November 10, 2023
Markets and the economy are exhibiting robust resilience face of the the “Higher for Longer” interest rate message.
There are plenty of headwinds – geopolitical, potential for another rate hike, a richly valued S&P 500 at a p/e of 24+( Y Charts 11-9-23), and a terribly persistent inverted yield curve. Despite the headwinds, however, equity markets, which are forward looking, see persistent opportunity as we wind up this year.
In a flip of their traditional roles, we see the bond markets as posing a greater volatility for investors. As we saw last year and for much of this year, bonds have not proven to be the steady ballast in portfolios. They appear to have ceded that role to large cap, dividend paying companies, along with a few traditional growth companies, now being referred to as the “magnificent seven” pulling the Indexes to new highs.
Where do we look for indications of where the Federal Reserve will go with interest rates? Of course – Jobs. The reports around the labor markets which came out at the beginning of the month seem to indicate that labor is finally moving in the direction the Fed wants to see – that is, a slight softening without a truly painful increase in the unemployment numbers. Predictions of a recession have largely been muted or pushed well into next year, and even then “recession” has become “slowdown.” Higher interest rates are starting to cool a very hot economy.
For equity markets this Bad News is Good News. A cooling economy likely means the Fed will pause any rate hikes, and so this month we are seeing equity markets rally and fixed income rates decline pushing those valuations higher. Of course, now that interest rates are the highest we have seen in over a decade we have seen a flood of money going into CDs, Money Markets and other short term instruments. We see this tremendous cash hoard as an additional opportunity because it is there on the sidelines and available for investment.
A word or two about inflation – it is coming down although not yet to the 2% target the Fed would like to see. Those of us “of a certain age” remember when inflation ran well over 2%, and we use the long-term average of 3.75% to develop our financial forecast reports. What does declining inflation mean for consumers? It means average increases in the prices of goods and services will not be growing at those crushingly high rates, but rather will grow at more sustainable annual increases. What it does NOT mean is that prices will now revert to pre-pandemic levels. Watch an old movie and see what the person in the diner puts down for a cup of coffee. Maybe it is 25 cents; today, even in a diner or restaurant (not the drive through which comes to mind) it will be a couple of dollars. That is gradual inflation at work, barely noticeable increases over time. Inflation patterns during and following the pandemic were simply too much, too fast. As the Rate of Inflation normalizes, the equity markets will adjust. Perhaps anticipating this normalization is the impetus behind this quarter’s nicely positive move up.
The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
The return and principal value of bonds fluctuate with changes in market conditions. If bonds are not held to maturity, they may be worth more or less than their original value.
An investment in Money Market Fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. Although the fund seeks to preserve your $1.00 per share, it is possible to lose money in the fund.
Bank certificate of deposits are insured by an agency of the Federal government and offer a fixed rate of return whereas both the principal and yield of investment securities will fluctuate with the changes in market conditions.
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