Inflation Curbs Market Enthusiasm

Inflation Curbs Market Enthusiasm

Please note: This update was prepared on Thursday, September 15, 2022, prior to the market’s close.

It’s amazing the difference one half of a percentage point makes on Wall Street.

Tuesday morning, traders were greeted with a report that core inflation (which excludes often-volatile food and energy prices) rose 0.6% in August. This higher-than-expected read was not what they’d been hoping to see, and it sparked a broad sell-off among stocks, bonds, oil, gold…you name it. The Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite index all suffered their worst one-day drops in more than two years.

At the same time, short-term bond yields jumped. The three-month Treasury yield rose from 3.09% to 3.20% and the two-year advanced from 3.63% to 3.75%, the highest yields for these benchmark bonds in the current interest-rate cycle.

This latest evidence that inflation is running hot arrives just one week before the Federal Reserve’s next policy meeting, where fractions of a percentage point will also be much discussed inside and outside the bank. Will Fed Chair Jerome Powell announce an interest-rate hike of 0.75%? Or will policymakers aggressively ratchet rates higher by a full 1.00%? We’ll find out next week.

Here’s what else we’re watching and reading, and why it matters:

  • Headline inflation only rose 0.1% in August, thanks to a decline in gasoline prices, while food prices rose 0.8%. There’s no escaping this higher cost of living. But is it persistent? (More on this below.)
  • Tuesday’s stock market “losses”—and remember, they’re only losses if you sell—merely undid gains made over the previous four trading days. While it might have seemed like a sign of panic, indicators say otherwise. The Cboe Volatility Index (or “VIX,” a measure of volatility expectations commonly known as the “fear gauge”) moved higher on the day, but not dramatically so. In fact, Tuesday’s 4.3% S&P 500 decline was the worst-ever single daily loss to take place while the VIX sat below 30—a level often associated with extreme fear.
  • The Biden administration announced a “tentative” agreement this morning that would prevent a costly strike by freight rail operators—the last thing an overstressed but slowly recovering supply chain needs. We’re hopeful this additional inflationary pressure point can be averted.
  • World Health Organization Director General Tedros Adhanom Ghebreyesus held a press conference outlining why the globe has never been better prepared to minimize, if not eradicate, the COVID-19 pandemic. “The end is in sight,” he said, comparing pandemic-fighting efforts to a marathon. “We’re in a winning position. But now is the worst time to stop running.” After the devastating losses of life and the turmoil caused by the pandemic, this is a welcome message.

Down Days Sting but Offer Opportunity

No one would argue that Tuesday’s market decline was a pleasant experience. Yet—and we don’t say this flippantly—Tuesday was just one day in the market. And big drops often lead to big gains for patient investors.

Our research team has looked at how stocks performed following what we’d deem to be significant one-day declines (3.5% or more). As you can see in the chart, a big drop often leads to an even bigger gain—an average 25% just one year later.

Note: Chart shows performance of Vanguard 500 Index on days when the S&P 500 index fell by 3.5% or more as well as the total return of the fund over the following 12 months. Sources: Vanguard, Adviser.

While we can’t promise we’re on the road to a 25% gain come Sept. 13, 2023, the historical record suggests that it’s better to be a buyer (and certainly not a seller) when the markets spasm.

Chart of the Week: When Will Inflation Go Away?

 Interim Chief Investment Officer Jeff DeMaso

Yes, inflation remains high. And like a cloying summer hit song that you can’t get out of your head, I dare say many of us are both tired of hearing about it and living with it. Since we can’t change the channel on inflation, we’re left asking: “When will high prices come back down to Earth?”

Unfortunately, we don’t have a crystal ball or soothsayer to turn to. However, we can map out potential paths inflation might take over the next nine months by taking the consumer price index (CPI) at the end of August and applying a range of monthly price increases. That’s what I’ve done for you this week by picking three possible scenarios.

At the upper end, what if prices continue to rise by 0.6% each month—the post-pandemic average? On the flip side, what if inflation returns to pre-pandemic levels and increases by 0.2% a month? What if it’s somewhere in the middle, say, 0.4% a month?

Of course, inflation is certainly not going to exactly follow any of these lines, but this analysis helps give a sense of the outcomes we may face.

Here’s how I interpret this chart:

Our base case is that inflation will moderate from the post-pandemic level. In that scenario, at year-end 2022, inflation will still be around 7%–8% but should fall to the 3%–5% range six months after that. A continuation of the post-pandemic pace of price rises is a worst-case scenario, with inflation clocking in near 9% at the end of the year and around 6%–7% in the middle of 2023.

Yes, these ranges of inflation may be wider than the overly specific two-decimal-place forecasts you often see in the media, but we believe they’re more appropriate (and useful). Getting inflation directionally right seems better than being precisely wrong.

In sum, the chart tells us that inflation is likely to remain uncomfortably high for the rest of the year, but there is potential for it to decrease meaningfully in the first half of 2023. By then, I’m hoping to have a different (and better) song stuck in my head.

Note: Chart shows year-over-year changes in the consumer price index on a monthly basis from 12/31/19 through 8/31/22 along with projected annual rates based on the monthly changes listed through 6/30/23. Sources: U.S. Bureau of Labor Services, Adviser.

Expectations vs. Reality in Retirement

Manager of Financial Planning Andrew Busa

You may have seen the telling survey featured in The Wall Street Journal earlier this week in a lengthy article titled “How Much Can You Spend in Retirement?

Image Source: The Wall Street Journal.

The author discusses six key concepts for retirees to ponder when considering their spending in retirement:

  • Health status
  • Retirement timing
  • Filing for Social Security
  • Risk tolerance
  • Lifestyle expectations
  • Bequest desires

We thought the article made an astute point: Retirement income calculators are often too heavy-handed in their approach. Free online tools can be used as a high-level barometer, but they often fall short when it comes to your individual situation.

If anything, the information in this piece magnifies the importance of working with a financial planner before pulling the trigger on retirement (or any significant financial decision, really). The factors that go into the decision will determine how successfully your plan sustains an ideal quality of life in retirement—and these factors are highly personal. A good plan must consider all the topics listed above. In our experience, there is an enormous benefit to working with a professional who has deep knowledge of each of these elements.

Just look at the graphic above to see why. Clearly, the average American has not been great at gauging their retirement income. Most people frankly aren’t even that good at predicting when they will retire—doing so considerably sooner than expected.

That’s where we can help. We can assist you in setting realistic expectations and help you reassess when reality doesn’t go according to plan.

As part of our financial planning process, we take a comprehensive approach to every financial need and expectation for your retirement. We will continually customize your plan so that it fits your specific (and evolving) situation—after all, life in retirement looks different for everyone.

Strategy Activity Update

Please see below for a summary of the trades we executed over the week through Thursday and our current tactical strategy allocations.

Dividend Income
No trades

AIQ Tactical Global Growth

Sell Cash

Buy Fidelity MSCI Utilities Index ETF (FUTY)

AIQ Tactical Defensive Growth

No trades

AIQ Tactical Multi-Asset Income

Sell Cash

Buy SPDR Bloomberg Convertible Securities ETF (CWB)

AIQ Tactical High Income

No trades

Ask Us a Question!

We’re always interested in the topics or concerns you might like us to comment on. As much as we try to cover the investment and economic fields every week, we know there’s still more that you might want to hear about. Ask us a question about investing, the markets or financial planning and one of Adviser’s experts will answer it in a future edition of The Week in Review. CLICK HERE NOW TO POSE YOUR QUERY.

Adviser in the Media

Portfolio Manager Adam Johnson appeared on Fox Business to discuss the market’s reaction to this week’s inflation surprise and to give his take on whether peak inflation is ahead or behind us.

In this week’s Adviser Takeaways, Senior Research Analyst Liz Laprade explained what this week’s inflation data means for investors, while Manager of Financial Planning Andrew Busa talked about five compelling reasons to create a financial plan.

Looking Ahead

Next week, we’ll get looks at the state of the housing market (homebuilders’ confidence, building permits, housing starts and existing home sales) and leading economic indicators, as well as an update on the manufacturing and  service sectors. But all eyes will be on the two-day Federal Reserve meeting that will culminate Wednesday afternoon with a policy statement and press conference from Chair Powell.

As always, please visit for our timely and ongoing investment commentary. In the meantime, all of us at Adviser wish you a safe, sound and prosperous investment future.

About Adviser

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Please note: This update was prepared on Thursday, September 15, 2022, prior to the market’s close.

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