Inflation Surprise

Inflation – like a tiresome house guest, has decided to stick around awhile

The recent August inflation report came in higher than expected (8.3% vs. the expected 8.1%).  This was unwelcome news to the stock market; it triggered one of its worse days in years.  Investors were hoping for a bigger drop in the inflation number as declining energy prices along with a reduction in supply chain bottlenecks had painted an environment where prices were anticipated to start to fall at a more rapid clip.  In the end, the continued elevation of higher prices all but guaranteed a 75-basis (3/4 of a percent) point hike by the Fed on September 21st (some observers had even been calling for a 1% increase).

Fed Watch

In his Jackson Hole speech last month, Federal Reserve Chairman Jerome Powell said that even though sustained interest rate increases will bring “some pain” to Americans, letting inflation continue for longer would be even worse.  It is likely the chance of Powell bringing more pain to the economy through sustained rate hikes will increase if September’s inflation report does not see a meaningful decrease.

Impact on Portfolios

Stock and bond markets will most likely remain volatile until it is clear that inflation is under control and interest rates have leveled off.  A recession is also more likely since the higher rates will dampen economic activity – if the Fed must raise rates much higher, in order to dampen inflation, the recession could be deep and painful.  All eyes will be on the next few inflation reports as they will drive the direction of interest rates, the economy, and the markets. 

Market prognosticators are split between how much further the Fed needs to increase rates, with some even calling for no more rate hikes as the economy is already showing signs of significant slowing, especially in the housing market.  As we review portfolios, we may begin increasing the duration of the bond holdings (increasing interest rate risk) as the risk adjusted returns for intermediate-term bonds is beginning to look attractive, especially if we are near the end of the rate hiking cycle.

Celebrating our 40th year

As Bond&Devick commemorates our 40th anniversary, we want to take a moment to thank you for the continued trust and confidence you have placed in our team.  Whether you have been a client for decades or just a few months, our objective is to help you achieve your long-term goals and dreams.  We look forward to serving you for the next 40 years.

The Bond&Devick Team