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Making Sense of the Markets: November 2022

Economic news and the domestic markets can be confusing. With all the changes happening, it is important to stay up to date on the current developments and have a plan for the long term. Here are some of the main problems facing our markets today centered around inflation as well as tips for planning for the future of your portfolio.

Drivers of Inflation

Over the past 10 years, the Federal Reserve has been able to focus primarily on growth.
Over the past six months, their primary concern is on the second part of their dual mandate – inflation.

The point of higher rates is to slow economic growth, which in turn will slow the economy which is growing too fast. Rate hikes by the Fed have been aggressive with consecutive 75-basis point hikes to try and get on top of inflation as quickly as possible, but we expect that it will stabilize over the next six months with a slowdown to normal rate hikes of 25-50-basis points.

Back in the late 70s, we had similar inflation levels to today. Consumer expectations of forward inflation were also extremely high. Today, the Fed is trying to maintain low inflation expectations with its hawkish rhetoric and commitment to fighting inflation to avoid a repeat of the 70s where high expectations caused issues such as a wage-price spiral.

The Housing Market

Back in 2008, the housing market was one of the major causes of the financial crisis, and the market was hit hard as a result. But just because there is a threat of a recession does not mean housing prices have to fall off of a cliff.

Housing inventory is still at historically low levels. The way the market would crash is if there was more supply than demand. With housing inventory so low, there is still a healthy level of demand happening. For those who own homes, the housing prices likely won’t decrease that much. However, financing may increase. There is more than likely going to be some slowdown in housing activity and even some impact on prices, but we are not at the extreme levels we were at prior to the last great financial crisis.

It is important to note that housing is geographic, so the results can change based on location. Regions that were Covid-19 hotspots may see more of a decline in prices due to workers going back to the office.

Job Market Trends and Unemployment

At first glance, the job market and unemployment trends may look good to the untrained eye, but there are many ways to interpret this data. Right now, we have a low unemployment rate leveling at about 3.5%, which is the preferred rate by the Fed. There are about 10 million job openings, which is up from 4 million job openings pre-pandemic. This means that most people have jobs and there are many more available, which is great. However, wages are a big contributor to inflation, and additional demand on the labor market is driving up wages and causing another wage-price spiral.

The Fed wants to see job openings fall back down to about 7 million or less and unemployment to stay at about 4%1 to take pressure off the wage market and inflation, but that’s unlikely to happen. The reality will be that job openings will decrease and the unemployment rate will increase.

What We Can Expect Moving Forward

In the next six to nine months, we may see a recession. We also may not. The talk of a brewing recession is showing that the Fed’s goal of slowing down the economy is being achieved and their hawkish policies are working.

Right now, we’re looking at low return rates. In the past when returns have been at significantly low levels, forward returns have tended to be above average. This bearish market shows that a lot of bad news has already been priced in. Things could still go lower, but in the next one to two years, dedicated investors who remain in the market will likely see above-average returns. Historically, the market has been skewed in favor of the investor in the long term.

It’s important to remember that often the best days in the market come after the worst days. As for your portfolio, to stay successful in the long term you should center your plan around our roadmap. This includes avoiding rash or emotional decisions with investing, becoming better informed on the market, assessing which strategy works for you, having a conversation with your advisor, and of course, committing to your strategy.

1 https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20220921.pdf

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