Market Update December 20, 2021
Patrick Traverse CFP? EA CEPA?
Owner Founder at Breakaway Financial Group LLC
Fed Decision Implications?
What is it??
Ahead of the Federal Reserve meeting last week, the markets were cautious. Investors awaited news on Wednesday of when and to what degree the Fed will act.?
Jerome Powell, the chairman of the Federal Reserve declared that: “It will now be reducing the monthly pace of its asset purchases by $30 billion “in light of inflation developments and the further improvement in the labor market”.*
“And on the Fed’s “dot plot,” a chart that reflects expectations for future rate increases among individual Fed policy makers, it was clear that officials are more certain about the need to act than they were at the central bank’s September meeting. At the time, policy makers were evenly divided over whether there would be any rate increases at all next year. That median expectations shifted to three increases next year suggests the Fed is looking to move rapidly to try to rein in inflation, and that it expects the labor market to continue improving.”*
Why does it matter?
The Federal Reserve’s decisions have great implications on the stock, bond, and commodities markets. Hawkish statements by the Fed are normally not well received from the markets as stricter monetary policies and higher interest rates may slow down the economy.
However, this announcement was received as a sign of continued economic support from the Fed. Their move was partially expected, and not drastic enough to cause concern.?
The Inflation Conundrum?
What is it?
“Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.”*
Why does it matter?
Inflation can be detrimental to continued economic growth which may also affect the markets. Ray Dalio, the founder of Bridgewater Associates which is the largest hedge fund in the world, has recently stated that he is “significantly concerned about inflation”.**
“"There isn’t an individual, organization, country, or empire that hasn’t failed when it lost its buying power," he wrote. "To be successful one must earn an amount that is at least equal to the amount one spends."**
“In his LinkedIn post, Dalio warned that the U.S. is printing too much money without raising its productivity levels, a point he also made in his interview Monday with Yahoo Finance.”**
Could We Have Seen Peak Inflation??
What is it?
To better analyze inflation trends, we look at a multitude of variables. Some of the main things we look at are: the U.S. Dollar Index (UUP), the Ten Year Treasury Yield ($TNX), and a key commodity being oil (OIL). By analyzing the value of the Dollar, interest rates, and commodity values, we can get a better idea of how inflation may be evolving.
Why does it matter?
The first chart shows that the U.S. Dollar Index (UUP) has appreciated strongly from October into November. If this move by the US dollar continues, it may help relieve inflation since most of our commodities are priced in US dollars. A stronger dollar means more can be bought for the same amount of money.
www.stockcharts.com
In contrast, interest rates peaked in October before declining into and through November. A weakness in interest rates may show that the bond market is signaling a peak in inflation as higher interest rates are a tool used to combat higher prices.?
www.stockcharts.com
Oil prices on the other hand are a direct item of the inflation calculation. Lower Crude Oil market prices may signal lower prices at the pump which may help reduce inflation.
www.stockcharts.com
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If these trends hold up we may have seen peak inflation which may change the Federal Reserve’s stance in 2022.
How About Those I-Bonds??
What is it?
Series I Savings Bonds are bonds that can be purchased directly from the Treasury Department. They constitute a fixed yield and an inflation-adjustment that is set twice a year.
Why does it matter?
There is a silver lining behind all of this inflation. Recently, the Treasury has reset their inflation adjustment and is offering I-Bonds with yields we haven’t seen in a long time from a safe investment: 7.12%.
If you have some savings and do not plan to need it for the next year, this may be a good way to grow them depending on your financial standing and goals. You can buy anywhere from $25 to $10,000 of I Bonds per individual. If you want to invest in I Bonds, you can do so here .***?
Other articles I found interesting this week:
Current 401(k) portfolio
Our last portfolio reallocation: 10/11/2021.?
Want more information?
The weekly market update provides a window into the process we use in our investment management process. At MoneyCoach, we believe markets are always changing and require a nimble yet data-oriented approach.?
Our process attempts to identify trends and momentum in the financial markets. With that information, we align our clients’ portfolio accordingly in the hope to help our clients accomplish their life goals while attempting to lower the risk of a large drop in their portfolio.
Sources:
*Erin Fuchs. “Ray Dalio: I'm 'significantly concerned about inflation'”. 12/15/2021. Yahoo Finance. https://news.yahoo.com/ray-dalio-im-significantly-concerned-about-inflation-164744915.html
**Megan Cassella. “The Fed Plans Bigger Cuts to Bond Purchases in Move to Fight Inflation”. 12/15/2021. Barron’s https://www.barrons.com/articles/jerome-powell-fed-meeting-today-51639526564
***Treasury Direct. “Series I Savings Bonds”. 11/3/2021. U.S. Department of the Treasury. https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm
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