May the Fourth
For those who celebrate, we would like to wish you a happy belated Star Wars Day. Last Thursday, May 4th, 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.
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
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