Inflation Sensations

Doug Walters, CFA

Inflation stole investor headlines again this week, dragging down stocks. With all the negative news investors have had to absorb, they may be surprised to step back and realize that US stocks have held their value over the past four months.

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

Is anyone else out there tired of talking about inflation? It is exhausting! But it is driving investor behavior, so once again, we reluctantly dive into everyone’s least favorite topic, rising prices! This week we got a fresh look at pricing trends, and investors were not pleased. Tuesday’s worse-than-expected Consumer Price Index (CPI) set a negative tone that persisted throughout the week.

At first glance, inflation falling from an annual rate of 8.5% in July to 8.3% in August doesn’t sound that bad, even though it missed expectations for a decline to 8.1%. But this is the headline number. The “core” inflation print, excluding volatile food and energy prices, was of more interest. And there, we saw inflation increase from 5.9% to 6.3%. For investors, that felt like one step forward, two steps back.

One of the bigger culprits in the details was “shelter.” Despite rising interest rates, the cost of housing continues to drift up. We would expect the Fed’s rate increases to bite into the shelter line item eventually, but so far, consumers are defying that pressure.

So why did stocks have such an adverse reaction? It comes down to the Fed and what their response will be. Any setback in the fight against inflation means the Fed will have to be more aggressive in its rate increases. It also diminishes the probability of a soft landing. A “soft landing” is the Goldilocks scenario where the Fed gets inflation under control without doing too much damage to the economy. Stubborn inflation means that Goldilock’s porridge just got a few degrees colder.

So is it time for investors to start running scared? Of course not. Just as CPI was a drag this week, it could be a boon next month. It is a dangerous game to guess what is priced into the market, and an even more dangerous game to try and predict and take advantage of the next market gyration. A better bet is staying invested at your “right level of risk” for the long run.

Over the past few months, we have seen horrible headlines regarding the war in Ukraine, inflation, and the risk of a global recession. Yet, the US stock market performance has been flat over the past four months. There have been dramatic ups and downs along the way, but overall, the market has held up remarkably well. We do not know the next move the market will make, but we know that market volatility is normal. We also know that bad times come and go, and the most important thing an investor can do is ensure they are fully invested to enjoy the next bull market when it eventually comes – and it will.

6.3%

Inflation surprised to the upside in August… but

Tuesday’s inflation report disappointed on most fronts, with core inflation rising 6.3% from 5.9% in July. But some prices are coming down. Here are some areas for “glass half full” readers to focus on:

Gasoline may be up 25.6% year-on-year, but it was down 12.2% in August.Televisions are down 2.2% in August and a whopping 19.1% compared to last year. Time to upgrade!Computers and smartphones (IT commodities) fell slightly on the month and are down nearly 9% over the year.Automobile rental prices are down over 6% versus last year, as are admission prices to sporting events. So it is time for a road trip to go see your favorite football team!

Headline of the Week

US Stocks fell over 5% this week as the inflation print on Tuesday (CPI) disappointed investors. Adding to investor pessimism and winning the title of our “headline of the week” was a profit warning from FedEx (FDX).

FedEx has unique insight into world economic activity due to the global reach of its delivery business.
After hours on Thursday, the company issued a profit warning, noting a weakening global economy, particularly in Asia and Europe.
CEO Raj Subramaniam stated that the slowdown in their business is likely an early sign of a global recession.
Shares in FDX were down 22% on Friday.

For investors, the question is not just, “is a recession coming?” but, if so, how much of that news is already priced into shares? It will be a bumpy recovery ride, and we advise long-term investors to put their seatbelts on and keep their arms and legs inside the vehicle.

The Week Ahead

All eyes are on the banks next week. Central banks have rate decisions to make, with our Federal Reserve Bank being the biggest one.

50 no more

The Federal Reserve bank, only a week ago, was facing a 50-basis point rate hike or a 75-basis point rate hike decision. It is now probably looking at 1% as a possibility.

Stubborn inflation numbers are not backing down, leaving the central bank with no room to take it easy.
Fed Funds futures imply a 25% probability of a 1% hike on Wednesday.
Those same futures still see a rate cut in 2023 after the Federal Reserve moves rates to over 4% by year-end.
With only housing starts and existing home sales on the calendar before the meeting, it looks like all the data is already on the table.
After this meeting, the Fed will be on the sidelines until November, so going big may make sense.

Back to Business

With the passing of the Queen, the Bank of England had to move its rate meeting one week.

The funeral is on Monday, and a rate decision will be on Thursday.
The delay pushed the Bank of England to second fiddle as it would have been the marquee news item the previous week.
The decision to raise rates by half a percent or 75 basis points is still the big question.
On a side note, Kwasi Kwarteng, the new Chancellor of the Exchequer, and the New Prime Minister Liz Truss are about to make some policy changes, which include reversing corporate tax hikes.
With the European Union hiking by ¾ of a percent, would the hope of fiscal policy change be enough to keep the UK from matching that hike?

Yen on the line

Japan is not printing nearly double-digit inflation numbers like the rest of the developed world. However, it did climb year-over-year, 2.6% in July and 2.4% in June. That said, the urgency to hike is not based on inflation but on weakening currency.

The Yen at about ¥140 to a US Dollar is very weak, the weakest since 1990.
Japan reported a record trade deficit of ¥2.82 Trillion in August as the weak currency further inflates import costs for the energy-import-dependent nation.
With trading partners the US, the UK, and Europe all raising rates, how long can the Bank of Japan sit it out?

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on total client assets of over $2 billion.

Overview

Disclosures

Strategic Financial Services, Inc. is registered with the Securities and Exchange Commission (SEC) as an Investment Advisor. The term “registered” signifies compliance with regulatory requirements and does not imply a certain level of skill or training.

The information provided on our website, including weekly market commentaries, financial planning articles, and other educational resources, is intended solely for educational purposes. It is designed to offer insights into financial planning and investment management, aiming to enhance understanding of financial concepts, strategies, and market trends. This content should not be interpreted as personalized investment advice or a recommendation for any specific strategy, financial planning approach, or investment product. Financial decisions are deeply personal and should be made considering the individual’s specific circumstances, goals, and risk tolerance. We recommend consulting with a professional financial advisor for personalized advice.

Please be aware that Strategic Financial Services, Inc. does not provide legal or tax advice. The content on this website is not intended to be used as such or as a substitute for legal or tax advice from a licensed professional. We advise seeking guidance from qualified legal and tax advisors regarding these matters.
Investment Risks and Portfolio Management.

The discussion of any investments on this website is for illustrative purposes only and provides no guarantee that the advisor will make any investments with the same or similar characteristics as those presented. The investments identified and described herein do not represent all the investments purchased or sold for client accounts. The selection of representative investments to discuss is based on various factors, including recent company news or earnings releases.

It should not be assumed that any investments discussed were or will be profitable. All investments involve risk, including the potential loss of principal. There is no assurance that investments mentioned will remain in client accounts at the time you view this information.

When index returns are mentioned on this site, they are provided as a general indicator of market conditions and are not representative of any client’s portfolio performance. Indices are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly. Therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

While index returns are used as a framework to report on general market conditions, they should not be construed as an indicator of future performance of any specific investment or portfolio. Discussion of index returns is intended to provide context and insight, not to suggest that clients will achieve similar results. Each client’s portfolio is managed according to their specific investment goals and financial situation.

The opinions and any forward-looking statements expressed in the articles and videos featured in our resource center are as of the date of publication. These statements are based on current laws, regulations, market conditions, and other relevant factors, including third-party data. Given the dynamic nature of financial and regulatory environments, as well as potential changes in market conditions or economic circumstances, the information provided may become outdated or may no longer be accurate.
We rely on third-party data to form our opinions and projections, which means that these are subject to the same uncertainties that affect all data-dependent analyses. As such, we advise readers to exercise caution and not rely solely on the statements made herein for making financial decisions. It is recommended that investors consult with a professional advisor who can help assess the relevance and accuracy of the content in light of the current economic climate and personal financial situation.

Our website contains links to third-party websites as a convenience to our users. Strategic Financial Services, Inc. does not control, endorse, or guarantee the content found on such sites. We are not responsible for the accuracy, legality, or content of the external site or for that of subsequent links.
Contact the external site for answers to questions regarding its content.
The inclusion of any link does not imply our endorsement of the site, nor does it imply any association with its operators. Use of any such linked website is at the user’s own risk.