Vericrest Insights - June 2024
Remember when the Fed said higher inflation readings in January and February were a hiccup? Then March came in hot, delaying rate cuts even further? Well, recent numbers showed that inflation eased in April, further muddying the waters for the Fed – should they cut rates? Keep them the same?
The Core CPI (Consumer Price Index), which monitors the price of goods and services excluding volatile food and energy prices and is closely monitored as an inflation gauge, increased by 3.6% compared to the same period last year. This marks the smallest annual increase since April 2021. On a monthly basis, the Core CPI rose by 0.3%, marking the first instance in six months where its growth slowed compared to the previous month.
Other positive indicators for April as compared to March include a 0.2% decrease in grocery prices – the first decline in a year – and slower increases in health insurance and car insurance. (You know it's a peculiar state of affairs when we perceive a slower increase in price hikes as a positive.) All the while, consumer spending remained stable for April. So this easing of inflation suggests that Federal Reserve rate cuts this year are now a possibility, however, the timing will likely hinge on another positive CPI report demonstrating continued improvement.
On the surface, this may look like all butterflies and rainbows, but not quite. Several persistent factors are preventing inflation from declining further, notably shelter and gas prices, which collectively contributed to over 70% of the overall price increase, according to the Bureau of Labor Statistics. Gas prices rose by 2.8% (!) in April over March, reflecting recent upticks in oil prices, and housing costs remain stubbornly high. Another good sign, though, is that rents increased at their slowest rate in nearly two years. (Again, you know it's a peculiar state of affairs when we perceive a slower increase in price hikes as a positive.)
So even though inflation expectations continue to rise above their pre-pandemic range, these expectations remain far below where they were last year. This, along with consumers’ expectations that wage growth will slow, is a positive sign for the Fed that inflation is on a sustainable path back to its 2% goal.
Equity Markets
Looking at how these expectations are affecting the markets……or maybe not affecting the markets.? The S&P has been up 23 of the last 30 weeks. And the last time it was above that level was 1989, in the midst of one of the all-time great bull runs for the markets.
“History suggests that narrow stock market rallies can last for years,” according to Jonas Goltermann, deputy chief markets economist for Capital Economics, an independent research firm. “That was the case for both the 1990s dot-com bubble and the late 2010s ‘big tech’-driven rally,” he wrote in a note.
However – and there always seems to be a ‘However’ – recent press suggests that we are headed for a market recession prior to year’s end. And then, of course, other analysts believe the market will be higher at year’s end.
The most recent phrase I am coming across is “cautions optimism.” While the overall market outlook remains positive, there are inherent risks, including potential market volatility and economic uncertainties. This is nothing new.
Are we concerned about a downturn in the markets? Yes, we always are.
So what can we do to prevent it? Nothing.
OK, so then what can we do to mitigate it? Well, I’m glad you asked. Please, read on.
Diversification
I want to share with you a chart that we utilize in visually explaining a concept that we find both fundamental and critical to our overall approach to investment management and financial planning.
The concept of investment diversification has its roots in modern portfolio theory (MPT), which was developed by economist Harry Markowitz in the 1950s. Markowitz introduced the idea that an investor can construct a portfolio of multiple assets that will maximize returns for a given level of risk through diversification. His groundbreaking work, "Portfolio Selection," published in 1952, laid the foundation for modern investment strategies and earned him the Nobel Prize in Economic Sciences in 1990.
Investment diversification is crucial because it helps manage risk by spreading investments across various asset classes, sectors, and geographic regions. This reduces the impact of any single asset's poor performance on the performance of the overall portfolio. The goal is to enhance returns by balancing the inevitable fluctuations in different markets, ensuring more stable growth over time. By not putting all your eggs in one basket, we can achieve more resilient and balanced results.
Below is a chart that compares 10 years of annual performance from January through December of each year for 11 different asset classes. Choose any asset class and follow its performance over the past 10 years. Notice how any asset class has generally performed compared to other asset classes over the past 10 years. For example, Large cap growth (sky blue box) has been the top performer four of the past 10 years, despite being the bottom asset class in 2022. This demonstrates the importance of diversification, since each asset class tends to vary in performance from year to year; an asset class that leads in all categories one year could trail the next year.
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Periodic portfolio rebalancing is essential to maintain the desired level of diversification. This involves adjusting the portfolio to its target asset allocation by buying or selling assets to ensure it remains aligned with the investor’s risk tolerance and investment goals - no matter what market environment we find ourselves in.
Monthly Webinar
Inheriting an Individual Retirement Account (IRA) can be a significant financial event, often carrying both emotional and practical considerations. How you handle inheriting IRA can have long-term implications for your financial future.
Join us next Thursday, June 13th at 12pm for our monthly webinar series where we discuss specifics and answer your questions.
To register, please click here.
Additional Reading
Below are some recent articles that you may find interesting and helpful:
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Bill Davis is a CERTIFIED FINANCIAL PLANNER? and Managing Partner with Vericrest Private Wealth LLC, a financial advisory firm in Newtown, Pennsylvania.
Vericrest Private Wealth LLC ("Vericrest") is an SEC registered investment advisory firm. The information provided herein should not be?construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or investment advisory service.?Past performance is no guarantee of future results, and there is no guarantee that future investments will be profitable. While we believe that third party information provided is accurate, Vericrest does not guarantee or otherwise warrant such information.?For more information please contact Vericrest or refer to the Investment Adviser Public Disclosure website?(www.adviserinfo.sec.gov) to review important disclosures about our firm.