Summer Slowdown?

Is it August already?

Summer has flown by, and we are quickly approaching an historic Presidential Election. Given the current state of the economy and recent stock market volatility, it's worth considering whether your investment portfolio is positioned to withstand the long-term inflationary pressures that have gripped the country.

Markets experienced another volatile week, driven by a disappointing jobs report and weaker-than-expected earnings announcements from technology companies. This news overshadowed Fed rhetoric implying a rate cut was likely at its next policy meeting in September.

Stocks initially rebounded on Wednesday after Fed Chairman Powell's dovish remarks, but then sold off on Thursday and Friday following weak jobs data and disappointing corporate earnings. The S&P 500 and Nasdaq have now declined for three consecutive weeks.

The tech sector has been hit particularly hard, with microchip companies suffering significant losses. Corporate earnings have shown increased investment in AI-related projects, but many companies are struggling with the immense costs and limited revenue as the technology is developed.

Despite the market volatility, which has continued this week, the sell-off may not be over. The Fed’s hesitation to move quickly clashes with the stock market's desire for a more aggressive response, leaving the market in a state of uncertainty. The bond market's signal that the Fed may mishandle the situation further compounds the exasperating current market environment.

Looking back to 2020, the lasting impacts of inflation are palpable across the U.S. economy. The expansive CARES Act flooded the economy with an abundance of "easy" money, driving up prices for consumer goods, energy, housing, and healthcare to multi-decade highs. This inflationary peak in 2022 reached levels not seen in 40 years, with some areas experiencing double-digit price increases.

While the Biden administration and Federal Reserve have cited COVID, supply chain issues, increased spending, and the war in Ukraine as contributing factors, the effects have undoubtedly taken a toll on American households.

Wages did rise, but failed to keep pace with the runaway inflation, leaving more than half of U.S. adults reporting insufficient funds after meeting their expenses, even as incomes grew in 2023. In short, the purchasing power of the US consumer has rapidly eroded.

However, there are signs that the inflation tide may be turning. Recent data shows consumer prices rising at a slower rate, with the 12-month inflation rate through June 2024 dropping to 3% - the lowest level since early 2021. Additionally, key economic indicators like the money supply (M2) have started to contract, mirroring the Fed's quantitative tightening efforts.

But this shift is not necessarily good news, as rapid declines in M2 have historically been associated with significant stock market downturns, as seen in the 1920s and during the Great Depression. Investors would be wise to closely monitor these developments and ensure their portfolios can weather any potential economic storms on the horizon.

These ongoing inflationary challenges have sparked heated debates and, in some circles, a crisis of confidence in Federal Reserve Chairman Jerome Powell and the Fed itself. The Biden Administration and the Fed have attributed this exorbitant inflation to a litany of unrelated events, which reads more like a list of fiscal missteps and policy missteps.

While there may be some truth to these excuses, the root cause of this inflation appears to be the $5 trillion in pandemic stimulus flooding the US economy in 2020 - a move that, in hindsight, was the wrong decision. Injecting too much money into the system with limited supplies has inevitably led to increased inflation.

This is in stark contrast to the Great Recession of 2007-2009, when inflation was contained because banks were more cautious with their reserves and did not flood the economy with trillions of dollars. The recovery was arduous and slow, but it reached new highs by 2013 without the same inflationary pressures.

Given these circumstances, one must question whether the traditional interest rate tool is still the most effective method for containing inflation in a world that has become increasingly dependent on quantitative easing and the allure of easy money.

The recent market volatility, while within normal corrective ranges, may be hinting that this approach may no longer be as reliable as it once was.

As we move forward, it will be crucial to closely monitor the quality and interpretation of earnings reports, as well as any further developments in the labor market and manufacturing indices.

Despite the sell-off, this earnings season is off to a strong start, with several more companies yet to report.

However, the reasons behind the market sell-off are more nuanced.

Simply put, this recent sell-off relates to concerns over a slowing economy. The Fed is counting on this slowdown to tame inflation and justify interest rate cuts.

The Fed would prefer to see the pace of hiring slow, not grind to a halt, and recent data shows an increase in weekly jobless claims, fewer new jobs created, and a rise in the unemployment rate.

However, the reaction to this news has been less than positive, as the market seems to be anticipating a more significant economic downturn than the Fed's desired "soft landing."? The possibility of a recession has clearly increased.

In recent months, markets were debating if and how the Federal Reserve would adjust monetary policy. However, that narrative changed dramatically over this past weekend, as there is now widespread agreement on the path forward.?

Given the recent spike in volatility, some speculate that the Fed may consider cutting rates before their next scheduled meeting to mitigate greater systemic risk to the financial system.

While I do expect more volatility leading up to the election, my overall expectation is for the markets to finish the year on a positive note, provided investors are prepared for the potential challenges ahead.?

Further, considering the current levels of major market averages, even 1% swings will appear significant in terms of actual points moving up or down.

In summary, several key factors can impact your portfolio's ability to withstand inflation, including risk tolerance, asset mix, spending rate, and diversification.

If you have any doubts about the advice you've received, or simply want a second opinion, now is the time to seek help and complete your due diligence.?

Undertaking this evaluation will provide the peace of mind and income needed to enjoy the dignified retirement you've earned.

I would be happy to address any questions or concerns you have about your portfolio and income during this period. Please feel free to contact me directly.

I'm here as a resource to help guide you towards financial independence and I encourage you to schedule an appointment with me at your earliest convenience.