July Recap and August Outlook
July marked the best month for the markets since November 2020.
What happened after the rout of the first half? Some ideas:
It’s a bear market rally sparked by better-than-expected earnings.
Has Inflation peaked or is it near a peak, and the Fed is newly dovish after September, with lower rate increases in November and December and a decrease (!) mid-2023
The fly in the ointment? That pesky second-quarter GDP contraction could be interpreted as a sign that we are in or near a recession. But there are other, more positive data too. Let’s get into the data:
GDP decreased at an annual rate of 0.9 percent in the second quarter of 2022, according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP decreased 1.6 percent. The decreases were business-investment driven – consumers are still spending.
The personal consumption expenditures price index (PCE) rose 6.8% in June, the most significant 12-month move since the 6.9% increase in January 1982. This is the Fed’s preferred measure of inflation data
The employment cost index rose 1.3% in the second quarter and 5.1% on a 12-month basis, the highest increase since 2002. This measure is also closely followed by the Fed
University of Michigan Consumer Sentiment Index rose to 51.5 in July. This is an improvement over the historical June low of 50
What Does All of That Data Add Up To?
The province of the National Bureau of Economic Research (NBER) determines whether we are in a recession. They don’t just look at GDP. Given a broader range of data, including increasing GDI (gross domestic income), strong labor markets, and continued (if slower) wage growth, it’s possible we may not be in a recession. This is the view of Fed Chairman Powell from his remarks after the 75 basis point increase at the FOMC at mid-month. Even if we are in a recession, or if one is likely in the upcoming months, it may be mild and short. Chairman Powell telegraphed a possible 75 basis point increase in September but opened the “data dependent” door to potentially lower rate increases for the rest of the year.
The Fed is aware of the pain that fighting inflation is causing. Still, once it has achieved some “slack” in the economy – interpreted as lower employment – it may be willing to reassess future rate increases.
Remember, the Fed only has demand tools in its arsenal. It raises rates to lower investment, which puts downward pressure on growth, which impacts both jobs and wages and eventually lowers inflation. Inflation isn’t just demand-based. There is a significant supply component, which is still hostage to the invasion of Ukraine and ongoing supply chain disruptions.
The Smart Investor
The Fed uses the phrase “data dependent” to indicate that it will be revising its position on interest rate increases as the economy responds to the increases it has already enacted.
Fed Chairman Powell stated that the 25-basis point increase in March, a 50 basis point increase in May, and 75 basis point increases in June and July that have raised the Fed funds rate to 2.25%-2.50% may have created more economic slowing than is reflected in the current economic data. He termed it “in the pipeline.”
For the Fed, this means it may decrease rate increases if inflation declines and the job markets shows more signs of loosening.
But what does that mean for you?
Even if the Fed slows the pace of rate increases – rates are still going up
Investors are seeing a bounce in asset values, but the overall amount of volatility has increased, and that makes planning more challenging
And as consumers, goods still cost more, and any type of loan or debt is still more expensive
How should you prepare yourself for this to continue, at least to the end of the year?
Think about three dimensions of wealth planning:
Budgets and cash flow planning. Keep expenses on track or lower them, and tie income closely to short- and long-term goals. If you don’t have a cash flow plan, now is the time to get one in place
Taxes. You want to keep as much income as possible. Tax-loss harvesting, charitable giving, and Roth conversions are all measures to consider
Potentially avoid making big swings in your allocation – but look at incremental changes to rebalance risk or take advantage of opportunities
And finally, one big thing about mental and emotional health. Keep in mind that bear markets are generally short, and recessions end. Once you’ve done the necessary advance planning, don’t let the market volatility interrupt your life. As always, we are here to help. Please do not hesitate to contact Hampton Park Financial Planning.
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