KF Update – Markets and Inflation Thoughts Continued

5 Minute Read

Good morning, I hope this email finds you well and you had a nice summer.  I wanted to send along some of our continued thoughts around the markets and inflation.  If you have any questions, please do not hesitate to contact our office.

What is the latest on inflation?
Year over year inflation fell slightly in August from 8.5% to 8.3%, while expectations were for a drop to 8.1% due to lower energy prices.  While energy prices were lower, other parts of the Consumer Price Index, namely housing, outpaced expectations.  Here are the year over year numbers over the past 12 months: 

September 2020 – September 2021 – 5.39%
October 2020 – October 2021 – 6.22%
November 2020 – November 2021 – 6.81%
December 2020 – December 2021 – 7.04%
January 2021 – January 2022 – 7.48%
February 2021 – February 2022 – 7.87%
March 2021 – March 2022 – 8.5%
April 2021 – April 2022 – 8.3%
May 2021 – May 2022 – 8.6%
June 2021 – June 2022 – 9.1%
July 2021 – July 2022 – 8.5%
August 2021 – August 2022 – 8.3%

Source: US Bureau of Labor Statistics

How has the market been performing?
On the day of the August inflation reading last week, most major indexes fell by over 2%, and have been up and down since.  Even with the most recent downturn, the S&P 500 is flat over the past 4 months, and down just over 17% year to date. 

Long-term, the stock market has still been an excellent way to grow capital. 

Here is the performance of the S&P 500 over the past 10 Years:

Here is the performance of the S&P 500 over the past 25 Years:

Source: Kwanti

How long could this downturn last?
Markets are unpredictable so there is no way of telling, but until inflation shows signs of easing, we will most likely continue to experience this volatility. 

While we sometimes think “We do not have time to recover our losses,” historically markets have bounced back much quicker than anticipated.  The 2008-09 financial crisis, one of the worst in world history, took just 49 months (Yellowish Bar Below) for the S&P 500 to recover all of its losses.  Less severe recessions have recovered much quicker:

Source: LPL Research and CFRA Factset

Are there any positives to the markets and economy?

  1. Bond yields are rising, providing more income within client portfolios.  The 10-year treasury yield is currently over 3.5%.
  2. Corporations are flush with cash.  In your typical recession, companies turn to layoffs to help offset a drop in demand.  With an ultra competitive job market, corporations may use that cash to avoid significant layoffs and retain as many workers as possible.
  3. Higher US interest rates are leading to a stronger dollar, helping to make imports cheaper to purchase.  As a net importer of goods, this is a positive for the US.
  4. Moving away from the easy monetary policies of the last 13 years could set up our economy and markets for good things longer term.
  5. Stocks are trading at more attractive valuations. Here is the historic Price to Earnings Ratio of the S&P 500:

Source: https://www.multpl.com/s-p-500-pe-ratio

In Summary:
Tomorrow the Fed is expected to raise interest rates by another 0.75%.  It’s important to remember that the markets are leading economic indicators meaning this raise has already been priced into valuations.  In fact, the markets have already been pricing in the next raise as well, another reason it’s so difficult to predict when the markets will turn the corner.  In my experience, it’s usually during the worst of the economic news.

We will continue to rebalance client portfolios as opportunities arise, perform tax loss harvesting where it makes sense, and communicate to clients on a regular basis.

While these downturns can be unnerving, they typically lead to a more healthy economy by weeding out excess, poor monetary policies, and speculation.  Brighter days are ahead for those of us who continue to focus on that long-term perspective.

We hope you find this information helpful, and again, please do not hesitate to contact the office with any questions.

Clint & Renee

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