Did that Really Just Happen?
Sometimes when things are moving along nicely, whether it is a ride in a car or on a boat, or even on a larger scale as you go through life, something occurs that really catches you by surprise. These events can be good or bad and the impacts can be relatively minor or quite significant. Often these occurrences happen so quickly you stop and ask yourself if that really took place. The stock market seemed to have done just that last week, fortunately in a positive way.
The markets began the week drifting lower in what appeared to be more of the same negative sentiment that we’ve experienced the past few weeks, but then something great happened on Thursday when the S&P 500 posted its largest single day gain since March. This momentum continued with further gains on Friday. The big move was attributed primarily to a strong start to the earnings season, but also the weekly jobless claims numbers continue to drift lower reflecting continuing strengthening in the labor market. It also helps that nationally we seem to be past the peak in the recent surge of coronavirus cases and a short-term agreement was made to raise the debt ceiling, averting a default by the federal government.
Higher and Higher
We’ve all experienced higher prices recently on the things we buy, so it was not a surprise that the inflation data released by the government last week showed inflationary pressures persist. The Consumer Price Index (CPI) rose by 5.4% compared to a year ago, remaining at a 13 year high and the fifth month in a row inflation came in at 5% or higher. This was driven primarily by higher energy prices and a surge in food prices, plus the largest increase in rent in 20 years. The Social Security Administration uses CPI data to adjust social-security payments and on a positive note announced last week the cost-of-living (COLA) increase for next year is 5.9%; the largest annual increase in about 40 years.
Also on the inflation front, the Producer Price Index (PPI) increased 8.6% on an annual basis, which is the highest reading since the early 1980s. The PPI measures the change in the price of goods sold by manufacturers and therefore is generally a leading indicator of consumer inflation. Of note in this report was that a few months ago the price increases were attributable to a few products, namely lumber and used vehicles, but now the increases are more broadly spread amongst additional goods and services. With inflation remaining persistent, many economists are no longer referring to it as being “transitory” but instead are now describing it as being “sticky.”
Earnings season kicks off in earnest this week, which we anticipate will provide further tailwinds for the markets. Analysts are revising earnings estimates higher, albeit to a lesser extent than the previous two quarters. Congress continues to consider large spending bills, but the price tags on each seem to be coming down which is likely another factor for optimism in the markets. We continue to keep a close eye on interest rates, especially in light of the recent inflation reports. There seems to be a disconnect between bond yields and inflation, with low bond yields discounting that inflation will remain on a prolonged basis. We think inflation will continue and bond yields will edge higher. Since bond yields and bond prices have an inverse relationship, any move higher in yields would cause a drop in prices. Traditional fixed income may not provide the safety it has in the past so we would encourage you to consider other vehicles for providing income and diversification to your equity portfolio. We would be glad to discuss strategies with you to protect your portfolio from inflation while providing protection in the event of downturn in the stock market.
I will be sharing more insights and strategies during our monthly Lunch and Learn on October 25th. You can join us in-person at our office here in St. Louis Park or watch online. See this week’s Secured Retirement Weekly Newsletter for more information and to sign-up.
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