2006 4th Street,
• New bouts of volatility have whipsawed global markets over the last month since our committee last met.
• The jobs report showed an additional 315,000 jobs created. However, the unemployment rate ticked up slightly to 3.7% due to more people entering the workforce.
• Yesterday’s CPI report disappointed once again. It showed core inflation accelerating.
• This will likely lead the Federal Reserve Bank to raise interest rates by at least 75 bps when it meets next week.
• From a historical basis, the one-year period following a midterm election has historically produced strong results, regardless of which party won.
The Horizon Advisor Network's Investylitics Committee met on the afternoon of September 14th. We were happy to have the opportunity to share thoughts and ideas about both the economy and the financial markets, as there have been significant data points come to light since we last met in Dallas in mid-August.
The committee was happy to report that the model portfolios managed for the benefit of our clients have all performed in line or above of their risk adjusted, index-based allocation models over the last one, three and five year periods of time. These are satisfying results for the committee, and hopefully for you, our trusted friends and clients, especially given our unique economic and political backdrop.
New bouts of volatility have gripped both global stock and bond markets over the last month. After bottoming in mid-June, the S&P 500 Index moved up nearly 18% over the next two months. This upward momentum quickly came to a stop as Chairman Jay Powell shared at the Fed’s annual Jackson Hole Symposium that they would continue raising rates for the foreseeable future to combat stubbornly persistent inflation.
This prompted stocks and bonds to fall in value. Remember that as interest rates rise, bond prices fall. This has led to the worst performance that we have seen for diversified portfolios in many years, as you can see in the chart below.
Over the last two decades, investors have become conditioned to see the Federal Reserve lower interest rates to support the economy anytime we have seen significant bouts of economic downturn or volatility. Prime examples would be the dot.com/9-11 drop and the ’07-‘08 subprime mortgage crisis which led to the failure of AIG and Lehman brothers. It has been nearly 40 years since we have seen the Fed aggressively raise interest rates in the face of a slowing economy and falling stock market.
Two recent reports show that the Fed has further work to do in combating rising prices. First, the jobs report showed 315,000 new jobs created. While this number is slowing from where it was 6 to 12 months ago, there are still nearly 2 jobs available for every person looking for work. This is continuing to put upward pressure on wages, and therefore, inflation.
Secondly, yesterday’s CPI report came in above expectations. It showed that both year over a year headline and core inflation, which excludes food and energy prices, were higher than expected. This immediately led to a sell off of 4%+ in the US stock market. This reversed gains that have been made over the previous two weeks.
It is widely expected that the Fed will raise interest rates by at least 75 bps when they meet on September 21st. The narrative that comes from Chairman Powell‘s press conference will be watched closely for indications of further rate hikes over the next few quarters. We know that the Fed does not have a great track record of raising interest rates without eventually tipping the economy over into recession. There is much debate about whether we are in the early innings of a recession currently, or simply in the pregame waiting for it to happen. We will continue to monitor these events going forward.
A number of models managed by the committee have had adjustments made to them recently to help manage risk and position them for our current economic backdrop. While rising interest rates have been painful to the bond market this year, it does make future returns more attractive on a going forward basis. The committee stands ready to make additional adjustments if and when they are warranted.
Sources: Capital Group, RIMES, Standard & Poor’s. Calculations use Election Day as the starting date in all election years and November 5th as a proxy for the starting date in other years. Only midterm election years are shown in the chart. As of 12/31/21
Finally, we wanted to remind you that market returns following midterm elections have historically been strong. As you can see in the chart above, since 1950, the one-year period following a midterm election has produced much stronger returns than other years. This is regardless of which party came out on top in the election. Of course, past performance does not guarantee future returns, but it is an important perspective to keep in mind. We know it is difficult to see volatility and negative news all around. We wanted to provide you some hope and positive perspective for the future.
The committee will next meet in person when we gather in Baton Rouge in late October. Should you have questions regarding this report or your financial planning goals between now and then, please do not hesitate to reach out to your advisor. We are here to help you and your family. Thank you for your trust and confidence, we appreciate both.
The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
Jesse Hurst - Chair, Impel Wealth Management
Nathan Ollish - Impel Wealth Management
Clint Gautreau, Horizon Financial Group
Kevin Myers, ATL GlobalJoy Schlie, FHT Financial Advisors
Dusty Green, Spencer Financial Inc.
Sincerely,Jesse W. Hurst, CFP®, AIF®CERTIFIED FINANCIAL PLANNERTMFinancial Advisor
*Award Recipient Jesse Hurst
*The 2021 ranking of the Forbes’ Best–in–State Wealth Advisors1 list was developed by SHOOK Research and is based on in–person and telephone due–diligence meetings to evaluate each advisor qualitatively and on a ranking algorithm that includes client retention, industry experience, review of compliance records, firm nominations, and quantitative criteria (including assets under management and revenue generated for their firms). Overall, approximately 32,725 advisors were considered, and 5,000 (approximately 15.3 percent of candidates) were recognized. The full methodology2 that Forbes developed in partnership with SHOOK Research is available at www.forbes.com.
1 This recognition and the due–diligence process conducted are not indicative of the advisor's future performance. Your experience may vary. Winners are organized and ranked by state. Some states may have more advisors than others. You are encouraged to conduct your own research to determine if the advisor is right for you.
2 Portfolio performance is not a criterion due to varying client objectives and lack of audited data. SHOOK does not receive a fee in exchange for rankings.