The investment market remains resilient amidst a backdrop of mixed economic signals. While corporate earnings have generally exceeded expectations, concerns about economic growth and persistent inflation persist. The tech sector continues to lead the rally, fueled by strong earnings and enthusiasm around artificial intelligence.
As we enter the month of September, the most important thing to watch is the Federal Reserve likely changing to a more accommodative monetary policy. Powell signaled strongly in Jackson Hole, WY that the time has come to adjust and start lowering rates. The market strongly believes the first rate cut will occur in Sept and in all likelihood a second time in December. It gets more hazy the further out we look, but the best guess is about a 2% decrease from current levels over the next 6 months.
The Fed is still trying to engineer a soft landing where the economy stays strong and rates normalize without entering into an economic contraction or recession. This would be very rare historically and is only possible if inflation continues to decline and the labor market stays relatively strong. The Feds most preferred inflation gauge recently showed an increase of 2.5% from a year ago, getting close to the target of 2%. While this sounds great, it’s important to keep in mind this is an increase from last year, not back to where prices were prior to this inflation cycle that started in 2021.
This chart shows in aggregate, prices are about 11% higher today than where they would have been if the trend had remained the same. The Fed is not trying to have deflation and get prices back on this trend, but rather to get back to an annual increase of 2% from current levels. This is important to note as it impacts ongoing cost of living and something we continually monitor for each of your financial plans.
Portfolio Allocations
Our portfolios remain positioned to take advantage of the current bull market in stocks and bonds with a current bias towards domestic growth companies. As rates adjust down, we will look to be opportunistic with each dollar and add structured income notes, private credit, and private equity where it makes the most sense.