The term “riding high” generally means to be successful and is often used when referring to individual people, especially politicians, as well as the markets and economy when they are doing well. The term most likely originated in the Old West when a cowboy would ride high in the saddle of a horse to be imposing and show resolute. Unfortunately, the markets are not riding high, but what does remain high is inflation as we found last week.
The stock and bond markets were smacked by the Consumer Price Index (CPI) report showing that inflation remains stubbornly high and is not showing signs of easing. Core inflation, which strips out food and energy, unexpectedly reaccelerated from the previous month’s tamer pace. The headline CPI, while easing from the previous two months’ reports amid falling gas prices, was higher than expected and rose month-over-month when economists had expected a decline, indicating prices overall continue to move higher. Despite lower energy prices, the cost of food and shelter rose sharply. Shelter is a large component of the CPI measure and is based largely upon the cost to rent, not home prices, so it is expected this will continue to add pressure to CPI readings in coming months as rental prices continue to increase.
This CPI report, coupled with the stubbornly high PPI report, will keep pressure on the Federal Reserve to continue to raise short-term interest rates in an attempt to keep inflation in check and not accelerate further. Prior to last week’s CPI release the markets had rallied in hopes that “peak” inflation had been reached and we were nearing the end of the Fed’s cycle of raising interest rates. Previous expectations were that the Fed peak rate would be 4% (it is currently 2.50%), but after this report projections are now that it will reach 4.50% sometime in 2023. We would caution against putting much confidence into current projections since previous forecasts for inflation and interest rates have continuously been adjusted higher throughout the past year; a trend that could very well continue given the trajectory we are seeing.
Trying to Keep Low
After the CPI report last Tuesday, stocks suffered their largest losses of the year with the S&P 500 falling 4.3% and the Dow plunging more than 1,000 points. However, the days leading up to the report saw the markets rally with the thought we had reached “peak” inflation and future Fed action would be more subdued. Despite the pullback on Tuesday and a further pullback on Friday, on the heels of an earnings warning from FedEx amidst a deteriorating economic outlook, the major indices are now trading about where they were in mid-July and ahead of the recent lows set in June. This should come as no surprise since interest rates had been steadily rising over recent weeks and spiked last week after the inflation report. Interest rates are an almost invisible, but incredibly important, factor in determining stock prices since current stock prices are predicated on discounted future earnings. However, to keep things in perspective during this time of enhanced volatility, the markets are still higher than they were two years ago.
With inflation remaining high and entrenched, the Federal Reserve is widely expected to raise interest rates by another 75 basis points (0.75%) for the third-straight meeting this week. There is a chance they could raise rates by a full percentage point, which would be the most at a single meeting in its modern history. We do not expect the latter to occur, but it does not diminish the fact the Fed has an urgency to act to contain inflation and odds of sustained tightening for the remainder of the year are much higher than they were a week ago. Hope of the U.S. gliding toward lower inflation without much economic distress has now been undermined. And with that, expect stock markets to remain volatile for a prolonged period. On the bright side, a year-end rally after the November elections could be a real possibility but it may not be enough to bring stocks into positive territory for the year.
It is easy to get discouraged and feel down when the market drops and can be especially unnerving to retirees who are relying upon their assets to fund their lifestyle. This is why we emphasize the importance of having a sound financial plan for retirement, which includes taking risk in the market at a level comfortable for you as well as taking advantage of opportunities. If you have cash on the sidelines, it might make sense to look at the potential for dollar-cost averaging into the stock market or consider one of the many fixed income alternatives available which provide potential for growth but minimize the risk of loss. If you would like to find out more about what is available, please give us a call. We strive to ensure our clients feel like they are riding high in their retirement, regardless of how the markets are behaving.
We would like to extend an exclusive invitation to our next 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.
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