The average frequency of an earthquake rated 9.0 or greater in magnitude is estimated to be between 10 to 50 years. That frequency fits with the recent inflation headlines with inflation hitting the highest point in more than 40 years. 2022 markets have seemingly been defined by these inflation readings and the subsequent fed action. So far, July is turning no different.
Inflation Runs Hot
The 9.1% annual inflation increase is the fastest increase since November 1981, which again outpaced economist expectations. Core inflation, which strips food and energy, actually had a slower pace in May, but everyone knows food and energy are a big part of our expenses.
While that big number stinks on all fronts, there are signs that inflation may start to ease its grip. High mortgage rates and home prices may begin to normalize/slow the housing market. For example, Redfin reported that ¼ of Jacksonville homebuyers backed out of their contract before closing. At the same time, the number of mortgage applications was 18% lower than last year. At the very least, housing seems to be normalizing and may be peaking.
Commodities have also recently come down a lot. Remember not that long ago how expensive lumber was? Through the first half of this year, it is down roughly 40%. Industrial metals, like tin and copper, have been crashing. Even food commodities, like wheat, have come down.
Just because commodity prices have come down and demand may be waning in certain areas does not mean inflation automatically drops immediately. There is a lag before it filters to prices. But at least for now, there is hope (though not a guarantee) that we may begin to turn the corner in the coming months.
What’s next for the Fed
Back in November 1981, the last time inflation ran this hot, the effective fed funds rate was 13.31%. Today, that rate is 1.58%, a vast difference in policy. At the Fed’s last meeting in June, they increased the rate by 0.75% and, importantly, estimated that by the end of the year, the Fed Fund rate would be 3.4%.
The next time the fed meets is July 26th and 27th, and we will hear how big the next rate hike will be and their closely watched dot-plot with projections for future rates. After the recent hot inflation report, many market participants are projecting that the next increase will be a full 1%. Given that there is no August Fed meeting, the next rate increase is probably in September; the Fed may want to make the larger jump and do a full percent, but we shall see. Again, the Fed action and comments will be a major focus for markets in the coming weeks.
Through July 19th:
- The S&P 500 is down 16.71%
- International market (MSCI EAFE) is down 18.37%
- Bonds (Barclays Aggregate Bond Index) are down 10.14%
The Smart Investor
There just isn’t enough data to know if we’ve peaked with inflation. We believe that the fed will soften its messaging for rate increases once they start to see that their policies are working in softening demand, and we think that will be a positive for markets. We just don’t know when exactly we’ll hit that point.
It’s been a tough year to watch account balances for investors, but we urge you to keep hanging in there. Remember, we are in this for the long haul, and unfortunately, periods of negative returns are regular occurrences.
Stock prices have fallen, so it may be time to take advantage of tax-saving strategies. Tax-loss harvesting can offset gains elsewhere. If you’ve been considering a Roth conversion – now may be an ideal time. Lower stock values mean lower taxes, and any growth in these assets in a Roth account will be tax-free. Keep your long-term plan in mind. Managing emotions is a balance of taking a realistic view but keeping your goals in front of you. Don’t make impetuous moves; focus on the things you can control.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities that represent the stock market in general. The Bloomberg Barclays US Aggregate Bond Index is a broad base, market capitalization-weighted bond market index representing intermediate-term investment-grade bonds traded in the United States and is used for measuring the performance of the US bond market. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East.
This material is provided as a courtesy and for educational purposes only. Investing involves risk including loss of principal. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. This article contains links to articles or other information that may be contained on a third-party website. River City Wealth Management is not responsible for and does not control, adopt, or endorse any content contained on any third-party website. The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. Past performance is not indicative of future results.