Inflation is a top concern of households, investors, central banks, governments, and companies. The increase in the inflation rate has created havoc in financial markets in 2022.
In our Quarterly Market Commentary and in our semi-annual client clarity sessions, we have, over the last year, pointed out the combination of at least eight factors fueling inflation:
- supply chain disruptions (including those aggravated by the war in Ukraine)
- energy policy
- pent-up demand from the pandemic
- excess cash from years of accommodative monetary policy
- companies having a more difficult time finding, retaining, and collaborating with employees under emerging hybrid and remote work trends
- resilient consumer spending keeping the demand of products and services high
- pandemic related health insurance costs going up in 2020 and 2021
- elevated government spending
Fortunately, our concerns about interest rate increases and inflation, and a slowing economy have led us to put in place a more defensive asset allocation in 2021 for 2022. For instance, we significantly underweighted Europe and Emerging Markets, continued to lower our duration of fixed income securities and emphasized high-quality companies meeting a variety of factor tilts we believe could weather the storm better than others.
Six reasons Inflation May have Peaked
Looking ahead into 2023, we are making additional tweaks aligned with what the weight of evidence is revealing as more likely possibilities for 2023. While we believe it is too early to make a call (or portfolio tweaks) related to inflation, we do see six reasons inflation may have peaked and could decline into 2023. These are among the items we will keep an eye on and potentially utilize to rebalance portfolios in the future:
- The New York Fed measure of global supply chain pressures has peaked and is heading lower (Source: NDR and Bureau of Labor Statistics, Federal Reserve Bank of New York).
- Dwell Times (amount of time sitting) of container ships, trucks and railroad cars have declined (Source NDR and Pacific Merchant Shipping Association).
- Medical Insurance Costs, distorted by the pandemic, are likely set to flatten, or decline as policy prices reset in October 2022 and on (source: NDR).
- Crude and Retail Gasoline prices have declined since July 2022 (source Wall Street Journal, U.S. Energy Information Administration).
- The Measure of Common Inflation Expectations (Source: Department of Commerce) indicates that the marketplace continues to have confidence in the Fed that it can and will contain inflation into the future. The Yield Curve also reflects this belief.
- Increases in interest rates (including mortgage rates) across the full spectrum of debt instruments and declines in Leading Economic Indicators (Source: The Conference Board) for the last six months are increasing the chances of a recession in 2023. Historically, higher interest rates and a recession at the same time, reduce inflation. Note: Our current reading is for a mild recession in the U.S. in 2023, a scenario that we believe has already been priced into the stock market.
Soft Landing or Mild, Moderate or Severe Recession?
Last week, we published the post Is an End-of-Year Stock Market Rally in the Cards? The more the market sees signs inflation is peaking and is potentially on the way down as a longer-term trend, the more likely a rally in the stock market will occur and can be sustained. Then, it is likely all about whether a soft landing, mild recession in 2023 (currently our most likely to occur scenario) or a more moderate to severe recession evolves out of the actions to keep the economy from overheating. Stay tuned as we will chime in as the weight of evidence unfolds.
What can You Do Now? How to Select a Financial Advisor Who Can Help You
Our clients are tuned into the various investment management and wealth management actions we have taken and potentially will take as a variety of economic and market indicators inform our decision making. Clearly, we are in a profound time of change that requires wisdom, expertise, discipline, and fortitude. What can you do now? Here’s our best advice to high and ultra-high net worth investors:
- Always make your balance sheet, cash flow and portfolio your friend not your foe. Read up on our Strength Based Wealth Management® (SBWM) discipline for details on this sound approach to volatility and uncertainty. Make certain your high or ultra-high net worth is the advantage in the marketplace that it can be.
- Always protect your lifestyle and confidence with a Lifestyle Protection Analysis®. In short, you can act to stress test your finances and portfolio, in ways that can help you act to improve the Elastic Limit Threshold (amount of financial stress you can withstand) of your wealth. Make certain your high or ultra-high net worth is positioned properly among personal, safety, market, private and aspirational asset classes.
- Always invest in a smart, lean and weight of the evidence way, aligned with your circumstances and risk temperament. Read up on our Evidence Based Investing (EBI) approach for details on what this looks like. Make certain you are taking advantage of gaining access to investment vehicles designed for high and ultra-high net worth investors via highly experienced and capable fiduciary financial advisors.
- Always be in the position to make smart proactive and reactive portfolio management tilts and adjustments in a timely and tax savvy manner. The speed, efficiency, and capability to manage a portfolio prudently is just as important as the knowledge and expertise utilized to make important asset allocation decisions.