September was a terrible month in the stock market.
Investments reacted to the Federal Reserve raising interest rates while they tried to rein in inflation not experienced for 40 years. They have increased rates five months in a row or 3% during that time. They have said they will do whatever is necessary even if it creates some pain.
Yet, the stock market had two huge days to start October. This does not mean that it is time for a market recovery. This is probably similar to what happened in June when there was some relief rally and then the market retreated again.
Last week, Hurricane Ian caused an estimated $250 billion worth of damage. Whole cities were destroyed and many families lost all of their possessions. This tragedy has to have a negative effect on inflation. Auto dealers in the country were just starting to replace their inventories. Now, we have tens of thousand more cars that have been flooded and need to be replaced. Building materials, refrigerators and all other things now need to be repurchased. Buying all these things will cause new supply chain issues. If there is more demand for things, prices will go up.
Because of the war in Ukraine, we are donating billions of dollars of weapons and humanitarian aid. Putin has bombed many cities causing billions of dollars in damage. We live in an international economy. Other countries buy large amounts of U.S. products just like we purchase theirs. All of these demands will have to increase inflation pressures.
Wall Street is trying to encourage the Federal Reserve to slow the pace of interest rate increases. They are even suggesting that the inflation problem has been dealt with, if they will just give it time. I think that is wishful thinking. Everyone who has visited a grocery store or restaurant recently knows that inflation is real, and a costly problem.
Some elements of inflation, such as gasoline prices, are easier to deal with. Commodities move up and down all the time. Supplies can be increased and demand is variable. Structural increases in cost, such as wages, are much more difficult to reduce. The same is true of many other fixed costs. Some people were encouraged when job openings nationwide went down by 1.1 million in August. While this may be a start, there still are many more openings than applicants.
The Federal Reserve is not likely to give up the inflation fight soon. They have left interest rates low for too long. Last year they were calling inflation “transitory.” It is not their job to worry about stock values. There are some asset bubbles in the economy and bubbles can sometimes break.
The FED is in a difficult position. They must slow the economy and try to engineer a soft landing. Many economists predict that we will have a recession, most likely in 2023. How severe it may be is being debated. During recessions and slowing, economy corporate profits usually decline. This often depresses stock values. Since stocks have benefited from low rates for so long, they may land in a new lower range. There are lots of unknowns. Make sure your portfolio is allocated to handle whatever happens.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.