Let ‘er Buck
The expression “Let ‘er Buck!” means to bring on a challenge and let it throw you around while you try to conquer it. The origins of the phrase are from rodeos, where a cowboy sitting on top of a wild horse or bull, tightly contained in a pen, will give this command to open the gate so the animal can start bucking. The goal is to stay on the horse/bull as long as possible while the horse/bull tries to buck you off. Rodeos have been, and remain, popular in the American West, especially in the state of Wyoming which long ago adopted a bucking horse as its symbol. This past week the Federal Reserve held their annual economic symposium in Jackson, Wyoming where comments from Fed Chair Jerome Powell sent markets bucking.
With inflation remaining persistent near 40-year highs, there was added attention and hype to this year’s gathering of central bankers. Powell’s comments came at the end of the symposium and were unusually short, lasting less than 8 minutes. But during this time he emphasized the Fed’s commitment to fighting inflation even if it comes at the cost of labor markets and overall growth. He even went as far to explicitly say that the process of reducing inflation will not be painless to American families and there will be “unfortunate costs of reducing inflation.” Despite Powell’s comments being highly expected, markets moved sharply lower with the stock markets recording their worst week since mid-June. However, the markets remain 10% higher than the June year-to-date lows. Not surprisingly interest rates moved higher on the week and the yield curve remains inverted with 2-year Treasuries yielding about 0.37% more than 10-year Treasuries, indicating a dimming outlook for economic growth prospects.
The Fed’s pledge to fight inflation no matter the cost implies they are likely to continue to raise rates if inflation remains high with little regard to what else is happening in the economy. The working theory from a few weeks ago that the Fed will raise rates through the end of this year and then start to reduce rates in 2023 as economic activity slowed has now largely been abandoned. Odds of a “soft landing” in the economy are now diminishing. If the Fed continues to raise rates, as is now expected, eventually this will negatively impact consumer spending and employment, which is very likely to send us into a recession.
When the rodeo cowboy is riding atop the bucking horse or bull the goal is to stay on for 8 seconds. It may not sound like much but ask anybody who has done it; trying to stay on such a powerful animal for that long is a very difficult task. Not to mention the risk of injury should you get bucked off. With all the market volatility experienced this year, the goal of any investor should be to emerge relatively unscathed. Many investors have lost a great deal of money this year, but the amount of money lost only matters if it affects your overall financial plan and has an impact on your lifestyle. The key to remaining in the game is to have a sound investment strategy and more importantly for retirees, having a solid income plan.
We do not believe that we are in a recession, but signs are looming we will eventually encounter one. What have you done to protect yourself from market volatility? Historically bonds were a good hedge against stock market volatility. When investors became fearful, they took money out of stocks and put them into bonds. The demand for bonds increased, pushing prices higher and yields lower. Such a strategy has not worked thus far in 2022 and is not likely to work going forward. With interest rates rising, and likely to continue to as the Fed fights inflation, bond prices are falling so bonds do not provide the protection and diversification they once did. It is time to look at other alternatives in your portfolio to provide protection, especially since it is unlikely this volatility will be going away anytime soon.
This next week looks to be relatively quiet as we close out summer and head into the long Labor Day weekend. Markets and investors will continue to digest the comments made in Jackson, including the implications they have for the markets going forward. The monthly employment report is due out on Friday but since it is right before the long weekend any market response is expected to be somewhat muted, barring a major surprise. There will be some housing data released early in the week which could receive added attention since nationally the housing market seems to be deteriorating quickly.
The markets have been challenging this year and that is not likely to change. The goal is to hold on while you try to conquer it. The definition of success is not be to have the best returns or outpace a particular benchmark but rather to be able to maintain your lifestyle. Be sure your portfolio is positioned appropriately so if the markets do start to buck you can hold on.
If you would like to hear more about our thoughts regarding a potential recessions and ways to protect your portfolio, please join us for our monthly Lunch & Learn today, Monday, August 29th at noon in our St. Louis Park office. You can also watch via livestream or watch the replay on YouTube. As always, we are here to help so do not hesitate to contact us.
Have a wonderful week and a great Labor Day weekend!
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