We’ve been at this for just short of 21 years, having practiced through the dot com meltdown, the financial crisis, the shock of the pandemic and now decades high inflation coming out of the pandemic mixed with geo-political turmoil.
In the simplest terms we’re mostly tasked with getting our clients into and through retirement as comfortably as possible which is generally a proposition covering at least a couple of decades.
We’re constantly faced with the reality that volatility benefits us over the long run, but can be painful when it goes against us, as it’s guaranteed to do periodically. The outlook can be bleak, but when it starts to clear, if one misses the jumps off the bottom, long-run performance is very likely to be permanently compromised.
We’ve retraced about 18 months of gains in the stock market and inflation is still the biggest worry.
How long will inflation persist, how high will interest rates have to go and how much will the increase in interest rates slow the economy?
We can’t know the answers to these questions without marking more time while we operate today based on available information.
Core consumer prices (excluding the more volatile items of energy and food) did drop last month and there are signs consumers are dipping into savings and starting to use more revolving credit. Without The Fed even actually raising rates much, markets have reacted pushing bond yields, and thus the cost of borrowing, up substantially so big ticket borrowing and buying have already slowed.
The surplus of cash in the system which, in part drove current inflation, has already diminished substantially. The “natural forces” we’ve written about in the past with respect to moderating inflation are kicking in.
The Fed did just raise the fed funds rate by 0.75% instead of the pre-announced 0.50%. Of course things can get worse, and something unexpected can arise, but given current trends top line inflation may moderate in the coming months and The Fed may not have to go that far. The moment The Fed signals they’re not as worried, or even sooner than their signal, we may get some reinflation for stocks and bonds.
Some corporations are saying they’re ready for whatever lies ahead, better able to react than in any time in history while others made errors in their level of inventory and their profits are suffering.
Every challenging economic period looks different and we’re in the unique position of still having strong employment growth but weakening output as consumers have shifted to spending more on services.
Large US stocks are still relatively expensive on a historical basis but other baskets of stocks are not and thus putting more capital to work in the coming months may yield higher than average long term returns.
