes, not only in your individual situation as life happens but also in your portfolio as a result of changes in the markets.  And when it comes to the markets, we are now seeing the beginning of a shift.  

The Federal Reserve hiked interest rates by another 75 basis points, or three-quarters of one percent; the sixth rate hike of the year and fourth consecutive hike of that magnitude. After the Fed’s monetary policy statement, equity markets initially moved higher with the flick of a possibility the Fed might slow, or even pause, rate hikes.  But it wasn’t the rate hike that was the real news. During the Fed’s press conference, Chairman Jerome Powell quashed any ideas of the central bank pausing rate hikes anytime soon.  The message was that the Fed may slow the pace of the hikes but the forecast of the terminal rate, or peak in interest rates, is now higher than it was just two months ago, signaling a slight shift in expectations.   The terminal fed funds rate is now expected to be reached in May, 2023 compared to the previous expectation of this occurring in March, 2023. 

The shift in Fed expectations also contributed to the steep move higher in bond yields with the spread in yields between 2-year and 10-year U.S. Treasuries reaching the largest inversion since 1982.  Interest rates on the short end of the yield curve rose to the highest levels since 2007.  Moves higher in longer term rates have especially had an impact on the housing market, which has been hard hit by the shock of 7% mortgage rates and is seen weighing on economic growth.

The Long Road

Equities were lower last week after posting back-to-back weekly gains.  After the Fed press conference on Wednesday stocks fell sharply as investors reversed previous bets on the possibility of a pivot or pause.  It is still widely anticipated the Fed will pause at some point next year to assess the impact of rate hikes, but that does not necessarily mean they will pivot.  85% of S&P 500 companies have now reported earnings with a blended growth rate less than what was expected at the end of the quarter, according to FactSet. Despite growth rates coming in below expectations, the markets have reacted mostly favorably.  This is likely because of a low bar being set, results being better than feared and the possibility of oversold conditions. 

Labor market reports last week were mixed with the headline numbers being positive and ahead of consensus.  However, underlying data shows a mixed bag.  Average hourly earnings increased more than expected, leading to the narrative that wage pressures continue to contribute to inflation.  The unemployment rate moved higher, but much of that was attributable to the number of people leaving the workforce.  While some of the data may be troubling, this is only one month’s worth of data so should not yet change views on the long-term trends of the economy.  But it could be warnings signs of what might be coming.  And it is labor market resilience that is a key factor contributing to the “higher for longer” narrative.  The hope is that the labor market will remain healthy while softening enough to allow inflationary pressures to abate. 

Looking Ahead

week brings the mid-term elections where current projections are that there will be a shift in control of Congress.  This remains to be seen and is contingent upon several key races, which at this point appear to be very tight. If such a shift were to occur, it would likely lead to gridlock since there would be different parties in control of the executive and legislative branches of government.  Markets tend to prefer gridlock, which may especially be the case today since there has been a large amount of government spending, arguably contributing to ongoing inflationary pressures.  There is likely to be a sharp reaction in the markets immediately following the election but it could be rather short-lived and we want to remind readers to remain focused on the long-term. 

Also of great significance this week is the monthly release of the Consumer Price Index (CPI).  While not necessarily the favored inflation measure of the Federal Reserve, this is the most widely accepted measure of inflation.  What will be of most interest is the Core CPI, which excludes food and energy.  Headline CPI, while remaining quite elevated, has slowly been trending downward over the past couple of months but Core CPI continues to move higher.  Currently futures are pricing in a 50/50 split in expectations for rate hikes of 50 and 75 basis points (one-half and three-quarters of a percent, respectively) at the December Fed meeting.  The CPI report is likely to push probabilities in one direction or the other. 

As we mentioned at the onset, you will likely need to make modifications and adjustments in your retirement plan, especially as shifts occur in the markets.  We are here to ensure that despite these changes your retirement plan stays on track.  Contact us if you would like to discuss your individual plan to ensure you are making the changes necessary to arrive at your destination. 

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