Should I Invest When Markets Are Making New Highs?

Contributed by: Angela Palacios, CFP®, AIF®

While it may seem counterintuitive, the answer can be yes! The chart below shows forward returns for the S&P500 when investing on days when the market is making new highs. The green bar shows the average forward returns when investing on a day the market makes a new high, and the gray bar shows the forward returns on average when investing on any day. You might be surprised to learn that the outcome is usually better when investing when markets are making new highs!

Think about timing the market less and focusing more on your short- and long-term financial goals. Deciding when and how to invest is more nuanced and needs to be tailored to your situation rather than focusing on short-term market fluctuations. If you are uncertain about the best course of action, ask your financial planner!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author, and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

Q3 2023 Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

The third quarter of the year has brought some downside volatility with it. While it can be concerning when opening your statement, it is important to remember that minor pullbacks are very normal throughout the year. August and September are, historically, the toughest months on average for markets, as shown by the chart below. The good news is that the last quarter of the year tends to be one of the strongest on average.

Over the past quarter, investor mood has shifted. The S&P 500 ended the quarter down 2.08%. A diversified portfolio ended the quarter down 2.63% if using a simple blended benchmark of (40% Barcap Aggregate Bond index, 40% S&P 500, and 20% MSCI EAFE International index). Quarters like this make it challenging to remember why you want to continue holding a diversified portfolio. Periods like that of 2000-2008 are a distant memory for most investors (and many have never experienced investing when U.S. markets and technology companies have struggled). If you dissect the returns of the S&P 500 year to date, you can see that most of the returns have come from the media dubbed “Magnificent Seven.” In reality, the remaining 493 companies in the S&P have contributed only about 2% of the positive 13% in year-to-date returns. The chart below shows how just these seven companies are responsible for most of the returns.

Source: Morningstar Direct

Maintaining a balanced approach to investing is important, as most of us are investing over a lifetime. While diversification may not always work over short periods of time, studies show it to be a successful strategy over the long term.

What contributed to volatility this quarter?

Higher intermediate and long-term interest rates have spelled trouble for equity valuations recently. The Federal Reserve (the Fed) did not raise rates in September but signaled that they are likely to raise one more time this year and are unlikely to cut rates in early 2024. This has caused longer-term bond rates to increase drastically over the summer (about 1%). We have continued to maintain our allocation to short-duration bonds, which has helped over that time period.

Higher interest rates contribute to equity volatility because investors view all asset classes through a risk/reward lens when determining where best to deploy money. When interest rates are low, investors are incentivized to reach for yield in equities as they pay an attractive dividend (more than treasury bonds were paying for a long time!). You also have the added upside potential of capital appreciation. When you can get interest above 5% in a money market or CD with extremely low risk, investors are less incentivized to invest money into equities, as most of the return needed to achieve long-term goals can be earned with little to no risk! Rates usually don’t stay elevated like this for very long. On average, the period between the last interest rate increase by the Fed and the first interest rate cut is nine months in historically similar periods. So don’t expect these high rates with no risk to stay around long.

Political brinksmanship is yet again holding the economy hostage to further both sides’ political agendas. The government averted a shutdown with only hours left but kicked the can down the road, so we may hear about this again in November. Like with the debt ceiling, we have been here before. The good news is, generally, shutdowns don’t coincide with recessions. There is a lot of noise and, usually, short-term volatility but not a longer-term impact on markets or the economy. The longest shutdown was 35 days at the end of 2018. While it created some temporary market fluctuation, it did not cause a larger economic issue. At that time, the economy contracted about .2% that quarter but got that back the following quarter because government employees get back pay once things open back up. Moody’s, the final of the big three debt ratings agencies to have the U.S. rated AAA, is questioning their AAA rating on U.S. government debt because of the behavior of the politicians. 

Economic Growth is slowing

While Taylor Swift’s Eras Tour is coming to a close and noticeably adding to the local GDP of the cities she performs in, the rest of the economy might be better described by her song “Death By A Thousand Cuts.”

The consumer is out of extra money (one can only buy so many $90 concert t-shirts). The chart below shows how families had stockpiled excess earnings and government transfer payments from the COVID shutdown but have spent this excess savings over the past two years.

The UAW strike will continue to impact numbers like the above chart. As the strike expands, so does the risk of increased shutdowns and layoffs spread throughout the economy. It remains to be seen how long the strike will continue and, thus, how much of a negative impact on GDP it will have. While this strike will have economic consequences, it is only one industry. While there could be spillover if it goes on long enough (for example, people may go out to eat less if they are on strike and not earning their full wages), the UAW strike shouldn’t single-handedly be the cause of a recession.

Home affordability will continue to be hurt by high-interest rates.

Student loan payments restart in October, pulling more money out of the consumer’s pocket.   

Jobs are strong, but job openings are pulling back.

These items, or something yet unknown, could be the tipping point for the economy to turn over into recession in early 2024. Most don’t realize we have already been in an earnings recession this year. This is classified as two or more quarters of contraction in earnings from the prior year. S&P 500 companies have experienced this as a whole this year. Equity markets are certainly spooked about this and are reacting accordingly now, even as the Fed tries to engineer a “soft landing.”

What is a soft landing?

In short, very rare. Ideally, the Fed will stifle GDP growth enough with higher rates to bring down inflation but not stifle so much that growth turns negative. Rather, it just slows down, avoiding a recession. They are counting on the strength of the labor market to remain, keeping the economy out of recession. Only time will tell if the Fed will need to keep rates higher for longer to put the inflation genie back in the bottle. They have come a long way in fighting inflation, as it was just a year ago that we were talking about 9% inflation, and now we are below 4%. The easy sources of inflation have been targeted and curbed (think supply chain shortages), so now it is time to let high interest rates work their magic throughout the economy.

Politics

The Speaker of the House, Kevin McCarthy, was ousted in a 216-210 vote, with 8 Republicans joining the unified Democratic vote. Patrick McHenry is serving as the temporary speaker, who is well respected in the house and should provide good leadership for now. Since we are well into the congressional term, proceeding without a formal leader shouldn’t be too disruptive to normal functioning as committees have already been formed and a rules process adopted. Electing a new speaker will, however, take valuable time away from working on funding the government past the November 17th deadline.

The media coverage is starting to pick up for the election in 2024. Undoubtedly, headlines will only pick up later this year and throughout next year. While there is no shortage of negative headlines during an election year, they tend to be positive for markets. Markets don’t care which party controls the white house. I think many view Republicans as being more pro-business and assume that returns will be far better than when a Democrat holds the office, but that isn’t true. The S&P 500 has gone up regardless of who holds the office most of the time. This is because markets focus far more on what is going on with the economy than on politics. American companies find ways to be innovative and successful regardless of who is leading the country.    

While all of this noise can create market volatility, keeping your long-term goals in mind is more important than ever. We do not generate future forecasts; rather, we trust in the journey of financial planning and a disciplined investment strategy to get us through the more challenging times and stay the course. We appreciate the continued trust you place in us and look forward to serving your needs in the future.

Please don’t hesitate to contact us for any questions or conversations!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Any opinions are those of the Angela Palacios, CFP®, AIF® and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not a guarantee or a predictor of future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Q2 2023 Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

While Federal Reserve (the Fed) policy, macroeconomic headlines such as inflation, and geopolitical uncertainty are themes investors continue to hear about, U.S. large cap stocks finished the first half of 2023 up 15.5%. It is important to look under the hood of these returns as they have been entirely driven by the market's largest stocks, with the top 10 companies in the S&P 500 accounting for over 95% of gains. Beyond the largest companies, performance fell off quickly. Developed markets equity (International) has had notable returns year to date ending over 11% in positive territory for the year so far. While their returns struggled to eclipse the top 10 companies in the S&P 500, international investments handily outpaced the balance of the companies in the S&P 500. Commodities struggled the most as economies and production started to slow, and inflation is coming down (even though it is still elevated higher than we would like to see).

Much of the quarter was dominated by the banking sector headlines that cropped up at the end of the first quarter and debt ceiling negotiations in Washington. Two larger regional bank failures put the markets on edge, waiting for contagion to kick off this quarter. However, the backstop provided by the government and FDIC quickly seemed to curb potential contagion. Then all attention turned toward Washington dragging its feet over raising the debt ceiling, which led to intra-quarter volatility. As the U.S. government approached the date it was expected to run out of money to pay its bills, a deal was reached on June 1st to suspend the debt ceiling through January 2025 while cutting federal spending. As we mentioned in our previous commentary, this is the outcome that would likely occur as history has served as a guide for this. This agreement averted a U.S. government default ahead of the deadline.

The strong equity returns in the year's first half may have taken many by surprise. The question is, where do we go from here? Summer tends to be a time of weakness for markets, and a strong first half of the year could cause buyers to pause. It's not uncommon to see the market stop and gather itself and digest strong gains after they occur.

Higher interest rates

We have witnessed a large amount of excitement surrounding higher interest rates in CDs, money markets, and short-term treasuries. While this is great for money, we need to keep liquid for a shorter-term need or a place to park cash while implementing a dollar-cost averaging strategy; it is important to not give up on investing in a diversified portfolio. When rates were attractive in the early 2000s, it may have been tempting to divert some of your equity investments into cash equivalents rather than invest in the S&P 500 during a recession and continue with this throughout the years. But the opportunity cost is high. The chart below shows how investing $12,000 per year into equities, whether perfectly timed or the most poorly timed, outweighs diverting excess additions beyond need into cash equivalents. Even the worst timing over the years ended up well ahead of cash equivalents.

So, what has happened in the shorter term after times when CD rates peaked and seemed their most attractive? The chart below shows 12-month forward returns for different asset classes after rates peaked. While they may offer the added protection of FDIC insurance, notice that the 6-month CDs never returned more than the peak rate. This makes sense, as you are locking in a rate. The dark blue is the U.S. bond index, the light blue is high-yield bonds, and the green is the S&P 500. As you can see, the other asset classes returned far more than the CD rates 12 months after rates peaked in most of the periods shown below.

Again this reiterates the point not to allocate more than is appropriate for you into short-term fixed strategies.

Check out the video for an economic update!

This summer, all eyes will be on the next Fed decision when the FOMC meets at the end of July. In June, the Fed decided to pause and let the economy digest the drastic rate increases of 2022 and earlier this year. They did signal that we could likely see up to two more rate hikes this summer/fall. The U.S. economy still looks strong, so the FED feels they have room to continue to increase interest rates, even though at a much slower pace to get inflation under control. GDP growth worldwide continues to hold up, signaling we aren't in a recession yet (see the chart below). The Fed will continue to remain very data-dependent when determining their next steps, but the risk is rising that they will overtighten and push the economy into recession.

While the taxable bond yield curve remains strongly inverted, the Municipal bond yield curve is less inverted. This means that investors are better compensated for moving out longer in duration. For those in a higher tax bracket, municipal bonds can provide attractive taxable equivalent yields.

Continue to expect some volatility through the summer as markets digest hefty first-half returns, and we learn more regarding future interest rate action. A sound financial plan and regular rebalancing, when needed, help bring a portfolio through uncertain times. We are here to answer any questions you might have! Do not hesitate to reach out! Thank you for the trust you place in us each and every day!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Any opinions are those of the Angela Palacios, CFP®, AIF® and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not a guarantee or a predictor of future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Q1 2023 Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

The year has started much stronger than it may have felt so far. Growth-style investments trounced value-style investments as tech names came back into favor. International development beat U.S. while EM equity lagged, which was contributed by a weaker U.S. dollar. Small company stocks lagged large company stocks mainly due to a heavier technology exposure for large company indexes like the S&P 500. In contrast, the smaller company indexes had a heavier weighting in financials. The Morningstar asset allocation category of funds had 50-70% stock and 30-50% bonds, so on average, a 60% stock/40% bond allocation was up about 3.9% in the first quarter of the year.

Speaking of financials, Silicon Valley Bank (SVB), a lender to some technology companies and startups, became the largest bank to fail since 2008. Signature Bank became the 3rd largest bank to fail within hours of the SVB failure.  

How did they get to the point of failure? SVB was a commercial bank that specialized in servicing the venture capital community. Over the last few years, there has been much activity in venture capital fundraising, and many deposits flowed into the bank in late 2020 and 2021. SVB's balance sheet at this time went from $70 Billion to $200 Billion, while lending was only a fraction of what they did. So they had excess levels of liquidity and took most of that money to purchase treasuries. Their intention was to hold to maturity, so while they didn't have credit risk exposure, they had a lot of interest rate risk. During 2022 they experienced deposit outflows as venture capital companies were experiencing a lot of spending outflows and not as many inflows. At the same time, interest rates increased, causing unrealized losses in these bonds. As money continued to flow out of the bank, this caused a liquidity issue which forced the bank to sell treasuries at a loss to meet withdrawal demands. So ultimately, high amounts of interest rate risk and sector concentration were the main reasons for failure.

What about contagion? It's important to remember that banks do fail almost every year. Usually, they are caused by Fraud or mismanagement. But there are times when something bigger is going on that can cause multiple banks to fail. In the chart below you can see the largest amount of failures happened in the 1980s due to the farm crisis, oil prices, and the S&L crisis. The great recession was another big wave of bank failures.

Source: https://www.bankingstrategist.com/history-of-us-bank-failures

In the case of the most recent failures, the government acted quickly over the weekend to create policies to back-stop banks that may need to sell treasuries to meet customer withdrawals. These policies allow banks to take cheap loans backed by those treasuries for a short term to meet depositor withdrawal demand if needed without booking losses.

Are my deposits with you covered by FDIC? We diligently review FDIC coverages for our clients. If you're unfamiliar with the Raymond James Bank Deposit program, here is a primer. One account at Raymond James through the Raymond James Bank Deposit Program (RJBDP) can provide up to $3,000,000 ($6,000,000 for joint accounts) of total FDIC coverage. Raymond James does the work behind the scenes as available cash is deposited into interest-bearing deposit accounts. RJ uses a waterfall process to ensure higher cash levels for clients than the traditional limits. With the Raymond James Bank Deposit Program, uninvested cash is deposited into interest-bearing deposit accounts at up to 20 banks, providing this increased FDIC eligibility.

Raymond James will deposit up to $245,000 ($490,000 for joint accounts of two or more) in each bank on a predetermined list. Another way to qualify for more coverage is by holding deposits in different ownership categories (account types such as an individual account, a trust account, and an IRA all qualify for their own FDIC coverage).

Is my money safe in Raymond James Bank? Questions about how Raymond James is positioned in this stressed environment? Watch this video.

Cash management is a much more active process than in the past. Short-term treasuries, Certificate of Deposits, and money market mutual funds offer attractive rates for the right investor. While these options don't carry FDIC coverage, they shouldn't be ignored. Talk to your advisor to explore what might be right for you if you're carrying large cash balances at your bank with no immediate need of utilizing the cash.

The U.S. government is close to its limit (Debt ceiling), where it can no longer borrow additional funds. Several months ago, Congress had to begin using "extraordinary measures" to fulfill some obligations, and the clock is ticking for them to be able to come to an agreement and raise the debt ceiling so that spending can continue without pause. Estimates show these measures run out as early as June. The issue is typical (see other times when the debt limit was raised in the graphic below), but a divided Congress can make the issue more contentious. The main holdup is that Republican opponents want to see spending cuts before the ceiling is raised, and spending cuts are not easy for anyone to agree upon. 

https://www.pgpf.org/analysis/2023/01/debt-ceiling-update-whats-at-stake

Expect volatility as deadlines to meet obligations approach and the market's price is in more uncertainty. The direct impact and potentially biggest worry for investors is the risk of the U.S. government defaulting on its Treasury debt. Additional pain in the form of spending cuts would have a direct economic impact, with uncertain outcomes and hard decisions being made on where to cut the spending. There is no way to predict the future, but history as a guide would suggest a deal is reached and the ceiling is once again raised as it has been every other time the issue has come up in our lifetimes. We lean on diversification, conservative portfolio positioning, and a sound financial plan during times of uncertainty, and we're always here to answer any questions you might have on the topic.

Is ESG Investing Political? Check out our upcoming webinar on April 19th!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Any opinions are those of the Angela Palacios, CFP®, AIF® and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not a guarantee or a predictor of future results.

A 2022 Snapshot

Contributed by: Angela Palacios, CFP®, AIF®

Diversification

• The S&P 500 ended 2022 negative by 18.11%, while the Bloomberg US Aggregate Bond Index was down 13%, and international investments, as represented by the MSCI EAFE, were negative by 14.45%

• Stocks and bonds both being negative for 12-month returns is exceptionally rare and has only occurred in 2.4% of 12-month rolling periods in the past 45 years.

• Many well-known target data and diversified strategies allocated roughly 60% stocks and 40% bonds down in the 17-18% range for the year. (Source: Morningstar)

Fixed Income

• The Federal Reserve raised interest rates seven times in 2022 to combat inflation.

• Interest rates moved from 0-.25% all the way up to 4.25-4.50%

• This year's sharp increase in rates and, thus, negative performance in bonds has been an anomaly and is unlikely to repeat.

Volatility Driven By

• Russia/Ukraine conflict has lasted far longer than anyone had predicted.

• Inflation is retracing its steps stubbornly slow.

• Interest rate increases.

• China's zero covid policy up until their elections. They then moved from one extreme to the other by relaxing all restrictions following unrest from the population. Now, they are dealing with a wave of Omicron hitting the population.

• Cryptocurrency woes.

Elections and Politics

• Split congress suggests there will be no major legislation this year. Gridlock is usually positive for equity markets, but debt ceiling expansion could cause a standoff, and we may hear rumblings of a government shutdown in the fall. In the past, this has not had a long-term impact for markets.

• Secure Act 2.0 – Check out this blog written by Kali Hassinger for more information. We will also take a few minutes to review the changes at our upcoming investment event.

Interest rates

The biggest story of 2022 has been how drastically the yield curve has shifted. Check out the chart below showing where the yield curve was at the end of 2021 (Dark gray line) and where it finished in November this year (blue line). The shaded area shows the range of the yield curve over the past ten years. Not only is the yield curve no longer upward-sloping, as it is currently inverted, but it also sits near the high end of yields we have seen over the past decade. While this created short-term negative returns for bonds with both short and long duration, yields are again a meaningful part of future projected returns. Bonds continue to deserve a meaningful allocation in most portfolios.

Inflation

Another major headline of the year has been inflation. The Federal Reserve (the Fed) has shifted the yield curve aggressively by raising short-term rates this year in an effort to combat inflation. We are seeing gathering evidence of inflation coming down with improving supply chains and gas prices coming down. This evidence gave the Fed confidence to slow to a 50 bps increase in December as opposed to the string of .75% increases leading up to this past month. The most recent inflation reading came in at 7.1% for December. You can see in the chart below the month-by-month print of CPI throughout 2022 influencing the Fed decisions.

Looking under the hood at what drives inflation numbers, we can see port congestion has also improved, which is a lead indicator of inflation. Remember in early 2022 when I shared a chart showing 100+ ships waiting to get into the Port of Los Angeles and Long Beach? Now, it hovers below ten – bottlenecks are reducing. The chart below shows the relationship between slower delivery times (blue line) equating to higher inflation (gray line) and vice versa, with faster delivery times equating to lower inflation. 

Chart of the Week: Source: BLS, S&P Global, J.P. Morgan Asset Management.

We should see inflationary pressure continue to lessen in the coming months. A reversal of China's zero Covid policy will also start to decrease delivery times of items coming out of China.

Consumer trends are also a leading indicator you can watch, and right now, they are walking a thin line as credit card balances are at all-time highs while savings rates are at all-time lows. This can not continue perpetually, so as consumers slow their spending, we should see inventories build and prices decline as retailers struggle to clear shelves.

As the Fed tries to move toward a target of 2% inflation, risks for the Fed's overtightening are my next worry. Tightening too much could determine if the economy goes into a recession and how deep of a recession. While a mild to moderate recession is likely priced in now, it is important to remain defensive with a well-diversified portfolio.

Housing Affordability and Inflation

With mortgage rates rising, many worry about home affordability and a retreat in home prices. While higher rates do not impact existing mortgages, they will impact new mortgages. People will be less likely to sell their homes as their rates are locked in at such low levels, meaning there will be a lack of homes on the market for new household formation. Typically, when the U.S. falls into recession, housing drops with it. Most of us remember home values falling swiftly and significantly during the Great Recession. A drop like that is unlikely to occur this time, as there are many factors that are different now. Mainly, there is not a glut of homes as there was in 2008-09. Demand for homes is still much higher than the supply due to the lack of building over the past decade, so while prices may come down from current levels, they will not be by much.

2023 should bring with it continued inflation relief and the potential for recession. We continue to remain cautious by holding a shortened duration in our bond portfolios and holding some extra cash for a time when the technicals of the equity markets are pointing toward downside exhaustion and healthy bottoming activity. We continue to rebalance as needed, watch our trusted indicators, and maintain our process over trying to predict what is to come. We know investing in a year like 2022 can be challenging to stay disciplined through, and we are humbled and honored by the trust you place in us to guide you through these times. 

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Any opinions are those of the Angela Palacios, CFP®, AIF® and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Dividends are not guaranteed and must be authorized by the company's board of directors. Special Purpose Acquisition Companies may not be suitable for all investors. Investors should be familiar with the unique characteristics, risks and return potential of SPACs, including the risk that the acquisition may not occur or that the customer's investment may decline in value even if the acquisition is completed. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not a guarantee or a predictor of future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Q3 2022 Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

2022 has brought steadily worsened news weighing on both stock and bond markets for three consecutive quarters. The Russia/Ukraine conflict, higher gas and commodity prices, a strong U.S. dollar, China's zero covid policy, supply chain disruptions, high inflation, rising interest rates, a minimum effective corporate tax rate, recession fears, and Cryptocurrency crashes have all wreaked havoc on investor sentiment. According to the AAII investor sentiment survey, as of 9/30/22, investors were only ever more bearish at four points in the history of the reading (8/31/1990, 10/19/1990, 10/9/2008, and 3/5/2009). "Unusually high bearish sentiment readings historically have also been followed by above-average and above-median six-month returns in the S&P500."

Raymond James recently wrote regarding severe recessions, "Recessionary bear markets have historically contracted 33% on average over a 13-month span. We are already down 24% (as of 9/29/2022) over nine months. Timing an absolute bottom is extremely difficult when uncertainty and volatility runs high. The index often capitulates at the bottom, reaching a low in sharp fashion for a very quick period, with very rapid recoveries. On average, the S&P 500 is up 16% in the first 30 days of a recessionary bear market bottom." This type of snap-back rally is particularly important to participate in for the success of a long-term investment strategy and is extremely difficult to try to time. We encourage investors to remain patient and trust in the financial planning process that plans for times like these to occur. Asset allocation, diversification, and rebalancing remain core tenets of our process during these times.

The FED is making up for lost time

The Federal Reserve continues to aggressively raise interest rates with an additional rate hike of .75% in September, making it the third consecutive .75% rate hike in a row (June and July). I believe The Federal Reserve feels guilty for letting inflation get out of hand and not responding quickly enough, so they are taking aggressive action now and signaling that they will continue to do so until they see improvement. Inflation resulted in less reduction than was hoped for by markets in September. So, the Fed is not resting on the hope that inflation will come down on its own; instead, they are taking aggressive action to force it down. They have decided to proactively fight it in the form of higher rates by year-end nearing 4.3% (another roughly 1-1.25% increase from where we are now). 

Policy adjustments need to happen with an eye toward future economic conditions, not current ones. The FED action in September is aggressive enough that if we continue along their anticipated path, it suggests there could be trouble for the economy ahead. It is likely that this intensified upward push will start to slow the economy, sending us into a recession, or what many are calling a hard landing now. This is why markets reacted so strongly to the downside for the last half of September.

Inflation

Inflation is starting to come down, and it is just not coming down as fast as the Federal Reserve (not to mention consumers) would like. Gasoline prices have continued their downward trend since peaking in June of this year. While that has helped curtail inflation, it is a lagging effect. Housing prices and food are the most troublesome components now. With mortgage rates catapulting to the 7% range on a 30-year fixed market, many people are getting priced out of the housing market. This means housing prices will likely start to decline, meaning less pressure on inflation in the coming months. Check out the video portion of our commentary for more in-depth information!

Bonds, Certificates of Deposits, and Treasuries are in style again!

Just as equities have experienced a tough year, bonds have also shared their own headwinds. With interest rates increasing rapidly this year, bond prices have come down and affected performance. But bond yields are finally paying some pretty attractive rates, and the yield on bond holdings is rising. Some might ask: "If rates are up, why is my brick-and-mortar savings account still yielding only .13% on average?” Banks are slow to adjust the interest they are paying because they have ample cash on hand to lend out (not to mention borrowing has all but dried up at these higher rates). So they do not need to pay you higher rates to attract you to deposit more money.  

Russia

For the moment, there is a lot of uncertainty in Europe from the Russia/Ukraine conflict. Putin is a wild card, as we do not know when and how he will strike out on any given day. It seems like he should gradually be getting weaker, but we do not know how long this conflict will continue. If there is a policy change or leadership change in Russia, international markets could be in a much better situation. 

Strength of the U.S. Dollar

High inflation and high-interest rates to fight the high inflation have strengthened the U.S. Dollar versus most other currencies worldwide. Our strong currency means importing goods from the rest of the world is cheaper. However, there are drawbacks to a stronger currency for companies that source revenue from overseas. On-shoring the profits from foreign currencies back to the U.S. dollar acts as a tax (on top of the new minimum tax rate imposed recently by the administration) to the corporation that must do so, meaning less profits. Following is a chart of how much the U.S. dollar has strengthened this year versus the Yen, Pound, and Euro.

Source: Raymond James

Recession Fears

Still, no one has officially declared that the U.S. is in a recession. Two-quarters of negative GDP (both of which happened in the first and second quarters this year) is the traditional definition of a recession. Politics and mid-term elections coming up will impact whether or not we will hear recession rhetoric out of Washington, but the definition is pretty clear. The National Bureau of Economic Research officially calls a recession here in the U.S. It weighs jobs, manufacturing, and real incomes when assessing whether or not we are in a recession and not just real GDP, so this is important information to watch.  

What if we are in a recession?

The average drawdown for the S&P 500 for past mild/moderate recessions (as opposed to severe recessions in the statistic above) has been 24%, which is almost exactly where we ended the quarter. 

We also had already hit this level in mid-June before the recovery experienced through the remainder of the summer. Leading into this year's drawdown, we took several actions in portfolios, including rebalancing (since equities had such a strong run in the second half of 2020 and 2021), adding a real asset strategy to help hedge potential inflation, and shortened duration on the bond portfolio. If cash was needed in the coming 12 months, it was raised. 

Staying calm in the face of daily market volatility is not always easy. That is why we are here to help. If you are anxious, never hesitate to contact us with your questions!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Any opinions are those of the Angela Palacios, CFP®, AIF® and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Dividends are not guaranteed and must be authorized by the company's board of directors. Special Purpose Acquisition Companies may not be suitable for all investors. Investors should be familiar with the unique characteristics, risks and return potential of SPACs, including the risk that the acquisition may not occur or that the customer's investment may decline in value even if the acquisition is completed. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not a guarantee or a predictor of future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Summer 2022 Economics Summarized in 5 Charts

Contributed by: Angela Palacios, CFP®, AIF®

Is inflation transitory again? Transitory was struck from the Federal Reserve's language after inflation didn't dwindle for a few months. But depending on your definition of short and long-term, it could still be viewed as transitory. Headline inflation was lower than expected for July, and most of the reduction came from energy. You can see the breakdown by month below.

Source: JP Morgan Weekly market update, BLS, FactSet

Unemployment hits a multi-decade low. This equates to difficulty in the hiring process for firms. Job openings are declining, but there are still two job openings for each unemployed person.

Source: Raymond James Weekly Headings

Source: U.S Department of Labor, J.P. Morgan Asset Management. *JOLTS job openings from February 1974 to November 2000 are J.P. Morgan Asset Management estimates.  J.P. Morgan Guide to the Markets – July 31, 2022.

Mortgage rates spiked and are coming back down, helping the affordability of buying a home again.

Source: Raymond James Weekly Headings

Yield curve inversion continues to steepen. There's much focus on the yield curve as it's usually an early signal for the economy slipping into recession (although technically, this definition has already been met with two negative quarters of GDP). This spells trouble for banks as they have to pay higher interest rates on short-term customer deposits like Certificate of Deposits but earn less on mortgages, for example. This money-losing gap can prompt banks to tighten up on lending.  

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

The information contained in this letter does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Angela Palacios, CFP®, AIF® and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability.

How Do I Prepare my Portfolio for Inflation?

Contributed by: Angela Palacios, CFP®, AIF®

Inflation is common in developed economies and is generally healthier than deflation. When consumers expect prices to rise, they purchase goods and services now rather than waiting until later. Inflation has continued to trend higher here in the U.S. over the past year, and many are now asking, "Can this harm my portfolio's ability to help me achieve my goals?" Consider the following factors contributing to or detracting from the inflation outlook.

Our investment committee has discussed inflation at length for several years now. Here are some highlights from our discussion.

Factors influencing inflation in the short term and long term:

1. Large amount of monetary and fiscal stimulus

There has been a record amount of stimulus being pushed into the pockets of Americans by the government. The consumer is healthier than it has ever been and demanding to purchase.

2. Supply chain disruptions  

Due to shipping constraints or lack of manpower, companies can't make enough of many different products to meet current demand. Does this sound familiar? It should; because two years ago, all we could talk about was not having enough toilet paper and disinfectant wipes. People were paying high prices for even small bottles of hand sanitizer. Fast forward two years and the shelves are now overflowing with these items as prices have normalized. Once people have spent the money they accumulated over the past two years and can purchase the goods and services they want when they want to, demand will likely return to normal.

3. Starting from a very low base 

The point to which we are comparing current inflation is one of the biggest influences on the calculation. For year over year inflation, we were comparing to an economy that had very little to no economic activity occurring and was still digging out of the hole the pandemic created. When you compare something to nothing, it looks much larger than it is. Now we are starting to compare to a more normalized time, so we should see this number trend downward simply because of this anomaly.

4. Wage inflation 

One of the biggest factors in the lack of inflation over the past decade was a lack of wage inflation. We are now seeing wage inflation because companies can't hire enough people to meet the current demand for their goods or services. Wages are going up trying to entice people back to work. For many years, no wage inflation at lower-paying jobs has culminated in a resetting of wages recently (it is likely wages settle at a higher base than they were before, but it doesn't mean they will continue to rise at the pace they have been).  

5. A complete lack of velocity of money

While banks are flush with cash, they still aren't lending. Why? Because the banks, due to banking regulation changes over ten years ago, only want to loan large amounts of money to someone who is creditworthy. Creditworthy consumers are so healthy that they don't need to borrow money.

6. Technology increasing productivity

A large portion of the country increased productivity by reducing commute time via remote working capabilities over the past two years. Companies that would never have considered allowing remote work now find themselves reducing office space and making permanent shifts in working style. This is just one example of how growth in technology can increase productivity which, over time, puts downward pressure on prices. The Center is an excellent example of this. While our team is back in the office, we work a hybrid schedule of several days in the office and several days remotely.

It is important to understand what investments could do well if we are surprised and inflation is around the corner.

First of all, your starting point is very important. Are you starting from low inflation, or are your inflation levels already elevated? The answer is we are starting from a long stretch of time with very low inflation rates. So in the chart below, you would reference the lower two boxes. Then it would be best if you asked, "Is inflation rising or falling?” Low and rising inflation is in the bottom left box. You may be surprised to see the strong, average performance from varying asset classes in this scenario. Inflation that is reasonable and expected can be a very positive scenario for many asset classes.

The past year had inflation prints that many investors saw as unreasonable and unexpected. Stocks and bonds struggled because of inflationary pressures. If inflation starts to moderate, as I think it will, fear should start to diminish. In the meantime, commodity-linked sectors and countries benefitted through positions held in portfolios like real asset holdings. Diversification remains important!

Inflation assumptions are fundamental in the financial planning process. This is why it's important that we utilize Monte Carlo simulations, meaning we plan for some pretty bad scenarios in the planning process. If you would like to gather more insight or an update on your plan, don't hesitate to give us a call!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

The information contained in this letter does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Angela Palacios CFP® AIF®, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability.

US GDP Unexpectedly Gives a Negative Reading

Contributed by: Angela Palacios, CFP®, AIF®

As the U.S. Market entered correction territory (down 10%), another warning sign entered the state of the economy. Gross Domestic Product (GDP) for the first quarter fell at a 1.4% annualized pace. The definition of a recession is two consecutive quarters of negative GDP growth. Below is a great visual of the makeup of GDP growth this past quarter, so we can dive deeper into what is making up the negative number.

Source: Washington Post

The consumer continued to hold up its end of the bargain fairly well, contributing to nearly 2% of GDP growth as shown by personal consumption. But much of the drag this quarter came from an excessive amount of net exports (pink area), which are a negative drag to GDP. These imports were the largest ever on record this quarter as businesses worried about Russia’s invasion of Ukraine and front-loaded their imports. Also, consider that we are comparing against quarter 1 of 2021, which had a direct cash infusion by the Federal Reserve into consumers’ bank accounts. This quarter’s reading encompassed bad news like the Russia-Ukraine conflict and the biggest spike in covid cases ever here in the U.S.

All of this negative news has weighed on investor sentiment. This reading is typically a contrarian indicator, the AAII Investor Sentiment Survey, but has recently registered the worst reading since 1992. Readings were not this bad during the 2008/2009 financial crisis! Usually, a reading like this is contrarian because a market bounce generally follows it to the upside. 

So, which indicator do you follow to make investment decisions? Often we get mixed signals from markets. It is best to determine what is important to pay attention to and what might be noise so that you can have an action plan built ahead of time during periods of stress. This is no easy task and is one of the main mistakes made by do-it-yourself investors. Planning is in our name, and the importance never diminishes. If you have questions and need to speak with someone, don’t hesitate to reach out to us!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Angela Palacios, CFP® AIF ®and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Individual investor's results will vary. Past performance does not guarantee future results. Investments mentioned may not be suitable for all investors.

March FOMC Meeting: Rate Liftoff

Contributed by: Angela Palacios, CFP®, AIF®

“The best-laid plans of mice and men often go awry” is a nice way of saying bond market experts had beautifully laid out projections of interest rate increases for the rest of this year, but those projections have quite possibly been turned on their heads now that they are exposed to reality. However, the Federal Reserve (the Fed) began the potential upward march in interest rates with a .25% increase this month. 

Remember from my writing last year, the Fed increases interest rates in an effort to temper inflation. Recent events in Russia put the Fed in a difficult position because they feel pressured to move away from their ultra-accommodative policy. However, the longer the Russia/Ukraine conflict persists, the more unlikely it is that the US economy will be unscathed, as we are seeing with energy prices right now. Raising interest rates will not combat inflation caused by a spike in energy prices nearly as easily (not that it was easy before). It may even risk pushing the economy into a stagflationary environment (a period of low economic growth with high inflation).

The bonds markets have accounted for a large amount of these rate increases already (pricing six 0.25% rate increases in 2022, giving a 50% change of a .5% rate increase occurring at the next meeting in May). However, we are still seeing rates jitter up and down as bond markets try to digest rate liftoff coupled with inflation and the Russia/Ukraine crisis.

So while Chairman Powell is still standing firm that they will utilize increasing interest rates (approximately six more times this year) to combat inflation, plans can often change!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

This market commentary is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of the author and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss.