Pivot, Pivot, Pivot!
Perhaps one of the most memorable scenes of the 1990s sitcom “Friends” is when Ross enlists the help of Chandler and Rachel to help carry a couch up to his apartment so he does not have to pay a delivery fee. When moving the couch up the stairs and having to make turns, Ross yells “Pivot!” numerous times as the three of them try to maneuver around the turns of the narrow staircase. This term has become part of pop culture lexicon and a catchphrase, particularly amongst those who are moving furniture with the help of another person. Coincidentally, “pivot” has also recently become a bit of a buzzword for the markets and economy.
In the year 2020, the buzzword was “unprecedented” as referred to global events having to do with the Covid pandemic and especially lockdowns. Last year’s buzzword was “transitory”, a reference to how inflation was supposed to be short-lived and price increases would soon level off. (Obviously we have found this was not the case and now inflation is being referred to as “persistent.”) This year’s buzzword seems to be “pivot,” which is a reference to the Federal Reserve changing course by reconsidering its monetary tightening policy and no longer raising interest rates. It was the belief that the Fed would pivot sooner than expected that led to the market rally we experienced from late June until mid-August, when comments from Fed officials dashed those hopes and the market began its slide anew.
Last week the major stock market indices did show gains thanks to rallies early in the week based upon hopes, once again, that the Fed would pivot sooner than previously expected. Those hopes had little basis and were all but abandoned, sending markets lower in the last half of the week but not enough to erase all of the gains. The employment report on Friday showed that the labor market remains robust. This provides further ammunition for the Fed to continue to raise interest rates since it appears actions taken thus far are not having a negative impact on the employment situation, something the Fed monitors closely since it is part of their mandate.
How You Doin’?
Last week confirmed that markets, both stock and bond, remain volatile with much of the movement remaining hinged upon anticipated Fed action and interest rates. In order for the Fed to quickly pivot and start lowering interest rates, something is likely to have to break which could cause a very undesirable chain of events. Ideally the Fed will be able to engineer a soft landing and it is more realistic scenario that they will raise interest rates to a terminal level, where they will remain for some time while the Fed will pause to assess the impact. Generally, it takes several months to determine the full impact of monetary policy decisions so it is likely once interest rates reach their peak for this cycle, it will be a while before they begin to retreat.
We continue to believe that fundamentally the economy is holding up relatively well in the face of higher inflation and interest rates. Employment remains strong as does manufacturing and overall consumer spending, but it seems there have been some changes in consumer attitudes and preferences plus we are seeing a real softening in the previously strong real estate sector. We still believe we will experience a recession some time next year, but do not expect it to be very deep even though it could last several quarters. The biggest questions on everyone’s minds are likely to be regarding how high interest rates will go and what the stock market will do. We think interest rates will continue to move higher, at least through the end of this year. The stock market will remain volatile, and we think it could go even lower, however we continue to believe that we are much closer to the bottom than the top and would not hesitate to add money at these levels. And for those fully invested, we urge you to be patient as this is all part of normal market movements and historically patience has been rewarded.
There is no dearth of economic data coming out this week, with the most notable being the Consumer Price Index (CPI) and Producer Price Index (PPI) reports. These will give us an idea of whether inflation is truly moderating and possibly starting to abate. The focus will be on the “Core” which excludes food and energy. The Core CPI was higher than expected last month, indicating it was not only energy contributing to inflation. The stock market is likely to react adversely if there are not compelling signs of inflation moderating since it would bolster the Fed’s case for continuing to raise interest rates. It is doubtful either inflation gauge will come in low enough to deter the Fed from raising interest rates by at least another 50 basis points, or one-half of one percent, at their November meeting. We would also caution that these inflation readings may already be outdated since we have seen a move higher in energy prices since the beginning of the month, which will not be reflected in these reports.
Earnings season kicks off this week. Expectations have already been lowered, which has been factored into the stock market, so any positive news could provide a catalyst for markets to move higher. Long-term we remain very optimistic on the stock market, but less so on the bond market. This is a good time to reevaluate your goals to ensure you remain on track and adjust, or pivot, if warranted.
If you have not already done so, this is the last chance to claim tickets to the TaxSmart™ Summit on Thursday, October 13th with Becky Ruby Swansburg. Becky spent her early career working in Washington, D.C. with members of Congress and the White House under the second Bush administration. Her work on tax policy and America’s savings habits turned her attention to the urgent needs of today’s retirees. With her policy background and extensive retirement planning knowledge, Becky provides a wealth of information. If you want to learn ways to help protect and position your retirement assets for long-term success, no matter what future market and tax conditions may bring, you will not want to miss this event. Call us at 952-460-3290 to reserve your seat or click this link to register online.
Have a wonderful week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.
Office phone # 952-460-3260