The markets and the economy seem to have completely shaken off the trauma of the dramatic increase in interest rates of last year. The market, and our accounts, since last October have shown excellent performance by recovering all of the 2022 losses while reaching new highs. Each week and each month, there is very little new and earthshaking news that would alter a strong and positive economic trajectory. The economy continues to perform moderately well. There is very little that would exacerbate inflation or cause a slowdown. Labor and employment remains moderately strong as ongoing job creation continues while historically low unemployment is barely rising. Housing remains moderately strong as housing starts, building permits and existing home sales have all been very steady even with elevated mortgage interest rates. Consumer liquidity and consumer demand continue to support ongoing durable goods and consumer goods.
The greatest concern of the past year, inflation, appears to be reaching its end game. The latest CPI reports released this month show that while consumer inflation over the past year was 3.0%, the annualized rate of inflation for the month of June was only 2.4%. We are very close to a full retreat of post-covid inflation. This week the Fed has telegraphed that they will proceed with a minor .25% increase in the Fed Funds rate, but at this point the increase will be inconsequential to either the economy or the markets. The Fed will continue to monitor conditions for some months before declaring the war over and before reducing rates on the yield curve to a normal positive slope. This does not mean that rates will fall anytime soon back to the historic low levels of the past decade. Other banking system news is that any risk of banking contagion spreading from the previously two large bank failures appears to be contained. Stock prices of the previously deemed “at risk” banks are rising and returning to normal.
In regards to risk, one important ever present risk is that the economy is performing so well, and the markets have been rising so strongly, that the sweet spot simply cannot continue, that we don’t know what we don’t know and cannot foresee what we cannot foresee. What is new and different in the current environment, after many decades, is the newly emerging proactive stance of Congress to providing ongoing fiscal stimulus to the economy which in turn relieves pressure on the Fed to go it alone with monetary stimulus. This coordinated approach is something we have not experienced in quite a long time. The recent Inflation Reduction Act, the Chips Sciences Act, the Infrastructure Act among others are proving effective in creating a manufacturing boom and infrastructure renewal that will likely sustain economic growth in the absence of easy money from the Fed.
As always, we remain cautious and vigilant. Please remember that because these quarterly thumbnail sketches are very brief, do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.
Very Best Regards,
Joseph L. Toronto, CFA
Affiliated Investment Advisors 