Quote of the Week
“Life isn’t a matter of milestones, but of moments.” – Rose Kennedy
Last week the stock markets had a nice rally. The S&P 500 was up +3.68%, the Dow was up +2.72%, and the Nasdaq was up +4.15%. Then today, Tuesday, the balloon was popped big time when the CPI (Consumer Price Index) came out for the month of August at +8.3%. The markets were expecting a modest decline in the CPI. It didn’t happen, so the markets are assuming that this gives the Fed a bright green light to keep aggressively raising interest rates. I agree. Fed Chairman Jerome Powell has said that he is going to “wring out” inflation no matter what it takes.
The surprisingly high inflation reading reported by the Labor Department on Tuesday, despite an easing in global supply chains, had contributed to a surge in prices earlier in the year and a -10.6% drop in the price of gasoline. With a resilient labor market supporting strong wage growth, inflation has probably not peaked, keeping the Fed on an aggressive monetary policy path for a while.
Consumers had to dig deeper in their pockets to pay for food, rent, healthcare, electricity, and natural gas. Food prices rose +0.8%, with the cost of food consumed at home increasing +0.7%. Food prices surged +11.4% over the last year, the larges 12 month increase since May 1979.
The Fed meets next Tuesday and Wednesday for their regular policy meeting. Financial markets have priced in a three quarter percent rate increase next Wednesday, with potential for a full percentage point increase according to CME’s FedWatch Tool.
According to Charlie Ripley, senior investment strategist at Allianz Investment Management, “It’s becoming more apparent to market participants that the amount of tightening from the Fed thus far has not been enough to cool the economy and bring down inflation”.
So what does this mean for your portfolio that we manage? It is clear that if Chairman Powell keeps raising rates, it will eventually slow corporate earnings growth which we certainly expect in the coming third quarter so we are staying away from the stock market. We do have a about 30% in bonds. This position so far this year hasn’t worked out well for us. We do expect that as the stock market continues its path downward, people will start to move from stocks to bonds which will help our bond positions. We also expect that as the economy slows longer term interest rates will begin to fall.
We currently have 50% of the portfolio in cash. Now, our allocation position is to lay low and stay out of the way until we get signals that the trend for bond yields are starting down. Then we will start adding to our bond positions. The stock market is somewhere far off in the distant future.
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These are Larry Lof’s opinions and not necessarily those of Cambridge, are for informational purposes only and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.
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