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Weekly Insights

Weekly Insights 3/20/23 – 3/24/23

March Madness

The term “March Madness” was originally used in 1939 to commemorate a high school basketball tournament in Illinois.  It was not brought to the NCAA Basketball Tournament until 1982 when sportscaster Brent Musberger used the term while covering the event for CBS.  From there the term soon became synonymous with the national tournament, even though the NCAA did not take ownership of it until 2010.  When most people hear the term March Madness they probably think of the basketball tournament but the phrase has recently been thrown around when describing the markets. 

Equities were mixed in a week dominated by a blizzard of headlines around banking uncertainties.  Markets were whipsawed by evolving concerns about the banking industry following the regulatory shutdown of Silicon Valley Bank.  Many other banks thought to be at risk of deposit outflows also came under pressure, including many smaller and regional institutions.  Banks take deposits and use the money to make loans.  Due to the inherent risk in making loans, not all deposits are loaned out so banks are required to maintain a certain amount of capital, generally invested in bonds of government entities.  The sharp rise in interest rates over the past year has led to the value of many of the bonds, especially those that are longer dated, being worth much less than their face value.  If depositors withdraw deposits, the bank is forced to sell those bonds at a loss, reducing the bank’s capital. If the bank does not maintain a certain level of capital it is closed by regulators. 

The stress in the financial sector has caused interest rates to plunge with yields on 2-year U.S. Treasuries falling more than 1% in a week and a half. Yields on 10-year bonds also dropped, but the rate spread in yields between 2-year and 10-year bonds has narrowed considerably after hitting a fresh post-1981 record inversion a week ago.  In this atmosphere, expectations for the upcoming Federal Reserve meeting and further interest rate trajectory have become quite volatile.   

Bracket Busters

“Bracket Buster” is a term used when an underdog, or lower seeded team, unexpectedly defeats a higher seeded team in the tournament since the results often knocks out subsequent predictions of a fan’s (or bettor’s) bracket, which they filled out with game predictions.  Odds of interest rate hikes by the Federal Reserve have been gyrating since the beginning of the year, with odds having steadily increased for rates to move higher and stay there for longer. However, predictions of future rate increases have significantly changed over the past couple of weeks with the stress in the financial sector. 

Even with turmoil in the banking industry and uncertainty ahead, the Federal Reserve likely will approve a quarter-percentage-point interest rate increase, but for the first time in a very long time the action of the Fed is not a foregone conclusion.  Rate expectations have been on a rapidly swinging pendulum over the past two weeks, varying from a half-point hike to holding the line and even at one point some talk that the Fed could cut rates.  However, a consensus has emerged that Fed Chairman Jerome Powell and his fellow central bankers will want to signal that while they are attuned to the financial sector upheaval, it’s important to continue the fight to bring down inflation.  The interest rate increase will likely be accompanied by assurances that there’s no preset path ahead. The outlook could change depending on market behavior in the coming days, but the indication is for the Fed to hike, especially since last week’s Consumer Price Index (CPI) numbers indicated inflation remains sticky at an annual increase of 6%, still well above the Fed’s comfort zone.

Looking Ahead

The major event of the week will be the crucial two-day meeting of the Federal Reserve.  While there is much speculation regarding the outcome, it remains largely unknown, and it may be the post-meeting public comments from Jerome Powell that move markets the most.  Somewhat contrary to interest rate hikes, monetary conditions may be loosening with the new Bank Term Funding Program (BTFP) pushing bank borrowing and in some ways undoing the work of the Fed’s Quantitative Tightening (QT) program.  Also, bond yields have dropped dramatically over the past several days leading to lower borrowing costs and perhaps providing some economic stimulus.  There is a possibility this will provide a tailwind to risk assets, i.e. stocks. 

We continue to monitor the situation with the banking sector, but at this time do not think there will be further contagion and deeper economic strain.  However, the added stress coupled with continued tightening by the Fed seems to be increasing odds we will experience a hard landing and recession later this year.  Our biggest concern remains corporate profit growth.  First quarter earnings reports will begin in a few weeks, which is likely to set the tone for the remainder of the year. If earnings estimates were to drop further, it would not bode well for the markets.  By the time earnings begin we should also have further clarity and resolution regarding the banking sector.

If you would like to review your portfolio to ensure it is positioned to weather the current madness, do not hesitate to contact us.  Do not chance having your retirement dreams busted by unexpected events.      

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 3/13/23 – 3/17/23

Risky Business

Tom Cruise was catapulted into stardom for his portrayal of a teenager looking for fun while his parents were away in the movie Risky Business. Running around the house in his underwear while lip syncing Bob Seger was relatively benign, but that turned to greater mischief and Cruise’s character learned is that a little bit of fun can quickly get out of hand.  Are parts of our economic system getting out of hand?  What can you do to manage your risk and protect yourself?

The biggest story of last week was the volatility around Fed rate path expectations.  Equity markets suffered their worst week of the year with the S&P 500 shedding 4.6%, giving up almost all of 2023’s gains.  The Dow Jones Industrial Average is now negative on the year while the Nasdaq remains somewhat of a bright spot, being higher by 6.4% despite losing 4.7% last week.  The selloff began on Tuesday after Federal Reserve Chair Jerome Powell opened the door to a more rapid pace of rate hikes to reign in resurgent inflation.  His comments seemingly increased the odds of a half-point interest rate hike at the Fed meeting next week, versus the quarter point previously expected.  Losses deepened on Thursday after Silicon Valley Bank’s (SVB) sudden move to raise cash spooked investors and depositors, sending bank shares reeling.  Markets were stunned on Friday after the FDIC’s seizure of SVB, which raised questions about whether serious problems are developing in the financial sector. 

Odds of a half-point interest rate hike by the Fed fell sharply on Friday amid labor market data, as well as recession and financial system concerns.  The February jobs report showed that more jobs were created than expected, but the unemployment rate moved higher and average hourly earnings growth was cooler than expected, lessening fears of the labor market overheating. While expectations of the next rate hike are now for a quarter-point, risk remains to the upside pending this week’s Consumer Price Index (CPI) report.

The Color of Money

 In The Color of Money Cruise plays a young, arrogant pool player alongside a more experienced and wiser character played by Paul Newman.  Cruise’s character learns that he needs to curb his ego in order to succeed.  Investors often become arrogant, as they did prior to 2022, but markets tend to act very weirdly, which can be very humbling.  This perhaps was the case with SVB.  Banks “borrow” short-term cheap money – typically deposits – and invest the money at higher rates, either by making loans or buying safe government bonds.  SVB focused on venture capital companies and with the brutal sell-off in tech stocks and downturn in valuations of start-up companies, the flow of venture capital has slowed. This means money-losing tech companies are rapidly burning through cash that previously sat on deposit at SVB.  In order to cover the outflow of deposits, SVB had to come up with cash quick, or sell some of their government bond holdings.  Because interest rates have risen so much (bond prices fall when interest rates rise), these were sold at significant losses.  The bank attempted to raise money to cover the losses, but in doing so caused concern amongst depositors, exacerbating the situation since other depositors saw this as a warning and withdrew funds.  87% of the money on deposit at SVB was above the FDIC insurance limit of $250,000 per depositor but the FDIC, in conjunction with the Fed, have devised a plan to backstop all depositors in an effort to provide confidence in the banking system.

SVB was unique as it catered primarily to venture capital companies. Also, as we came to learn over the weekend, SVB did not hedge interest rate risk well. Other banks are likely to fail, but the chances of contagion, or the spread to other institutions, as we saw during the Great Financial Crisis in 2008 are unlikely.  This does not rule out other bank runs, especially since most banks are paying very little in interest and significant amounts of money are being moved to money market funds with much better interest rates.   There are lessons to be learned from the failure of SVB, including do not concentrate holdings in one sector and hedge primary risks. The easiest way to avoid these risks is to diversify holdings

Looking Ahead

In addition to a continued focus on the banking sector, this week brings key reports which are considered catalysts headed into the arch Fed meeting the following week.  The February CPI will be released on Tuesday with expectations it will remain above 6%; providing justification for the Fed to continue raising interest rates. Producer Price Index (PPI) and retail sales data will be released on Wednesday. 

If you would like to learn more different types of risk and how to manage it, join us for our monthly Market Huddle on Monday, March 20th at noon.  You can register by clicking here.  We would also be happy to discuss ways to manage risk in your portfolio;  contact us to discuss your situation in detail.  Opportunities remain in the market, but do not risk your retirement and let things quickly get out of hand.

  

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 3/6/23 – 3/10/23

Cake Eaters

The term “Cake Eater,” which is a saying a person is so rich they can have their cake and eat it too, has long been known throughout Minnesota but it gained broader notoriety from the movie the Mighty Ducks, a story about a rag-tag youth hockey team.  Since we are currently in the midst of the state high school hockey tournaments, this term happened to come to mind but it can also apply to retirement.  Everyone should aspire to be a Cake Eater, having saved enough so they can fully enjoy their golden years.

Last week was rather uneventful for the markets with no major economic releases or catalysts.  The major stock indices did manage to post gains with the S&P 500 finally rising after three weeks of declines.  The market also continued to work through the tail-end of Q4 earnings season that seems to have cleared a lowered bar.  Retail was in focus with reports from many major retailers, including Costco, Lowe’s and Target. Well-worn themes tended to be solidified, including resilient consumer spending with some concerns about softening demand in the face of inflationary pressures.  In the end, the market narrative remained little change over the course of the week. 

Interest rates were marginally higher, likely in response to the rising expectations of peak rates.  Ongoing positive surprise momentum in economic data, including hints of continued inflationary pressures, have pushed market expectations for the Fed Funds terminal rate above 5.5%.  Shorter-term rates continue to rise and longer-term rates, while at their highest levels of the year, are slightly below the peaks seen in October.  Rates on one-year and two-year Treasuries are at their highest levels since 2007; much more movement higher and they will be at the highest levels since 2000.  For the first time in decades, investments in fixed income instruments appear to be attractive. This is especially the case for “idle” money not earning much interest. 

Baking a Cake

You are probably not likely to want to eat eggs, flour, sugar and butter individually until they are mixed together and baked to yield a cake.  The right amount of each ingredient is required or the cake may not turn out. Building an investment portfolio is very similar – your overall portfolio should consist of diversified strategies (ingredients).  A substantial allocation to a losing strategy can cause pain, just as a rotten egg can spoil a cake, which is why it is important to remain diversified and not be overly aggressive with holdings that can ruin your portfolio.

When you eat cake you notice the flavor of the finished product, the entire cake, not the individual ingredients.  Reviewing your investments should be done in much the same way; consider the entire portfolio and do not focus too much time on the individual parts. If your portfolio is built thoughtfully and strategically, the different strategies should work in conjunction with each other to deliver optimal outcomes. There may be times where one of the parts is not performing as well as might be hoped or expected, but the important thing is to consider the results of the overall portfolio, if it aligns with your risk objectives and if it is helping you achieve your goals. 

Just like how you might like one flavor of cake, for example chocolate, while other people prefer vanilla or strawberry, investment strategies that work well for other people may not be best suited for you since individual situations are different and everyone has their own unique needs.  There is nothing wrong with it being different; do what works best for you but be sure you have an overarching strategy that fits your unique situation.  Your portfolio should appropriately match your risk tolerance, risk capacity, and the amount of risk you need to take to achieve your goals.    

Looking Ahead

This week investors will be paying close attention to Fed ChairPowell’s congressional testimony before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday but the key highlight will be labor-market data on Friday. The Q4 earnings season is nearly complete, with only four S&P 500 constituents reporting this week.  Next week will bring keep inflation reports, including the Consumer Price Index (CPI) and Producer Price Index (PPI).  These are expected to help inform both the Fed’s rate trajectory, with the next meeting being held on March 21-22, and the prospects for soft-landing/no-landing scenarios.  The consensus is for a quarter-point rate hike at that Fed meeting, with the possibility of a half-point hike gaining some momentum.  Current market pricing now does not expect a pivot lower until March 2024.  This expectation continues to be pushed out further and further, so it may be foolhardy to attempt any predictions with much confidence at this time.

If you want to have your cake and be able to eat it during retirement, it is vital to have the proper level of planning so you can live comfortably, spend confidently, and pay taxes consciously.  Contact us if you would like to review your individual situation to ensure you have all the right ingredients to make this happen. 

  

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 2/27/23 – 3/3/23

Great Expectations

Charles Dickens’ classic novel Great Expectations is a coming-of-age tale of a young man, Pip, who unexpectedly receives a large fortune and his ambitions to rise to a higher social class.  Throughout the story Pip desires to improve his life and this belief in the possibility of advancement provides great expectations for his future. He learns that as his life improves it is not always more satisfying.  Closer to home, last week’s winter storm did not meet forecasted expectations of being a historical meteorological event, despite receiving what otherwise would be considered a decent amount of snow.  What if forecasters had instead predicted an amount of snowfall that was much less than what was received?  Given the amount of snow we did receive, would this storm have then been viewed as being more impactful?  Perspective is dependent upon expectations and reasonable expectations tend to lead to better outcomes, especially when it comes to the markets.  Did the bull market of the past decade alter reasonable expectations of how markets might perform in the future?

To provide a historical perspective, the price return (not including dividends) of the S&P 500 has averaged 8.7% per year going back to 1958, when the index was expanded from 93 to 500 stocks.  An 8% return for the stock market is frequently used when doing very rudimentary financial planning assumptions, but the S&P 500 has experienced a positive return between 6 and 10% during a calendar year only six times in the past 95 years. This demonstrates how annual market returns are much more volatile than the average and based on historical probabilities, chances are very high of experiencing returns in any calendar year that are significantly different than 8%.  Also, do not overlook the sequence of returns risk, where the assumed average returns might be as expected over the long term, but the order and timing of investment returns can have a big impact on how long your retirement savings last. 

Looking back at the not-to-distant past, during the “Lost Decade” of the 2000s the S&P 500 was nearly flat for ten years, losing an average of 0.6% per year.  This includes four years of double-digit losses and three years of double-digit gains, both averaging more than 20% in their respective directions. But looking out further, the S&P 500 has nearly tripled since the end of 1999. 

A Tale of Two Cities

Another classic novel written by Dickens was A Tale of Two Cities” which underscored the differences between London and Paris during the 1780s; a time when England was relatively peaceful and prosperous while France was experiencing upheaval in the events leading to the French Revolution.  In terms of differences, there has been much talk recently about conflicting expectations between investors and signaling from the Federal Reserve when it comes to the path of interest rates.  Much of the strength in the markets during January was attributed to expectations the Fed might “pivot” later this year and begin to cut interest rates, contradicting the Fed’s view that they need to continue pushing interest rates higher to fight inflation. The last couple of weeks have proven to be a time of reckoning for the markets, largely due to the latest inflation reports. Last week the Personal Consumption Expenditures (PCE) came in higher than expected with the core rate moving higher for the first time since last September, further dampening the disinflation narrative.  The gap between market expectations for the path of interest rates and the Fed’s outlook has been narrowing with markets seemingly accepting that rates are going to stay higher for longer.  This resulted in the major stock indices suffering their third consecutive week of losses.

We can use history as a guide when it comes to market expectations, but as any investment professional will tell you, “past performance is no guarantee of future results.”  Stock market performance has been robust with average annual returns in the double digits over three out of the last four decades, with the 2000s being the sole outlier.  The environment we are experiencing today is different than what has been experienced in the past.  Technological innovation continues to provide what we view as outstanding investment opportunities and information can be disseminated almost instantaneously to a wide audience, making this the best of times.  But wages are not keeping pace with inflation and higher interest rates are leading to higher borrowing costs, impeding economic growth, making this the worst of times, at least in recent memory, for many people.  Higher input costs and slowed spending are affecting the bottom line for many companies, leading to negative earnings growth.  These headwinds for the market are not likely to dissipate quickly and we do not expect the next several years to be as prosperous for stock investors as the last decade was.  However, we still strongly believe that over the long-term, wisely investing in the stock market remains the best strategy for building wealth and maintaining purchasing power of your hard-earned savings. 

Looking Ahead

Earnings season is largely winding down with a few notable retailers set to report this week, including Target, Lowe’s, and Costco.  These earnings reports are likely to show consumer spending remains resilient, but shoppers seem to be more price conscious, pressuring bottom line profitability.   A slew of speeches from Federal Reserve officials are also scheduled and while their comments might garner a great deal of attention, they won’t mean much until the next Fed meeting at the end of the month.  Since inflation remains persistent, interest rate increases are expected to continue with current expectations for three more quarter-point interest rate hikes this year; one at each of the three meetings.  In light of recent inflation reports coming in hotter than expected, some Fed officials have publicly stated they may favor a half-point increase at their next meeting in late March.  The anticipated peak in interest rates for this Fed tightening cycle continues to move higher and is now 60 basis points (0.60%) above where it was just a month ago.    

We frequently discuss the importance of maintaining a long-term perspective on the markets and caution against focusing on short-term moves. This was perhaps well captured in Berkshire Hathaway’s most recent annual letter, in which Warren Buffett stated that he and long-time partner Charlie Munger, “…firmly believe that near-term economic and market forecasts are worse than useless.”    Also of interest in the letter was Buffett reflecting on his many decades of investing.  He admitted most of his capital-allocation (investment) decisions have been no better than so-so and there have been some bad moves.  He goes on to say, “Our satisfactory results have been the product of about a dozen truly good decisions and a sometimes-forgotten advantage that favors long-term investors…”  In other words, he is saying not all investment moves will be successful but remaining patiently invested in the markets and maintaining a long-term perspective leads to success.  If you would like to discuss your situation and ensure the expectations you have for your retirement remain reasonable please do not hesitate to contact us. 

  

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 2/20/23 – 2/24/23

Fool’s Spring

With the recent weather being warmer than usual, including a rare February rainstorm last week, ask anybody in the Upper Midwest what season we are in, and they may be apt to tell you it is Fool’s Spring – the season between Winter and Second Winter.   The change in sentiment over the past couple of weeks might have investors wondering something similar about the stock market – did we experience a bear market rally, sometimes referred to as a Sucker’s Rally, in January or was it the beginning of a longer-term trend?

Market strength early last week was whittled away later in the week by economic data and hawkish commentary from Federal Reserve officials.  The S&P 500 was marginally lower and logged its second consecutive weekly decline. The Dow Jones Industrial Average also fell slightly while the Nasdaq eked out a small gain, but none of the three major averages made significant moves and all remain near where they traded in late January.  Bond yields moved higher with Treasuries reaching their highest levels since November.  The difference in yields between 2-year and 10-year Treasuries remains at the deepest inversion since the early 1980s, which many economists continue to believe foretells a recession later this year.

The heavy schedule of economic releases last week gave pause to the disinflation narrative.  Analysts have stressed that the deceleration would likely be bumpy, but these reports nevertheless seemed to inject a note of caution into the debate.  The January Consumer Price Index (CPI) was largely in line with consensus expectations while the Producer Price Index (PPI) came in hotter than consensus expectations.  Retail sales from January surprisingly surged, showing consumers remain resilient but causing concern strong demand could lead to continued inflationary pressures.  Robust spending combined with stubbornly higher-than-expected price increases are likely to keep the Federal Reserve on a hawkish track, continuing to raise interest rates for the foreseeable future. 

Second Winter

The threat of a major winter storm impacting the Upper Midwest this coming week is a reminder that winter is not yet over and despite the reprieve felt the past couple of weeks, it may indeed be time to hunker down for Second Winter. Investors are trying to figure out if they should also be hunkering down or if the worst is behind us.  The debate continues whether we will see a “hard” landing, where the economy falls into a recession as the result of higher interest rates, or if we will experience a “soft” landing with the economy slowing but avoiding a recession.  Thanks to the U.S. economy outperforming expectations, as is evidenced by strong labor markets and consumer spending, investors are now contemplating a third outcome – a “no” landing scenario where the economy does not slow, and the stock market continues its upward trajectory. 

The fallacy with the no landing scenario is that if the economy continues to expand, inflation is not likely to abate and will remain above the Fed’s price stability targets, increasing odds they will continue to raise interest rates.  Higher rates lead to higher borrowing costs, which hinder economic growth and therefore would increase the risk of a hard landing.  This would also bring back uncertainty about inflation and Fed action, which markets do not like, likely leading to volatile market action as we saw in 2022. 

While the stock markets ended the week in nearly the same place they started, bond yields moved higher as did the probabilities of a higher terminal Fed Funds rate. The “higher for longer” mantra previously discounted by the markets is now gaining greater credibility.  Some Fed officials have now openly declared that a half-point interest rate hike may be a possibility at their next meeting in late March.  Looking back at history, stock markets tend to reach their low points about the same time the Fed pivots and begins to move rates lower.  If history is a guide, we have not yet seen the bottom of this cycle and are probably not likely to see it until sometime later this year.  We continue to be cautions when it comes to the markets in the short-term but remind investors to maintain a long-term perspective.    

Looking Ahead

The week ahead will be highlighted by earnings reports from retail giants Wal-Mart and Home Depot, which will offer further updates on the health of consumers, as well as the release of the Personal Consumption Expenditures (PCE) price index.  The PCE is the Fed’s most closely watched assessment of how quickly prices are rising.  If this report comes in as expected, slightly lower than a month ago, it will lend support to recent indications inflation is not falling at the pace and extent investors were hoping for.  Prices seem to have stabilized somewhat, as evidenced by inflation now growing at less than the rate it was during most of 2022, but they still are increasing at a pace above the comfort level of most consumers as well as the Federal Reserve. 

The strong returns of the stock market in January provided hope that better days are ahead, but the volatility of the past year remains fresh in investors’ minds.  The past 14 months have been a reminder markets do not always move in a positive direction in the short-term and do pull back from time-to-time as part of the normal market cycle.  Historically markets have performed better over longer time periods.  This is why it remains important to maintain a long-term perspective as well as have strategies in place to protect your hard-earned savings from short-term fluctuations.  The market often gives false signs and as we’ve emphasized in the past, trying to time the market rarely works in one’s favor.  Be sure to have a reliable income plan in place so you can weather all storms the markets might bring and sustain the lifestyle you desire during 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

Weekly Insights 2/13/23 – 2/17/23

Balloons

Somewhat ironically given recent events, unmanned hot air balloons are thought to have been first used in China nearly 1,800 years ago for military signaling. Soon after the first manned hot air balloon flight took place in 1783, balloons were used for reconnaissance during the War of the First Coalition in France.  Observation balloons were also used during the American Civil War in the 1860s and both World Wars.  As we have become aware in recent days, high altitude balloons continue to be in use today for surveillance.  Much smaller and more colorful balloons are commonly used for decoration or signaling, such as for birthday parties or graduation celebrations.  As we’ve mentioned over the past several weeks, we are seeing conflicting signals in the markets now.  What do they mean?  Have we gained clarity on what might lie ahead?

The three major stock indices suffered losses last week for the first time this year and experienced their worst week since mid-December.  It seems the January Effect is now fading, and the market will again start to trade on fundamentals. Interest rates moved higher, turning into a headwind for the stock market, amid a slight repricing of the interest rate path of the Federal Reserve with a higher peak in the fed funds rate now being anticipated.  The yield curve continues to cause fears of a recession with the spread between 2-year and 10-year U.S. Treasury bond yields hitting their lowest point since the early 1980s.  Historically when the yield curve is inverted, i.e. shorter term rates are higher than longer term rates, a recession has followed on average one year after the beginning of the inversion. The current inversion began in March, 2022 so if the bond market is an accurate indication, a recession may not be far off. 

The biggest event of the past week largely flew under the radar – revisions from recalculated seasonal adjustments to past Consumer Price Index inflation numbers.  The revisions were all to the upside for the prior three months, including a rise in consumer prices in December, instead of falling as previously reported.  These revisions show that inflation may not be falling as quickly as previously thought and may raise the risk of higher inflation readings in months ahead. 

Blimps

 Another type of airship used for observation is the blimp, which in modern times are most likely associated with observations for sporting events.  Blimps were used for patrols in World War I and are still in limited military use today for surveillance and airborne early- warning detection.  Similar to hot air balloons, blimps provide a high-level view of events on the ground.  When it comes to investing, people often get caught up in the short-term and forget to maintain a high-level view of what is going on in the economy and markets over the longer term. 

According to the stock market, the most widely expected outcome this year is for a slowing economy or a “soft landing,” but not a recession.  Conversely, the bond market is signaling there will be a recession.  Given past precedence, we tend to think the bond market is going to end up being the more accurate indicator.  Inflation, while falling, remains persistently high and well above the Fed’s comfort zone so the Fed may be forced to raise rates more than currently expected, pushing the economy into a recession. 

Stock market valuations remain high, or above historical averages. There is not a rule stating valuations must remain in a certain range but based on past market action, reversions to the mean generally occur.  For valuation we are referring to the price-to-earnings ratio, which can either be backward or forward looking.  Measures of both are showing the market is overvalued.  In order to be more in-line with historical averages, either stock prices would have to fall, or earnings need to increase.  Unfortunately, recent earnings reports have primarily shown negative growth compared to a year ago, a trend we think will continue for at least the next two quarters in the midst of slowing economic growth. A common theme this quarter is that higher input costs are leading to smaller profit margins. Unless there is an upside surprise to economic growth or inflationary pressures ease considerably, earnings are not likely to improve significantly and stock prices could adjust accordingly.  In the recent past, when interest rates were near zero, there were not alternatives to the stock market so investors would continue to pile in regardless of valuations. That is not true today as investors have other options for earning returns and therefore are much more sensitive to prices and valuations.

Looking Ahead

The coming week is a big one for economic data, most notably around inflation.  The Consumer Price Index (CPI) is expected to show a slight drop to 6.2% on a year-over-year basis but what is likely to be watched more closely is the month-over-month number which is expected to be an increase of 0.5%, an acceleration from previous months.  This report will be particularly meaningful given the growing doubts around a smooth disinflationary path and the recent revisions to previous months’ data.  Housing prices, and as a result, rents as measured for the CPI, remain stubbornly high compared to a year ago and there is evidence of higher food prices, not to mention a surprising rebound in auto prices, so we would not rule out a surprise to the upside. This could potentially shock the markets, especially the stock market which has been pricing in a healthy dose of disinflation.  Also of significance this week will be the Producer Price Index (PPI) and retail sales reports. 

Looking out further, we anticipate a strong recovery after a potential recession or re-adjustment of stock prices.  If you have cash on the sidelines, this is a good time to be cautious and you may want to consider alternatives to the stock market.  But if you are fully invested, we suggest remaining patient and warn against trying to time the market since that often ends up being a fool’s game.    

When it comes to the markets there are often mixed, and even conflicting, signals.  This has been especially true this year, as much as any time in recent memory.  Be sure no matter what the signals are, you are maintaining a high-level, or long-term, view and being keenly aware of how it applies to your own retirement planning.  You cannot control what the markets do, but you can control how your retirement plan and individualized strategy incorporate income and tax planning.  Please contact us if you would like to discuss your 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

Ryan Keapproth

Ryan Keapproth

Retirement Planner

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

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