More Treats than Tricks
Happy Halloween! We pulled off a nice trick this month with very strong gains across all stock funds. As we have reached November on an even year, the only focus for the markets will be on the upcoming mid-term elections. We have seen significant changes in our economy over the past 3 years. First, we faced the supply shocks brought about by COVID, then the labor shocks brought about by COVID and changes in the workforce, and now we are facing an energy crisis, because of the war in Ukraine. The politicians on every commercial are telling us how they will deal with all these crises. Whether they can find a solution is besides the point. There will be change this election, not in who will be running the country, I’m not a political analyst, but rather there will be change in how we are running the country once the mid-terms are behind us and a new understanding on our country’s future.
With the perspective gained from the efforts over the last 9 months, the Federal Reserve is going to have to make a choice between continuing to raise interest rates at its current pace or pulling back to avoid another round of negative GDP growth. For those unaware, we had a positive GDP this quarter after two negative quarters of GDP, so technically, we are in a recovery.
Consensus on the street and in the international markets is the central banks will reduce the rate at which they are going to raise interest rates. Already the inflationary target has been raised to 3.0%, moving the goalposts as it were. We simply cannot return to low inflation without a recession. Hence, interest rates will reach their peak sooner than expected, and investment will return to the stock market as pricing models are recalculated.
I expect year-over-year inflation to remain at 6-7% for the next 6 months with energy prices leading the way and a Federal Reserve holding steady on interest rates after the end of the year. This reset in higher prices will lock in the inflation we have experienced. The impact on the market will be mixed to slightly higher from month to month, provided there are no more unexpected shocks (i.e., additional energy or labor shocks). Overall, there will be a return to the stock market as investors attempt to find bargains. I see myself continuing to be long in the C Fund. Keep investing!
