Your author recently had an experience where a short flight to Cincinnati was diverted only 200 feet from landing due to heavy fog at the airport. The incident did produce some anxiety, but he was thankful to the pilots for not trying to make the perfect landing. This is similar to what the Federal Reserve is trying to do: lower inflation while not crashing the economy. You have probably heard the narrative – is it a soft, hard, or no landing?
The Federal Reserve is parsing through the fog of immense amounts of data and trying to do that. And their language of higher rates for longer has spooked the markets in recent months. But let us rise above the fog and see where we are and where the Federal Reserve is trying to get to. U.S. stocks, as measured by the S&P 500 index, are still up 13.07% for the year through September 30, after they were down about 6% for August and September. This short-term sell-off has begun to cause some anxiety among investors and financial pundits.
The Federal Reserve has raised short-term rates four times this year by a cumulative 1.00%, bringing the fed funds rates to a range of 5.25% to 5.50%, the highest we have seen in over 20 years. The 10-year treasury increased by 0.73% to reach 4.59% at the end of September, its highest level since 2007. The 10-year treasury yield impacts everything from mortgage rates to credit cards to business loans and financing. This movement in rates is what has spooked the markets, and more specifically, the term “higher rates for longer.”
This is why we have taken a half step back after the year's solid first half. There are a lot of things the Federal Reserve and the market are digesting (some rational and some not), to name a few:
- Federal Reserve – will it continue to raise interest rates?
- Inflation – will it continue to fall, or will higher gas prices drive inflation?
- Government shutdown – will it happen in mid-November after the 45-day continuing resolution?
- Economic outlook – UAW strike, job and wage growth, corporate earnings, China slowdown, etc.
Let's review some of these and focus on the bigger picture.
Will the Federal Reserve keep raising interest rates?
The short answer we believe is no. It may raise short-term interest rates again one time this year but has signaled it is nearing the end of the tightening cycle. The end of rate hiking cycles is generally good for the stock markets as there is more certainty about what money will cost consumers and businesses. It is also good for our clients now seeing around 5% interest on their safe investments!
Will inflation continue to fall?
It will be a bumpy ride down to the Federal Reserve’s target of 2%, but the trend is still towards lower inflation. While it may not feel like it with elevated car prices and gasoline rising – the trend is lower, as we can see from the chart of the Consumer Price Index. This is why we hold stocks for our clients. They are the best hedge against inflation and provide our clients with portfolio growth.
While we all hope for some level of leadership from our elected officials, we are reminded to focus on the longer term when investing. As you can see from the below graphic, the market was positive for 11 of the previous 21 government shutdowns – reminding us to stick to our plans and control what we can control.
What does all this mean to you, our valued clients?
Cash is now earning 5%. Bonds are earning above 5% in many cases, and we can lock in higher rates for longer. Stocks may be volatile, but they are still the best way to combat inflation and grow wealth.
The chart below reminds us of the resiliency of the U.S. stock market. This is why we must constantly remind ourselves to stay focused on long-term goals.
Like the pilots on our author’s flight to Cincinnati, your Charter Oak advisors have their eyes on all the data coming in and will continue to help you navigate these foggy times. It is a pleasure and a privilege to help you navigate transitions and live your ideal life. We wish you a wonderful fall season ahead.