Kevin Ihrke, CFP®
My family and I took a road trip to Southwest Florida last month (part work, part vacation) and while my wife and I enjoyed the scenic view from the front seat of our car, our kids periodically called out from the back, "Are we there yet?" In total, the drive was a 3,054 miles roundtrip. Needless to say, we heard that question several times over throughout our drive.
The same can be asked of both the Federal Reserve's fight on inflation and a recession - which many on Wall Street said was imminent at the start of the year. The answer to that question for both the Fed and a recession is, "No, we're not there yet."
Inflation is down considerably from its four-decade high in June 2022. Even with the past 12 months of consecutive declines, the inflation rate remains above the Fed's 2% target rate. And in terms of a recession, 2023 has proven thus far to be a year of pleasant surprises for the economy.
Markets
Investors shook off the banking turmoil that was front and center in the first quarter of the year with the S&P 500 Index rising nearly 16% in the first half of the year. The Dow Jones Industrial Average was up 3.8% as of June 30th. And the Nasdaq 100 was the biggest gainer of the three major indexes, up almost 32% to finish out the first half of the year. Much of these gains have been fueled by "A.I." and large-cap tech. (More on A.I. next month!) A narrow sector of the market has led it to new highs for the year. It's not unusual for a handful of stocks to carry the broader market. Remember the big-name tech stock era of the past decade?
Should we see the breadth of these gains in equities expand into other areas of the market, we can feel more confident in saying a new bull market has arrived. Until then, the recent highs reflect a collective sigh of relief with cooling inflation, a recent pause on interest rate hikes, and an economy that has continued chugging along.
Inflation & The Fed
Top-line inflation continued its decline throughout the first half of the year. Year over year, the Consumer Price Index slowed to a 2.97% rise in June. That's down considerably from 9.1% a year ago. There's no "Mission Accomplished" banner in front of the Federal Reserve building just yet as core inflation (which removes food and energy) remains elevated.
After ten consecutive rate hikes, the Fed finally took a breather in June leaving the Federal Funds Target Rate at 5.00%-5.25%. The Fed has expressed willingness for two more rate hikes this year but appears to be in a "wait and see" pattern as current interest rates and tightening credit make their way through the economy.
Recession, Where art Thou?
Remember that recession we're supposed to be in right now? The one that industry pundits and economists have been predicting is just around the corner since the Fed began raising rates in March 2022 - well, it still hasn't arrived.
Non-farm payrolls have grown by an average of 278,000 jobs per month through the first half of the year. Unemployment remains at historically low levels, 3.6% as of June. GDP grew at an annual rate of 1.1% for the first quarter and latest estimates project 2.3% for the second quarter. And consumer spending is up over last year.
With more than two-thirds of the U.S economy comprised of consumer spending, should we see a significant pullback in the months ahead, it could be a sign of a recession to come. The Current Leading Economic Index, which anticipates future economic activity, fell for the 15th straight month in June indicating a deceleration of economic activity. With such a tight labor market though, whereby everyone who wants a job can essentially get one, I'm hard-pressed to see how or where a recession starts this year. At some point, we will have a recession. They are a natural part of the business cycle. The likelihood of a recession occurring this year though continues to wane with each passing month. Recent estimates by Goldman Sachs puts the probability of a recession over the next twelve months at 20%.
What's Next?
Active market participants are currently debating whether the market is getting ahead of itself given some of the macroeconomic headwinds and a current top-heavy market. But these same folks likely missed the recent stock market rally. This is a big reason to be a long-term investor: timing the market is a game of chance, it's easy to get left behind.
Having a financial plan and remaining focused on the long term allows an investor to avoid getting caught up in quickly changing narratives that could trigger emotional decisions. Emotional decision making can have detrimental effects on your long-term financial goals. The market volatility over the past three years has brought about an abundance of FOMO (Fear of Missing Out) and JOMO (Joy of Missing Out) headlines. The meme-stock craze, the meteoric rise of cryptos, and record levels of investors sitting in money market funds are all collective symptoms of FOMO and JOMO psychology.
Kevin Ihrke is a CERTIFIED FINANCIAL PLANNERTM professional. His firm, Investment Insights, LLC is located at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated. Comments and questions can be sent to kevin.ihrke@emailsri.com.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
These are the opinions of Kevin Ihrke, CFP® and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.