There is a popular kid movie where the lead character is first learning how to steer her boat by looking at the sky, the stars, and the horizon. It’s a comical scene, one that sets the stage for the leading character to ask for help from the snarky, muscle-headed, "demi-god" - the other lead character.
Clearly, the people determining monetary policy don’t have much of a clue about what’s on the horizon…or even if they’re going in the right direction. What Jerome Powell says publicly can have significant effects on our economy, so it’s important that he choose his words. But…
“Just look at what the Fed chair also said on Friday toward the end of his speech. Considering the path of inflation over the past year, strong U.S. gross domestic product ("GDP") this year, still-low unemployment, and the Fed and other central banks' goal of 2% inflation, Powell said,
‘These uncertainties, both old and new, complicate our task of balancing the risk of tightening monetary policy too much against the risk of tightening too little. Doing too little could allow above-target inflation to become entrenched and ultimately require monetary policy to wring more persistent inflation from the economy at a high cost to employment. Doing too much could also do unnecessary harm to the economy.’”[i]
Pure genius. (Rolling my eyes)
Based on what we’ve heard thus far, here are a couple of things I see on the horizon.
First, we will likely see more rate increases and it will be a long time – maybe a year or more – before we see rates cut at all. “Consumers remain a key support to the U.S. economy, so far buttressing against recession in the face of higher interest rates.
“Looking ahead, the consumer picture is less clear. On the one hand, rising delinquencies, high debt service costs, the erosion of pandemic era savings, and the resumption of student loan payments are looming threats for the main engine of the economy. Conversely, many Americans are finally seeing their wages rise faster than inflation, strengthening household purchasing power. In short, the consumer’s resiliency may be tested over the coming months.”[ii]
I believe the Fed will move interest rates higher than people think now, stay high longer than people believe, or both. There will be lots of press about the Fed’s moves in the coming months. Much of that press will sensationalize what’s happening financially in our country.
Resiliency is our key. We’re not planning to put our heads down and just power through without thought of the pathway. But we are determined to weather these headwinds as proactively and risk averse as possible.
Second, there will likely be a pullback on equities and volatility in the market could result in a downturn within the coming months. I still expect a mild recession, and just about everything I’ve read points in that direction. This year, we’ve also seen “increased dispersion of earnings-per-share during the past earning season, Chinese economic weakness, and some good old-fashioned profit taking.”
From what I’m seeing today, this pullback could mean the S&P 500 ends the year below 4,000 – maybe closer to 3,900.
Finally, there are a couple of other indicators that the economy is slowing. “Sales of previously owned homes in the U.S. declined in July, reaching their lowest level since the start of the year. Short supply and higher borrowing costs dragged sales down more than 18% year over year. Contract closings fell 2.2% from the previous month, nearing the slowest rate since 2010. High mortgage rates and inventory woes are pushing potential homebuyers toward new construction – and even complete withdrawal from the market.”[iii]
All in all, I like this summary of what’s to come:
“Recessions are ultimately about mistakes, about too much optimism given underlying economic conditions and the need for economic activity to adjust back downward. Consumers are soon going to be without the temporary extra purchasing power generated by COVID spending programs. Meanwhile, businesses are facing labor costs that continue to escalate faster than justified by productivity growth while business investment looks poised for a correction.
“In addition, the government policies enacted in the last few years have not boosted long-term growth prospects and, although AI is a long-term positive, it is unlikely to generate enough extra growth in the short run to spare us a downturn.
“A monetary policy that is tight enough to eventually wrestle inflation down to 2.0% doesn’t make for a pleasant economic ride in the next year. The road is smooth today, but potholes are ahead.”[iv]
Please reach out if you’d like to have a conversation about your portfolio.
And please share this newsletter with friends, along with an email introduction. If they’re important to you, I’d be honored to talk with them about their financial future!
[i]https://stansberryresearch.com/articles/the-other-day-in-jackson-hole-and-amsterdam - 08/28/2023
[ii]https://www.cnr.com/insights/market-perspectives/august-2023.html - 08/28/2023
[iii]https://stansberryresearch.com/articles/morning-briefing-the-economys-mixed-bag-outlook - 08/23/2023
[iv]https://www.ftportfolios.com/Commentary/EconomicResearch/2023/8/21/where-is-the-economy - 08/21/2023