Client Conversations with Wealth Management
Many clients have questions about how today's market conditions will affect their finances and investments. At CRBT, we continue to evaluate the market to give sound advice to our clients. Take a look at a few common conversations we've been having this year:
Where are interest rates headed?
The Federal Reserve has raised the fed funds rate several times this year, including the largest one meeting increase since 1994. At the most recent meeting, the Fed raised rates 0.75% again. Market expectations now are centered on a 0.50% increase at their September 21st meeting. As interest rates rise, bond prices fall, particularly mutual funds and ETFs. We think the best course of action continues to be a higher cash balance within the Fixed Income portion of the portfolio, paired with high quality individual bonds that are held to maturity. There may come a time prior to the end of the year where extending duration makes sense for clients. It is looking increasingly likely that 2022 will be a second straight year of negative bond returns and has the potential to be one of the worst years on record.
Will inflation reverse course?
Inflation is at its highest level in four decades and the June report showed CPI at 9.1%. There has been optimism by market participants that “peak” inflation has already occurred; however, the monthly reports have yet to indicate that. The good news? Oil has fallen below $100 a barrel from a high of just over $130. The Bloomberg Commodity Index experienced its 3rd largest 20 day fall in the last 90 years and now sits 15% off its high. Home and used car prices have started to level off as well.
Will the US go into recession?
There are several indicators pointing that direction. Inflation is at multi-decade highs, the 2-year and 10-year US treasury bond yields inverted (shorter rates had a higher yield than longer rates and has been a relatively reliable indicator), and Europe is likely headed into recession as a result of the Russia/Ukraine war. Looking at the stock market, the S&P 500 entered bear market territory (falling > 20%) and both the Nasdaq and small cap stocks have fallen over 30% from their highs. The good news? Earnings expectations still call for growth in 2022 and 2023. As a result of falling prices and strong earnings, stock valuations are at their most attractive levels in years. Also, the labor market is very strong with record job openings, historically low layoffs, and record quits (indicating people are comfortable looking for better jobs). Yes, 1st quarter GDP was negative and the 2nd quarter result was also negative (both largely due to inventory issues). Traditional market headlines are likely to call a recession on a second consecutive quarterly decline in GDP. However, the National Bureau of Economic Research (NBER, the official decision-maker of recessions) has indicated that they dig into the data more than that and in recent decades, real personal income (wages) and nonfarm payroll employment have carried more weight. It is hard to believe the US is currently in a recession while experiencing the fastest wage growth in decades and a record number of job openings per person looking for work (and near historic low unemployment). The headlines remain focused on consumer sentiment (the lowest on record for the survey, in over 70 years) and inflation. It certainly “feels” like a recession to many.
Despite all of the headlines discussed above, your financial goals should remain as the most important factor to consider when looking at your investments. If you would like to know more about how we are adapting to the current market conditions, or would like to discuss your individual situation, please reach out your CRBT Wealth Management experts at 319.862.2728.