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Volume 12, Edition 24 | August 7 – August 11, 2023

Focusing on Moving the Needle

Doug Walters, CFA
We field many questions about the Fed’s next move and the direction of the economy. We encourage investors to focus first on needle-moving actions they can control. We have three suggestions.

Contributed by Doug Walters, Max Berkovich, David Lemire, Eh Ka Paw

This week’s inflation data (discussed below) had economic prognosticators out in force, speculating on the implications for the Fed and the economy. Will they put hikes on hold? Does inflation moderation imply a soft economic landing? When “it’s all about the Fed,” it is hard to avoid these conversations.

Yet, for investors saving for retirement, there are far more important questions to be asked. The direction of the Fed and the economy are difficult to know. How the stock and bond markets will react is an order of magnitude more difficult to deduce and requires the hubris that somehow you know something that the combined wisdom of millions of investors has yet to figure out.

Now, we do believe there are evidence-based ways for some to do better than the overall market. We focus on proven factors (Quality, Value, Momentum, and Size). But there are other ways investors can ensure they do better than the average investor. The right questions to ask are:

  • Am I invested at the right level of risk for my situation? This means no market timing. If you have the ability1 to invest in a growth portfolio, stick to it. Avoid fleeing to cash when the market tests your nerves. As famed investor Peter Lynch said, “Far more money has been lost by investors in preparing for corrections or anticipating corrections than has been lost in the corrections themselves.”
  • Do I have a well-diversified portfolio? Avoiding chasing performance with concentrated positions. Yesterday’s winners may not be tomorrow’s winners. A well-diversified portfolio does not need to rely on predicting the future to give you attractive risk-adjusted returns. Get exposure to the right level of risk and take advantage of the free lunch that diversification can provide… higher risk-adjusted returns.
  • Are you maximizing the benefits of diversification with opportunistic rebalancing? Rebalancing can help you systematically sell high and buy low. Opportunistic rebalancing goes a step further than traditional rebalancing by looking for opportunities at the security level. When big moves in a security occur, this approach will use precision tools rather than blunt objects to extract that opportunity.

If you are not answering yes to the three questions above, then you are not yet doing the basics to get the most out of your portfolio. Worry about these questions first. These are decisions in our control as investors. The Fed’s next move and the direction of the economy are both unknowable and out of our control. Don’t let that uncertainty distract from proven, needle-moving decisions you can make.

1. Working with an advisor, you can identify the right level of risk for you based not just on your ability but also your willingness and need to take on risk.
4.7%

Core CPI (ex- Food and Energy)

Core CPI fell to 4.7% compared to a consensus of 4.8% and a previous read of 4.8%.

Headline of the Week

The Inflation Mess

Headline, Core, Super-Core, PCE… so many metrics, so much confusion. This past week’s CPI report did little to clarify things, although the general consensus is that there could be enough good news to keep the Fed from raising rates further. However, it did not meaningfully add to the debate as to whether the Fed is done and, secondarily, how long rates will stay at their current level. For now, “higher for longer” seems like the default.

This month’s report showed price increases matching last month’s muted gains which were largely viewed favorably. The most recent 12-month figure showed inflation creeping higher, which on the surface might be concerning. However, this increase was driven by the inflation decline that happened last July, which was replaced by this month’s increase. While this “base effect” could continue to hold annualized inflation above 2% (if not 3%), the lagged impact from housing could exert downward pressure.

The Fed gets one more look at this mess before its next decision, so any clarity or confusion will have to wait.

The Week Ahead

Federal Reserve meeting minutes and Gross Domestic Product from Europe and Japan may be overlooked as next week’s focus should be on the consumer at home and China overseas.

Are we there yet?

The minutes of the last Federal Reserve meeting ahead of the Jackson Hole symposium will have a very strong “are we there yet feel?”

  • Chairman Powell remained non-committal on the direction of rates, and a seemingly nonstop barrage of conflicting opinions from the other central bank policymakers may need some color from the meeting’s proceedings.
  • The consensus right now is the Federal Reserve is done, as the futures market indicates a 30% probability of another hike this year and is still tilting towards rate cuts as early as March.

Shopping spree

Not only is there a retail sales report for July this week, but earnings reports during the week are also dominated by retail.

  • Based on credit card data, retail spending is expected to remain solid, with consensus calling for a 0.4% increase in retail sales, stronger than in June.
  • The next question is what the consumer is spending on and where they are pulling back, and that is where earnings reports will help.
  • Walmart (WMT), Target (TGT), TJ Maxx (TJX), Ross Stores (ROST), Estee Lauder (EL), and Home Depot (HD) are all on the calendar next week.
  • Last quarter Walmart and Target found themselves on opposite sides of the picture. Wal-Mart raised full-year forecasts, while Target trimmed.
  • Interestingly, in the last quarter, Target identified rampant theft as a problem, claiming it would cost the company $1.1 billion this year.

Out there…

Gross Domestic Product from the Eurozone and Japan will take a back seat to inflation reports from the United Kingdom, Canada, and Japan to focus on the developed markets. However, China will steal the international show.

  • The world’s second largest economy will release fixed asset investments, industrial production, and retail sales on Tuesday.
  • Each report will be a bit more important after reporting deflation and a worsening contraction in both imports and exports this past week.
  • Chinese retail sales in April were up over 18% but have decelerated every month since.
  • With all the geopolitical challenges and new property market problems, the consumer needs to prop up the economy.
  • Investors shake off bad economic data from China with the hope of some government intervention to stimulate the economy, but nothing concrete has yet to formulate.

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