Disciplined Wealth Management - DWM

 

 

2024 should come in with double-digit gains! How did we get 74%, by following the data. We looked at all the annual S&P 500 returns starting in 1926, separating annual returns between secular bull or secular bear markets (Definition of secular market activities that unfold over long time horizons, or that aren't influenced by short-term factors.)

 

A surge in gasoline prices in August boosted consumer price growth both versus the prior month and versus a year ago. Core annual inflation continued to moderate, largely driven by slower price growth in core commodities prices, including another decline in used car and truck prices. The disinflation impact from used cars and trucks, however, is expected to dissipate in the coming months.

 

 

The market is currently in a secular bull market that began back in 2011. However, the past three years certainly does not feel as good as the first nine years. In fact, many investors are worried over the future and thinking of abandoning equites in favor of fixed income investments, which could be a timely and expensive mistake.

 

 

The collapse of Silicon Valley Bank, concerns over the health of less-regulated U.S. regional banks, and the Credit Suisse debacle begs the question, how have the recent stresses in U.S. banks spread to the rest of the world?

 

Consumers are heading into yearend with less cheer than in recent months. Personal consumption expenditures (PCE), the Fed’s preferred measure for inflation, ticked up 0.1% in November, the smallest gain since July, missing the consensus of a 0.2% increase. Real PCE, which adjusts for inflation, was practically unchanged, also its weakest showing in four months. Real durable goods spending dropped 1.5%, reversing most of the jump in the prior month, led by reduced spending on new vehicles.

 

Fed Chairman Jerome Powell’s speech at the central bank’s annual symposium in Jackson Hole, and following the most recent Federal Reserve meeting didn’t reveal much in terms of new information, but it did reinforce the Fed’s commitment to lower inflation at the expense of the economy. Powell said that restoring price stability would “likely require maintaining a restrictive policy stance for some time” and “require a sustained period of below-trend growth”. The remarks essentially quashed the hope for a Fed pivot, at least in the near term. 

 

 

Some investors may fear that the current predicament is similar to that suffered in the 1970s, when Federal Reserve Chairman Paul Volcker unleashed enormous interest rate hikes to quell runaway inflation.

Federal Open Market Committee (FOMC) and inflation

​

The cost of money has been ultra cheap for years. Yet the Fed has made it clear that containing inflation is Job No. 1 right now.

"The primary concern of the Fed is a full un-anchoring of inflation expectations which would then lead to a 1970s stagflationary environment," Joseph LaVorgna and Troy Ludtka, economists at Natixis, wrote in a Monday 3/14/2022 note to clients. "In response to such a development, the Fed may err on the side of causing a recession in order to further dampen already slowing demand with the intention of wringing inflationary pressure out of the system." 

Beneath the surface 
 

The S&P 500 roared back last week to notch a fresh record closing high, as concerns over the omicron Covid-19 variant eased. But a look under the hood may indicate the market isn’t fully out of the woods just yet. Goldman’s David Kostin noted that the market’s breadth has sharply narrowed since April. He said that just five stocks — Apple, Microsoft, Nvidia, Tesla and Google-parent Alphabet — account for 51% of the S&P 500’s returns in that time. The S&P 500 has seen a total return of 19.8% since April.

China’s Evergrande
 

The potential default of Evergrande, China’s largest and most indebted property firm, sent markets into a frenzy earlier last week amid concerns of another failure like Lehman Brothers during the financial crisis of 2008. The possible demise of Evergrande puts China’s economy, which remains fragile in the face of COVID, at further downside risk. Although we think that a Lehman moment is unlikely, the possible costs of restructuring and the risk of more defaults will add to China’s long-term challenges in achieving strong potential growth. 

Global Economy Roaring Ahead and Inflation

​

The global economy continued its strong path to recovery, expanding in May at its fastest pace in over 15 years, according to the latest global Purchasing Managers’ Index (PMI). Vaccination roll outs, the easing of stringency measures, monetary and fiscal stimulus, and the adaptability and resiliency of humans during the pandemic have contributed to the boom and broadening of the global economic recovery.