#economy

The first half of the year was difficult for investors as the Federal Reserve (the “Fed”) began an aggressive tightening cycle to fight inflation sitting at 40-year highs and risk-off sentiment pervaded.

Here are 3 things you need to know:

1. The S&P 500 index dropped 20.6%, marking its worst first half of a year since 1970.
2. Bonds, as measured by the U.S. Aggregate Index, had their worst first half on record falling 10.4%.
3. Bitcoin fell nearly 60% in the first half but cryptocurrencies like Ethereum, Solana, and Cardano fell between 67-82%.

Sources:

1. Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov)
2. Indices:
   • The Barclays Aggregate Bond Index is a broad-based index used as a proxy for the U.S. bond market. Total return quoted.
   • The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.
   • The MSCI ACWI ex-US Index captures large and mid-cap representation across 22 of 23 developed market countries (excluding the U.S.) and 27 emerging market countries.  The index covers approximately 85% of the global equity opportunity set outside the U.S. Price return quoted.
   • The MSCI Emerging Markets Index captures large and mid-cap segments in 26 emerging markets. Price return quoted (USD).

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

Fed predictions, Omicron, geopolitical tensions, oh my! This year’s stock market weakness culminated with some of the sharpest intraday swings since the start of the pandemic. However, the stock market is forward looking, and investors may have already priced in this information.

Here are 3 things you need to know:

1. A sell-off among leading tech stocks contributed to a 9% decline for the Nasdaq composite, marking the index’s largest monthly decline since 2008. Over 75% of Nasdaq stocks were down 50% or more from their 52-week high at one point during the month.
2. The Federal Open Markets Committee (FOMC) left the funds rate target range unchanged at 0–0.25% but is preparing for a March rate hike and suggested it could front-load rate hikes even more than previously indicated. The Fed Funds Futures imply 5 full rate hikes this year.
3. The Russia-Ukraine crisis heated up as the U.S. and its NATO allies are bolstering troops in Eastern Europe and crafting harsh sanctions.

Sources:

1. Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov)
2. Indices:
   • The Barclays Aggregate Bond Index is a broad-based index used as a proxy for the U.S. bond market. Total return quoted.
   • The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.
   • The MSCI ACWI ex-US Index captures large and mid-cap representation across 22 of 23 developed market countries (excluding the U.S.) and 27 emerging market countries.  The index covers approximately 85% of the global equity opportunity set outside the U.S. Price return quoted.
   • The MSCI Emerging Markets Index captures large and mid-cap segments in 26 emerging markets. Price return quoted (USD).

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

September marked a much weaker month for financial markets. Here are 3 things you need to know:

1. Inflation moderated across a few major categories that have been the most impacted by supply chain shortages and pent-up consumer demand, such as used cars, airlines and hotels. However, energy prices surged during the month with WTI oil increasing +9.5% for the month.
2. Expiring extended federal unemployment benefits did not bring a surge of job growth as expected. Robust wage growth suggests the weakness is primarily supply-side driven.
3. Signs of slowing growth and higher inflation brought up talk about stagflation. Arguments for a reflationary environment in 2022 in the U.S. include a healthy consumer and still-supportive monetary policy.

Sources:

1. Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov)
2. Indices:
   • The Barclays Aggregate Bond Index is a broad-based index used as a proxy for the U.S. bond market. Total return quoted.
   • The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.
   • The MSCI ACWI ex-US Index captures large and mid-cap representation across 22 of 23 developed market countries (excluding the U.S.) and 27 emerging market countries.  The index covers approximately 85% of the global equity opportunity set outside the U.S. Price return quoted.
   • The MSCI Emerging Markets Index captures large and mid-cap segments in 26 emerging markets. Price return quoted (USD).

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

By:  Thomas Steffanci, PhD, Senior Portfolio Manager

The July minutes of the Federal Reserve’s (the “Fed”) latest policy meeting were released on August 18th to the hue and cry of Wall Street pundits about the Fed making plans to pull back the pace of their monthly bond purchases before the end of the year.

The ongoing assumption has been that the Fed’s tapering would begin next year and be spread throughout 2022. The stock market reaction was swift and sharp as the Dow Jones Industrial Average fell nearly 2% in two days as expectations swirled that the first rise in the Federal Funds rate may be similarly pushed forward to next year, rather than in the prevailing opinion to 2023.

Now so far, the Fed has not disclosed any timetable of either of those two events. Several members of the Federal Open Market Committee (FOMC) have made public comments about a timetable which on balance has called for an early start to tapering and a year-end 2022 first increase in the Federal Funds rate. These members have touted the strength of the economy as rationale for their views.

Why is all this important? Because current, real time, economic data are indicating a sharp slowing of the economy, especially in retail and home sales, along with continued declines in consumer buying intentions and homebuyer expectations. And survey data show consumers now expect a more negative economic impact from Covid than they have for the past several months. Covid-sensitive spending in restaurants, air travel and hotels has weakened further in August. Higher frequency indicators of consumer activity such as daily credit card spending have flat-lined since mid-July.

There is an historical irony in all of this. In past cycles, the Fed was behind the curve in reacting to rising inflation accompanying above trend economic growth, raising interest rates sharply and too late, precipitating a credit crunch and a recession, or a tightening policy in anticipation of rising inflation which did not occur (2017-2018).  What may be unfolding here is much the same thing.

If market signals are correct on the growth slowdown, which the Fed’s econometric models fail to pick up, they would wind up behind the curve by beginning to reduce their bond purchases too early, raising false expectations that current conditions cited above are mere transitory data points. They are likely not…the economy is tapering toward an identifiable growth slowdown in the months ahead, putting the Fed’s 7% estimate for 2021 GDP growth in serious jeopardy. The lesson is that the Fed will need to be more cautious in their plans for the speed and timing of their tapering plans.

What would be the market impact? As market signals become reflected in hard data, expectations of a Fed policy reset could elevate equity prices, raise commodity prices, and keep bond yields low. As 2022 is an off-year election, inflation would not be a policy problem in an economy that downshifts to trend growth, and any political resistance turns to congressional job preservation.

Chart Source: FactSet, Federal Reserve, J.P. Morgan Investment Bank, J.P. Morgan Asset Management. As of August 20, 2021.

*The end balance sheet forecast assumes the Federal Reserve maintains its current pace of purchases of Treasuries and MBS through December 2021 as suggested in the June 2021 FOMC meeting. **Loans include liquidity and credit extended through corporate credit facilities established in March 2020. Other includes primary, secondary and seasonal loans, repurchase agreements, foreign currency reserves and maiden lane securities. ***QE4 is ongoing and the expansion figures are as of the most recent Wednesday close as reported by the Federal Reserve.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

By:  Michael Allbee, CFP® Principal| Senior Portfolio Manager

The past few months saw some eye-popping inflation readings after subdued inflation prints last year due to COVID. The Core Consumer Price Index (“CPI”), which excludes the volatile energy and food categories, rose 0.9% in June after increasing 0.7% in May and 0.9% in April, bringing the year-over-year reading to 4.5%. Headline CPI, which includes energy and food, rose to 5.4% year-over-year for the largest 12-month increase since August 2008.

A confluence of events drove these inflation outbursts: 1) the year-over-year inflation readings were expected to jump during the summer due to the low readings a year ago, 2) the speedy rollout of widespread COVID-19 vaccinations in the U.S. and fiscal stimulus unleashed pent-up demand faster than expected, catching many businesses off-guard, 3) the flow of goods ordered from overseas was slowed by shipping bottlenecks including the six-day blockage of the Suez Canal, 4) staffing issues are a contributing factor in the shortages, and 5) other one-off supply constraints (i.e., ransomware attack on a U.S. fuel pipeline, a brutal winter storm knocked out the power grid in Texas, and a global shortage of semiconductors).

Many economists (including those at the Federal Reserve) expect many of these price hikes to be short-lived (“transitory”) as output increases to reduce the bottlenecks.  In fact, roughly 90% of the CPI increase was accounted for by reopening price rebounds and supply disruptions. By far the largest contributor to the price rise in that category (accounting for over a third of the increase in the headline CPI) was used car purchases as new car sales were disrupted chip shortages. The other large contributor was transportation services, chiefly airline ticket sales. All the other categories (core services) barely budged. Despite three monthly increases, the 12-month increase in the shelter component, which constitutes nearly a third of the overall index, is still just 2.6%.

And add to this that as the supply constraints ease, year-over-year comparisons to the abnormal pandemic era are subsiding (May 2020 marked the pandemic low in the price index), the $300 federal enhanced unemployment benefit is expiring (many states have already ended it), many employers are re-opening offices, and school will soon be back in session.

However, while inflation might prove to be transitory, the longer-term path of inflation is still unclear and could depend on economic policy decisions yet to be made. Consider this. Inflation has been rising since last June, and yet the Fed has not changed policy one iota. It has been running monetary policy full steam ahead during rising inflationary pressures. Adjusting for inflation, monetary policy has become easier as the real Fed Funds rate (adjusted for inflation) has fallen from -1.1% to -4.4%. This is the result of their new policy framework not to raise interest rates preemptively but to seek maximum employment and deal with inflation later.

Given that “inflation is always and everywhere a monetary phenomenon” as famously said by Nobel laureate Milton Friedman, our goal as your advisor is to construct a risk-appropriate portfolio that will withstand any one of numerous economic scenarios that may unfold, including a scenario of high inflation.

One of my favorite quotes is attributed to Roman philosopher Seneca: “Luck is what happens when preparation meets opportunity.” At BFSG, we had already prepared our portfolio for an inflation scenario before coming into this year by reducing our exposure to long-term bonds, holding Treasury Inflation-Protected Securities (TIPS), initiating and adding to our gold position, holding international stocks denominated in foreign currencies, and having discussions with clients to reduce exorbitantly large cash reserves in low yielding savings accounts. We believe we will have an opportunity as inflation subsides over the next year to build these positions further and possibly add other real assets (i.e., real estate, natural resources, etc.). We believe our portfolios are prepared to meet the opportunity to enable our clients to withstand inflation and other challenges that will inevitably come our way.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.