Welcome to the latest edition of Markets, In a Nutshell.
In this September segment, there are a number of important changes to go through. As always, I encourage your feedback and questions. If you enjoy this blog, please pass it along so we can educate as many people as possible on the happenings of our world, today.
The Basics
- Inflation has ticked back up. If this persists, the Federal Reserve will likely need to raise interest rates again before the year’s end.
- Higher interest rates won’t necessarily break the camel’s back, but it will put even more pressure on an already strained economy.
- For the moment, the Federal Reserve is holding steady on interest rates, though they deem it likely to see one more 25 basis point hike before 2024.
- For a portfolio risk assessment, reach out to me: remy@jacobsonwealth.com
Inflation Snapshot
August's consumer inflation data came in very hot, showcasing a 0.6% growth month-over-month and 3.7% year-over-year. A big shift from the 0.2% increase we witnessed in July. What changed? Energy prices leaped by 5.6% in just one month! A quick breakdown:
- Oil Prices: As of time of writing, oil prices have surged over 23% in the past 6 months, mainly due to OPEC's supply cuts. Unlike last year when the Biden Administration leveraged our Strategic Petroleum Reserves (SPR) to manage oil prices, this strategy is no longer feasible. Another similar use of the SPR would deplete it entirely, making it harder for the U.S to cushion high energy costs.
As for Core CPI (which excludes volatile food and energy prices from consumer inflation data), it stood at 0.3% month-over-month. Though this is a more favorable rate, it tends to trail the trajectory of CPI, as energy costs eventually make their way into the rest of the economy.
The Fed’s Response
During September's Federal Open Market Committee meeting, Jerome Powell noted the Federal Reserve's intention to stay its current course on interest rates. However, many board members foresee a 25-basis point (0.25%) rise before 2024 begins. They also predict a slightly prolonged period of these elevated rates.
Market Reactions
This influx of data has sent ripples through the stock and bond market. The stock market dipped by 6% in September, and the 10-year treasury yield jumped from 4.1% to 4.6%. For a more in-depth look, revisit the August edition of Markets, In a Nutshell.
Some other things to note
Bankruptcy filings are also ticking upwards at a very fast rate – however, when you see this in the headlines, it is important to note that bankruptcy filings were at an all-time low during the 2nd quarter of 2022 and still remain well below average.
In addition, 3 months ago we witnessed three significant bank failures. In the short term, the Federal Reserve's Bank Term Funding Program (BTFP) has been a backstop, aiding banks facing significant unrealized losses and liquidity problems. However, the BTFP has only grown since its opening in March 2023, showing a reliance on this aid from the banking system.
My Take
For many, the economic pinch feels more palpable than ever. Rising prices at the pump and grocery store puts a strain on budgets. This economy is now at a point where growth has stepped down from its euphoric levels and will now fall into a period of slower and potentially negative growth. Whereas last year, we saw massive layoffs and corporate spending cuts, this year consumers will need to adjust their budgets.
I caution you to not act emotionally in response to the dramatic headlines which suggest, “The economy is about to snap!!” The far more likely scenario is that over the next few months, we will continue to trend downwards into a slowly brought on recession. A period of slow/negative growth lies ahead. A zero-interest rate economy is not coming back any time soon. With that, our economy will need to adjust growth expectations as corporations will need to deliver real value and profits instead of thriving on inexpensive debt.
Steps to Prepare
While the financial climate might seem grim, it is essential to approach financial decisions with a clear head. The benefit of a slow onset recession is that we have time to prepare. Here are some steps to take:
- Emergency Fund: Ensure you have a safety net, with 3-6 months of expenses in easily accessible accounts. This money should not be tied to any volatile markets.
- Assess your portfolio Risk: Spread your investments wisely to mitigate risks during challenging times. For a portfolio risk assessment, email me: remy@jacobsonwealth.com
- Address outstanding debts: Pay down where possible, and if that's tough, consider consolidating for lower interest rates. It is important to free up cashflow prior to a recession; however, do not deplete your emergency fund to do so, as maintaining liquidity is paramount.
- Dollar Cost Average into the market: It is impossible to time the market and to know exactly when the markets will turn course. To hedge against this, consistently contribute the same dollar amount into your investment portfolio every month. The result: In underpriced markets, you will acquire more shares at a lower price. In overpriced markets, you will buy fewer shares at a higher price.
As always, I encourage your feedback and questions. I wish you a wonderful day!
*Statements of future expectations are based on current market conditions, and involve uncertainties that could cause actual results to substantially differ from those expressed. This commentary is for informational purposes only and should not be construed as specific advice.