I would be remiss if I didn’t take a moment to acknowledge that this month’s market review is being released later than usual, and I would like to extend my apologies and appreciation for your patience and understanding.
While the reason is personal, it should be known that later this month, I will be undergoing rotator cuff surgery on my shoulder, which has been a source of constant and quite relentless pain. We’ve been very busy with year-end reviews to get ahead of the surgery. As a result, this month will be a bit briefer in an attempt to give you a timely update still.
Inflation Update
Last month we saw inflation numbers come in lower than expected, and the market rallied on this data point. This week will be rather binary concerning risk. The CPI data will be released tomorrow, and if it continues to show lower inflation, we believe the market will continue its rally. On Wednesday, the Federal Reserve will release its decision on interest rates, with the market pricing in another 50bps expected. On this front, the market could rally if this is the case.
Risk is binary at this moment because either we get the expected numbers and the market continues its rally, or we do not, and the market will likely retreat; it is very much a risk-on or risk-off proposition.
State Of The Markets
Last month we saw technical strength return to the broad US market for the first time in 10 months. That said, currently, the most recent retreat in the market over the last week or so does have us roughly back below the moving average by about 1.7%, so for this strength to continue, we do need to see the market rally from here in the next few days, or else we will need to reevaluate this allocation within portfolios once again. Also encouraging is that for the first time this year, we are also seeing technical strength broadly in other areas, including International, US Large Value, US Small, US Small Value, Financials, and High Yield Dividend Equities.
Looking forward, absent any new shocks to the system, inflation remains the most significant influence on the direction of the markets, in our opinion. If it proves to be stickier than we anticipate, the market will likely continue its downtrend.
While the US economy is undoubtedly slowing, layoffs have been somewhat subdued, and the job market and consumer spending remain strong. The latest snapshot of consumer health shows that the amount of money sitting in bank accounts remains historically high and will not be depleted until this summer at its current spending rate. As such, we believe it is possible we could avert a more severe recession for the first time in months.
The holiday shopping season will paint the picture for this next quarter and could be soft, and layoffs could increase after the holiday season. We are mindful of these possibilities and the market weakness that would likely follow. While Europe remains weak structurally, there is new stability concerning their currencies, which is a welcome and much-needed relief as the US dollar continues to soften against them.
The other significant influence on the direction of the world markets will be China’s approach to COVID lockdowns and what its numbers look like in the wake of any further easing instituted. While they cannot afford another outbreak that stresses their healthcare system, they (and the world) cannot afford such a major economy to be so hamstrung as the world attempts to recover from this pandemic more fully.
It cannot be stressed enough that this remains the most challenging environment we’ve witnessed in our 23 years of professional investing. As such, we continue to believe erring on the side of being more conservative is still warranted.
As always, we’re here for you, and if you have any questions about your portfolio or financial plan, please reach out anytime.