The Investment Committee met on the afternoon of Tuesday, September 5th. All team members were present and happy to share thoughts and insights about their recent investment and economic research. There continue to be many, and sometimes conflicting, economic and political data points influencing the markets and investor sentiment.
Once the debt ceiling agreement was reached in early June, the markets moved up in June and July. This was interesting as second quarter earnings declined once again. The markets then pulled back in August as it appears the lagged effect of the Fed raising interest rates 11 times over the last 18 months is finally starting to wear on the economy. It was the first drawdown that we had seen in stocks since February and March of this year when three regional banks failed.
After dropping from 9.1% in June 2022 to 3.0% in June of 23, the inflation rate ticked back up to 3.2% last month. Ongoing wage growth, higher shelter costs, and the potential for energy and food prices to increase due to global pressures could cause inflation to stabilize above the Federal Reserve’s 2% target rate, or potentially rise over the second half of this year.
Although job growth exceeded expectations for some time, we have now seen job growth disappoint three months in a row. Job gains of 187,000 in August were offset by downward revisions of 110,000 jobs in June and July.
You will also note in the chart below that the number of job openings in the US economy has dropped from approximately 12 million in March 2022 to less than 9 million today. This means that there are approximately 3 million fewer jobs available for those wanting to return to the workforce or find a new job. This could take some pressure off wage growth, which would be a welcome development and something that the Federal Reserve Bank has been working toward.
We are once again in a somewhat bizarre scenario where bad news for the economy could mean that the Fed will not raise interest rates further. Therefore, this could be interpreted as good news for the stock and bond markets. It is important to remember that market psychology and financial returns do not always align with each other.
Now that the Fed has brought short-term interest rates on high quality, liquid assets, such as CDs and T-bills, to the highest levels we have seen in more than 15 years, we would like to remind you that there are two sides to this coin.
The first is that money that you may need to withdraw in the next 12 to 24 months can be kept in vehicles earning attractive rates of return. It is the first time we have had the opportunity to get paid while we wait, in a long time. This is causing money to flock to vehicles, such as money market funds, which have attracted all-time highs in assets recently.
The other side of the coin is that we could potentially miss the opportunity to invest in longer-term growth-oriented vehicles, while prices are still below their all-time highs. We know from history that diversified portfolios tend to provide attractive rates of return that can help us to reach our long-term financial goals. We also want to remind you that when the Fed stops raising interest rates, and eventually begins to cut them, not only will you earn an attractive yield on your bonds, but they will also have the potential for growth as bond prices move inversely with interest rates.
It is important not to make short term or emotional decisions about your investment portfolios. This is especially important to remember in today’s highly charged 24-hour cable and internet news cycles. Your financial plan, and the advisor who helped you put it together, should be your NorthStar to provide you guidance during times of uncertainty. As always, should you have any questions about your unique situation, do not hesitate to reach out. We are here to help.
Thank you so much for your continued trust and support. We appreciate both.
Should you have any questions regarding these notes, please do not hesitate to contact Kevin at (678) 401-6102
INVESTMENT COMMITTEE MEMBERS:
The views stated in this piece are not necessarily the opinion of Cetera Advisors LLC and should not be construed directly or indirectly as an offer to buy or sell any securities. Due to volatility within the markets mentioned, opinions are subject to change 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. Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards. 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. Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards.
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. A diversified portfolio does not assure a profit or protect against loss in a declining market.
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe and is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.