October 3rd, 2023
The post-pandemic episode of ‘inflation’ in the US is now, essentially, over – the Fed’s 2% target has nearly been achieved. It just may not feel like it when you fill up your gas tank.
The Fed’s preferred metric – PCE – is now resting at 2.1% 3-annualized. A goal we’ve been in search of since the rate hikes began in March of 2022.
Despite the positive news, Fed Chair Jerome Powell said at September 20th’s FOMC meeting that ‘rates will remain higher for longer,’ and we’ll likely get one more 25-basis point bump in November as a ‘just in case’ measure.
Interest rates are not historically high. But the rapid shift from rates near zero to rates well over 5% has pushed certain levers in the economy to places where it feels like something might break. Yet, GDP growth is holding strong, employment remains high and consumers continue to spend.
With an election year approaching and the underlying concern of, ‘it feels like something might break,’ it seems smart to take a slightly more conservative approach to your investment allocation over the next 18-months. The risk-free rate (treasuries bond yields) now exceed 5.5% annualized on 6-month duration. The risk premium of holding only equities seems all too high not to be holding as least some treasuries – and for this reason we’re leaning into this safety net.
Interested in learning more? Schedule a call with me HERE.
And now, your Monthly Market & Economic Update by the numbers.
Warmly,
Mark S Sauer
Market Update
Global Equities: Market’s sold off following a rather hawkish sentiment by Fed Chair, Jerome Powell at this month’s FOMC meeting. The S&P 500 finished the month down -4.23%, the Nasdaq Composite fell -4.3%%, while the Dow Jones Industrial Average dropped -3.82% in the month of September. Equity markets were pressured further by government shutdown risk and rising bond yields, particularly on the long end of the yield curve. Developed International and Emerging Market stocks were also lower. Developed International market’s fell sharply at 4.58% while Emerging Market’s fell 4.3%.
Economic Update
Inflation Data Shows Progress: The Fed’s preferred inflation measure, the Core Personal Consumption Expenditure Index (PCE) hit an important milestone, falling below 4% year-on-year for the first time in two years. The monthly increase in Core PCE was just 0.1%, following two months of 0.2% increases. This puts the quarterly annualized measure right around the Fed’s 2% target. The Core measure, of course, excludes food and energy, therefore the headline inflation reading was higher at 0.4% monthly due to rising oil prices. Nevertheless, the Core PCE reading is a major win for those arguing that the Fed should halt rate hikes and allow the lagging data to catch up.
Charts of the Month
Core PCE
Our first chart shows the Annual change to the Core PCE index (black line) along with various subcomponents. The biggest decline has come from Core Goods (darker blue line) but other areas are also trending lower. Housing remains a major driver of inflation and may take a considerable time to catch up, given the limited inventory of homes for sale and very few homeowners wanting to leave behind there low interest mortgage for a substantially higher one.
Bonds
Our next chart shows the year-to-date return on the iShares 0-3 Month Treasury Bond ETF (blue line, SGOV), the iShares Core US Aggregate Bond ETF (black line, AGG), and with the longer-dated iShares 20 Plus Year Treasury ETF (red line, TLT). These ETFs represent short, intermediate, and long duration bonds, respectively. After back-to-back years of negative returns, 2023 was supposed to be the year of fixed income, with many analysts bullish on bonds. Nearly three-quarters through 2023, however, on a total return basis AGG is now flat and TLT is down more than -6%. While AGG and TLT have been major losers during the Fed’s inflation battle, the short end of the yield curve has outperformed. SGOV, however, has been a winner, returning 3.6% year-to-date and providing a liquid safe haven for investors waiting for the Fed to conclude its rate hike campaign.
Nasdaq
Our final chart is the Nasdaq consolidating in a tight range after having a spectacular run through the first half of the year. The consolidation range (highlighted by the purple box) represents an indecision point in the market. Many market and economic factors are pulling price in either direction. Rate hikes and a tightening economic policy – which will remain in play for longer – put downward pressure, while strong GDP, high employment, and strong earnings put upward pressure. If price breaks lower we’ll likely see price move toward where the 50-week moving average (blue line) and the supply/demand level of 13,590 (green line) merge – represented by the yellow circle.
