Inflation Number
This month’s inflation number is 8.1%, which is trending lower and seems like good news, but market treated this information like bad news because folks thought it would be lower. Coming into the announcement, markets were anticipating something better so upon the news, the market pulled back from a rally that started in anticipation of this announcement. Disappointment of the announcement resulted in down-day yesterday. The cycle we are in where Feds are raising rates has everyone looking for clues as to what the Fed will do – speed up, stop, slow down or reverse course. Corporate earnings reports tell how things were going for organizations last quarter(fundamentals) yet when earnings season ends, there are no earnings reports during this next several weeks. Stocks then tend to respond more to the news or technical factors instead of fundamentals. September is known for notoriously being the worst month of the year for market performance partly because of this.
Recession or Rolling Recessions
We are still experiencing the effects of the pandemic. Like a big rock dropped into a pond the effects ripple out over time. The initial plunge in all activity was followed by a surge in the buying of things. Travel leisure and entertainment lagged. Building surged and house prices and rents rocketed higher. Supply chain issues put additional pressure on prices. This is where the fed is trying to help calm the waters by raising interest rates to soften demand so that supply can catch up. The goal is to bring prices back down so that inflation doesn’t become entrenched. Inflation is already entrenched but at about 2-3% not 8.x%
A hot economy often causes energy prices to increase. Since energy is involved in the manufacturing of things, the shipping of things and getting people moving, rising energy costs can filter into rising prices. What we are seeing now is the purchasing of stuff cooling off from red hot. Travel and leisure purchases are ramping up. When the economy cools, we start worrying about a recession yet so far the decrease in spending on things is moderate enough that the increase in spending on travel and leisure is keeping us from being in a recession. There is a recession in part of the economy but not overall. Prices for oil, lumber and other commodities are falling. So inflation is coming down, but just not coming down fast enough to please the market. Food prices haven’t come down (except lobster) and have been impacted by droughts, floods, war in Ukraine. Specifically with food, we often get into substitution, looking for alternatives saves consumers some money. If inflation is high enough and labor supply tight enough, workers turn to their employer and ask for a raise.
If everyone gets a raise then its easier to justify raising prices and the higher level becomes entrenched. Inflation doesn’t actually need falling prices for it to moderate. No rise in prices eventually causes the average to come down. Falling prices will bring it down faster. That’s what the FED will be discussing next week. Are prices falling. Fast enough to bring inflation down but not so fast that people begin to wait. Anecdotally the housing market is the next area at risk of recession. House prices seem to be falling in some areas. We are still 4 million units short of supply and so demand won’t plummet and stay down but it is a key area where the FEDs policy is acting quickly.
So the corporations and the economy seem to be holding up. The Stock market is looking forward and trying to sort out what happens next. Some stocks to fall, then recover. Over time, other stocks fall and recover, which is all ok for the economy and keeps us out of recession. We should recognize government monetary policy wants a little bit of inflation. The dollar relative to other currencies is strong. Your USD buys more, as long as you buy overseas. Supply chain issues are global. The pandemic created chaos and we are still working through it. Visa, MC and AMEX continue to say that American consumers are “healthy,” and have money to spend.
Watching vs. trusting
Spoiler alert. If you knew the end of the movie, would you want to watch it? Where are we five years from now? When the Feds stop raising rates, and inflation returns to what it was a year ago then valuation techniques and formulas would begin to suggest higher prices for stocks and bonds. Growth stocks are priced based on Feds rates. Dividend stocks are priced on what decisions are being made at corporate level about the sustainability and growth of dividends. Bonds are valued differently. So a diversified portfolio will help manage risk over time. In the short run (3 months – year) the markets can create circumstances that cause asset prices to all behave in a similar way. In the long run more normal patterns return. So what does watching the stock market everyday do to help us trust it. Focus on the income from dividends, interest, rent, royalties, etc. allows us to see what matters most and learn to trust our plan for navigating this process. Eventually the effects of the pandemic will lessen and our new normal will begin to assert itself.
Past policies, procedures and predicaments
Policy makers are currently trying to equalize the tax treatment of stock buybacks and dividends. The fact they would be dabbling and in or interfering in the markets is not new. Change is the only thing that doesn’t change. During the great depression is the house value on a mortgage was less than what was owed the bank was allowed to foreclose. That’s changed. An accounting rule called mark to market was changed in 1938 helping the stock market to recover. It was brought back in 2007 and the repealed again in March of 2009 creating the same effect. Incentive stock options were a popular payment scheme in the late 1990s until accounting rules figured out how to value them. The fall of the tech stocks is partly just a repricing of this procedural change. In the 1970’s we went off the gold standard. That change will only happen once. So things that were significant causes of market turmoil in the past are not present in our current process. So watching and reading about past and present can help us understand the durability of our economic system and trust that we can get through this process and come out the other side better than when we went in.
We throw around a lot of terms and I recognize that not all of them are familiar terms for every listener or reader. If you are looking for a good glossary try this link www.Investopedia.com
In summary, a lot of vibration in the system has created ripples. The job of the CEO is to navigate the corporation through the weather – fair sky or stormy. The role of the investment analyst is to predict the weather and determine how severe today and tomorrow might be. The role of the financial advisor is to help you weather the seasons and trust that after winter will come spring. Corporations can thrive in any season and stocks can disappoint in any season. Over time things have a way of working out. Watch.
As always if you would like to schedule a call to discuss your investments, please reach out us at 207-847-4032 x100.
Be Well!
Tom
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may directly.
All investing includes risks, including fluctuating prices and loss of principal.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies.