“It is not what you look at that matters.
It’s what you see.”
- Henry David Thoreau
Markets continue to be confused regarding what the Federal Reserve will do in November, and perhaps again in December. The big question creating market volatility is simply:
Has the Federal Reserve raised interest rates
enough to curb future inflation down to the 2% target?
Decades of market studies clearly illustrate that investors/markets do not like uncertainty. The present uncertainty regarding how high rates will go has put the markets into a “wait and see” attitude, which is always accompanied by high levels of volatility.
The Federal Reserve acted slowly in the beginning of 2022 and, in hindsight, that strategy was not enough. Personal spending in both the U.S. and abroad continued to escalate along with inflation. As a result, starting in August of 2022, the Fed started to aggressively increase rates, signaling to investors a steadfast commitment to bringing inflation down to their target of 2-3% annually, which meant – watch out, interest rates are on the rise!
While all of these changes create unpleasant performance in both stocks and bonds, these adjustments are necessary and appropriate to set the stage for our future collective growth. Like all things in life, this is temporary!
Charter Oak’s advisors will be closely watching the Fed’s moves in early November, and how they signal what their next moves will be. We would prefer the Fed increase rates another 0.75% and state they are likely done raising rates for a while. If they act a little more slowly, we may have to wait until early December to see if the Fed call it quits on raising rates.
Our prediction is that as soon as the Fed signals a slowdown or stoppage in rate increases, the markets will begin their return to higher levels. During these periods, the advisors at Charter Oak have been and will continue to be working hard, frequently rebalancing accounts, and in many cases increasing stock exposure as the low prices present excellent buying opportunities.
Bonds (a.k.a. “fixed income”) are another important part of our client portfolios. The good news from higher rates is that bond returns are now in the high 3-to-low 4% range for terms of less than 18 months. This is great news for bonds going forward. As these changes take place, we will continue to reposition your bond investments to take advantage of these higher rates.
Inflationary pressure is not at all bad for all things. For those who are collecting Social Security income, you will see a whopping 8.7% increase starting in 2023, but don’t spend it too fast as some of those increases will be offset with increases in Medicare part B costs. Nonetheless, increases in pension plans that have cost of living adjustments, like Social Security, have seen their best two years of increases in over two decades.
Until the market recovery begins, we’ll remind our readers of the S&P 500’s historic and bumpy long-term 10% average and of the following facts:
- U.S. Gross Domestic Product per capita (a broad measure of a country’s economic health by population) has increased 140% since 1969
- The S&P 500 Index is up about 40 times since 1969 (nine recessions later)
- The cash dividend on the S&P 500 index is up 20 times since 1969, and (in comparison) inflation is up a little more than 8 times over that same time period
So, please step back for a moment and refer to the quote atop this writing and remember, you get to choose the lens through which you see the world. Are you focusing on the long-term rewards provided to the goal-focused, plan-driven investor or are you allowing the news headlines and fear to infect your psyche and change your outcomes?
While it is easy to get caught up in the current uncertainty and proclaim, “this time is different” (often referred to as the four most costly words in investing). We’ll remind our readers that every economically uncertain time in the past has felt “different.” The COVID recession looked nothing like the ’08-’09 Global Financial Crisis, which looked nothing like the great oil-shock recessions of the 1970s … yet they were all temporary. And after each challenging time, economic growth resumed its upward course.
We at Charter Oak acknowledge and understand that we all have real emotions during uncertain times. We recognize that if your feelings go unchecked and are not attended to productively, this can disrupt or derail an otherwise successful long-term plan. Therefore, if you have questions, concerns, need to talk outside of your regularly scheduled meeting times, please do not hesitate to reach out. We are here and we are happy to talk and guide you to a successful result. Thank you for placing your trust and confidence in us. We are grateful to guide you and we look forward to connecting at our next meeting.