You Can't Make This Stuff Up...
September 19, 2022
By Michael Moreland
Retired Vice President of Investments
According to thefreedictionary.com, the title of this commentary references a ‘...situation, event, or action that is or seems especially bizarre, surreal, or hard to believe.’
Last Tuesday, the White House hosted a garden party, featuring music by James Taylor, to celebrate the signing of the Inflation Reduction Act, one of President Biden’s signature achievements.
At the same time, a couple of hundred miles to the north, Wall Street witnessed its worst day since mid-2020, with major market averages losing 4% to 5% of their value. The reason? August consumer prices rose 8.3% year-over-year, unexpectedly (!) exceeding consensus estimates. While some components improved, food and shelter measurements continued to advance at a rapid pace.
With all due respect to James Taylor, the nature of the signing was tone-deaf. There is nothing in the Inflation Reduction Act which will have a near term impact on price pressures affecting American consumers and businesses. This view will be reinforced this week when the Federal Reserve’s Open Market Committee announces its next round of short term interest rate hikes.
Rate Increase Expected Again
The Fed is expected to raise rates by a minimum of 0.75%, the third such increase in as many meetings. There’s about a one-in-three chance of a full 1.0% increase. As noted by Fed Chair Jerome Powell following the August symposium in Jackson Hole, the Fed’s commitment to achieving its 2.0% inflation target will create pain for businesses and households. A ‘soft landing’ appears increasingly unlikely.
The stubborn refusal of inflation to abate – and its impact on financial markets – is the focus of our Fall edition of the Wealth Management Division’s Economic and Market Commentary, to be published at month end. In short, we believe financial markets will produce only nominally positive returns over the next few years. Markets will be confronted by a weaker economy as higher interest rates (national mortgage rates recently reached 6.0% for the first time since 2008) and embedded inflation take their toll on growth.
Keep Looking Forward
How can markets produce positive returns against these headwinds? First, fiscal policies will remain expansionary regardless of what the Fed does. Second, and more important, current valuations and sentiment suggest a poorer outlook is already being priced into asset values. Remember, markets are forward-looking. Prices will advance, despite headwinds, well before economic data turn positive. Thus our longstanding practice of remaining fully invested even when the headlines of the day suggest otherwise.
All that said, the purpose of the Wealth Management Division is to help you achieve your financial goals with a minimum of risk. While progress is never a straight line, we never forget that your success is our final goal. Contact your advisor or the Wealth Management Division to learn more.