Inflation, The Federal Reserve, Interest Rates, and the Markets

(Upcoming Webinar Information Below for More in Depth Conversation)

The Federal Reserve raised the Fed Rate by 0.75% on Wednesday (the 21^st) and was the fifth time this year along.  This has impacted mortgage rates, credit card debt, but has also had a large impact on both the stock and bond market. 

Last Tuesday, the 13^th of September, new inflation data came out for August; it wasn’t pretty and higher than the market had expected.  The market was expecting 8.1% CPI (Consumer Price Index Year over Year), it came in at 8.3%.  Month over month, the market was thinking inflation was ticking down instead it increased .1%.  As a result, the Dow Jones Industrial Average dropped 1,276 points.

For July’s inflation numbers, the opposite happened, inflation was slower than expected and the market had a nice pop off that news.

Here are a few highlights of Chairman Powell Press Conference after the meeting and announcement of rate hike on September 21st:

• Federal Open Market Committee is aware inflation poses significant hardship
• They are looking for compelling evidence inflation is easing
• Will be appropriate to bring rates down at some point (who knows when)
• Warns against easing up too soon as the Federal Reserve has backed off too soon prior
• Wages are up, but inflation is eroding those benefits

Economic Projections from the Federal Open Market Committee:

• Growth revised down to .2% in 2022, 1.2% in 2023 and 1.7% for 2024 which is below historic averages
• Unemployment rate bumped up to 4.4% in 2023 and 4.0% in 2024
• Housing market may have to go through a correction

Now what?  We believe the market will continue to be volatile at least through the end of the year.  We haven’t bought into the rally in the market like the one in August from July’s better than expected inflation data but didn’t sell out on the market drop on September 13^th.

We try to build portfolios for this prior to and make data driven decisions, not emotionally based ones. There are a lot of holdings in our portfolios in several “buckets” for the time frame of those invested dollars. We increased the cash in portfolios this spring to higher than I can remember levels and lowered our exposure to “growth” stocks last fall as we felt they were overvalued. 

We added more defensive holdings in utilities and consumer staples and are keeping cash, (aka dry powder) to buy if the market goes lower.  When we see a shift in the Federal Reserve’s aggressive stance and/or a couple consecutive months of a downward trend in inflation we will look for areas to use the excess cash.

The good news is with higher rates, we are seeing opportunities in owning individual treasuries and CDs that mature 1-6 months out and paying high 2% to 3% range.  It’s been years since we’ve seen rates like this. Historically these interest rates are still low, but an opportunity for some income finally.

Also, there are some structured notes that Lindsey and I discussed in detail on our August podcast (click here) as well as a new private real estate fund that we are digging deeper into that are some opportunities in this crazy year.

With all that said, we take our job managing your hard-earned money very seriously and know it’s hard on you with the volatility this year.  The Capstone Team/Investment Committee of Capstone take data and research from several sources to make decisions as well as compare our results to a number of others.  Is this approach perfect, absolutely not, especially looking with hindsight’s 20/20; we do review past decisions to inform our future ones along with new data and guidance.

We invest our own money and our family’s money in a similar fashion as we do our clients and take our duty as fiduciaries to heart.   If you want to review your risk, see what all is in your portfolio or just want to talk about all that is going on, call or email anytime.

There will be a live webinar on Wednesday the 28^th at 6:30pm MT with a Q and A at the end going more in depth on all the above.  Below is the link to join the webinar: 

Inflation, The Fed Reserve, Interest Rates and the Market Webinar 

Thank you again.

Ryan Turbyfill

Dow Jones Index can’t be invested in directly

https://tradingeconomics.com/united-states/inflation-cpi#:~:text=Less%20Than%20Expected-,The%20annual%20inflation%20rate%20in%20the%20US%20eased%20for%20a,%2C%20below%2032.9%25%20in%20July