September 26, 2022

Wall Street Is Getting It

Getting what? That Jerome Powell is serious about hiking rates to tame inflation, even if it means a recession. Mr. Powell said, “I wish there was a painless way to do that. There isn’t.” And the US Federal Reserve isn’t the only central bank raising rates. It’s a global phenomenon. The ECB, the Bank of New Zealand, the Bank of England, and many others are hiking rates dramatically to combat inflation. The Fed raised rates by 0.75% last Wednesday to a range of around 3.00-3.25% and signaled that more stiff hikes would come. Most analysts think that the Fed will eventually stop at approximately 4.50-4.75% and then take a rest to see how the economy reacts. And all for a good reason: inflation has been the highest since the 1970s. The latest CPI reading showed prices for all items in August rising 8.3% year over year. Though lower than July’s 8.5%, forecasters predicted an easing to 8.1%. Less food and energy, the index rose 6.3%. Though the energy index increased “only” 23.8% vs. 32.9% for the period ending in July, the food index increased by 11.4% – the largest 12-month increase since May 1979.

The Consumer Price Index

What Does It Mean for the Economy?

A hard landing. A recession, perhaps a nasty one. What’s changed lately is the Fed’s own admission that inflation is out of hand, and it’s determined to get it under control, even if it leads to higher unemployment. The unemployment rate is still very low at 3.7%, and there are millions of job openings. However, that may change quickly as jobs can evaporate suddenly.

On the other hand, a recession may still be avoided – a so-called soft landing – as the Fed may be assisted by relief in supply chain bottlenecks and labor force participation. If more sidelined workers return to the labor pool, upward pressure on wages should subside. We’ll see.

What Does It Mean for Stocks?

This summer, the stock market flirted with the idea of a “pivot” where the Fed would soon stop hiking rates as inflation peaked and might even start to cut rates in early 2023. That notion ended with the latest CPI readings. Inflation has not peaked, and the Fed is getting nervous. Growth stocks took a big hit earlier in the year as higher rates are bad for growth stocks since so much of their earnings are in the future. The longer you wait for earnings, the less significant they become as higher rates eat into their value. Now investors are concerned about profits for all companies. Will we see a recession? How deep will it be? How long? As of Friday, the S & P 500 is down 22.5% year to date. Nasdaq is down 30.5%. Oil dropped below $80 per barrel. Bitcoin fell to $19,128 – down over 70% from its all-time high reached last November. Yields on the 10-year US Treasury reached 3.69% – the highest since 2010.

What To Do?

In my last piece on July 15, I advised anyone who needed money in the next six to twelve months to take it now. It still may not be too late. However, hopefully, the rest of you are buckled down for the long haul. The market will come back. I don’t know when. You have to ride through these times. I expect things to get worse before they get better. These are anxious times. But think about the following:

• When will you need this money?
• Do you need all of it right now?
• What would you do with your cash, if you could get your money back?
• Will companies like Google, Apple, Walmart, and many others go to zero?
• Focus long-term
• Look out to the horizon and ignore the noise today

Also, remember that none of your portfolios are 100% stocks. Your portfolios are well diversified across many different asset classes. There is safety in that. There are always places to go for cash – positions that haven’t fallen or not much. Knowing that you have access to money will allow you to sleep better at night and survive this bear market. Hopefully, we’re closer to a bottom now, and don’t forget, stocks will eventually be a bargain, and it will be time to add to your positions. The fourth quarter tends to be a good one for stocks.

Please let me know if you have any questions or concerns.

Sincerely, 
Henry 

Henry Gorecki, CFP® 
HG Wealth Management LLC 
401 N Michigan Ave, Suite 1200
Chicago, IL  60611
312-723-5116