“Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.” – Ronald Reagan
By Morgan Christen
CFA, CFP, CDFA, CEO and CIO
Just as Ronald Reagan sang, inflation is a killer that needed to be tamed and the Fed deployed Jerome “Jacking Rates” Powell to whack the escalation. Many prominent economists opined that unemployment would need to rise to subdue inflation.
So far, however, the Fed has been able to pull off “immaculate disinflation.” That is a phrase we hear lately in reference to a central bank’s ability to bring inflation under control while not driving up unemployment.
Higher rates bring economic slowdowns. The data is mixed, as GDP has expanded just over 1% for the last five quarters (anemic). We are seeing some softening in employment, yet employers are still fighting for talent. Wage growth is slowing, workers are quitting less, but boomers are retiring with fewer younger folks to fill the void.
During the last meeting, Fed Chairman Powell stated they could have a few more rate bumps in store. But is the Fed currently looking at the correct metrics? As we see from Truflation, we are very close to the Feds’ 2% target level.
The Covid economic shutdown was totally out of the ordinary, and it should not be too surprising the current economy is not playing by the books either.
Workforces have shuffled, people work from home and governments gave away a ton of cheddar. This leveling of rates and reduction of inflation has allowed markets to jump in the second quarter as we will discuss below.
US equity markets posted positive returns across the spectrum with large growth stocks beating small and value stocks. As seen in the chart, the technology heavy Nasdaq outperformed the S&P 500 as well as the Dow Jones.
The S&P 500 does hold a healthy dose of technology, with the Dow tending to be more economic stalwarts. You will see the discrepancy in returns from the large growth and large value stocks in the “US Q2 return” chart.
International stocks were positive, however value stocks outperformed growth during the quarter. The emerging markets were mostly positive, with small capitalization stocks leading the charge.
The quarter saw interest rates increase along the curve. The Fed engineered short end of the curve saw a 50-basis point (bps) increase to 5.24% and the 2-year increased 81 bps to 4.87%. Longer out in the curve the increases were smaller as the 10-year increased 33 bps to 3.81% while the 30-year increased 18 bps to 3.85%. Quite a difference from a year ago when the Fed started their campaign to increase rates.
The commodity sector was off 2.56% for the quarter and off 9.61% for the one-year period, showing an ease in price inflation. Zinc and nickel performed the worst returning -18.10% and -14.67% respectively. Live cattle and soybean oil performed the best returning 10.80% and 10.26% respectively. Much like the mixed economic reports, we are both watching our cholesterol using soybean oil while simultaneously jacking it up with meat.
We will see if the Fed is able to pull off the immaculate disinflation, which will allow an economic soft landing. Looking out to the future, we are bullish on the US economy and markets.
As the GDP per capita shows, we are a productive group of people. Yes, there are bad things and continued improvements need to be made. But we are the most productive in the G7 and the most innovative. Science and technology will continue to disrupt and make our lives better.
We look forward to speaking with you and we thank you for your continued support.
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