Markets Have Good First Quarter

Global equity markets had a good first quarter – especially the tech names. And interestingly, in the fourth quarter of 2022, global equity markets also had a pretty good quarter – except for the tech names.

When the final Wall Street bell of the quarter rang out, NASDAQ had turned in its best quarterly gain since 2020, and the other three major U.S. equity indices turned in solid results too.

For the first quarter of 2023:

• The DJIA advanced by 0.5%;

• The S&P 500 gained 6.9%;

• NASDAQ jumped 16.8%; and

• The Russell 2000 added 2.3%.

The themes that drove market performance in the first quarter centered around inflation, the Fed, and the labor market, as recent inflation numbers hinted at a potential decline. In contrast, labor market numbers suggested that the Fed could continue its pace of rate hikes further into the year.

This quarter's other big theme was a new banking crisis – as Silicon Valley Bank and Signature Bank failed – with SVB being the largest bank failure since 2008. That helped push gold close to its record high.

And as a surprise to many, cryptocurrencies extended their recovery from 2022's disaster, with Bitcoin leaping more than 50%.

Further, we saw that:

• Volatility, as measured by the VIX, trended down this quarter, beginning just north of 21 and ending just shy of 19, although there was a significant spike in mid-March.

• West Texas Intermediate crude also trended down for the quarter, starting at just over $80/barrel and ending at just over $75, with a low of $67/barrel in mid-March.

Market Performance Around the World

Investors were pleased with the quarterly performance worldwide, as all 36 developed markets tracked by MSCI were positive for the first quarter of 2023 – that’s the second quarter in a row that saw all 36 MSCI developed market indices green. And for the 40 developing markets tracked by MSCI, only 28 of those were positive.

Source: MSCI. Past performance cannot guarantee future results

Sector Performance Rotated in Q12023

The overall sector performance for the first quarter of 2023 was ok, as 4 of the 11 sectors lost ground. But of the seven sectors that gained ground, the gains were significant. Compare that to the overall trend for the fourth quarter, which was good, as 9 of the 11 sectors advanced, with six advancing by double-digits, and going back to the third quarter of last year, which was ugly, as 10 of the 11 S&P 500 sectors dropped with only Consumer Discretionary staying positive.

Finally, as happened in each quarter last year, the performance leaders and laggards rotated throughout the quarter, and the ranges were substantial.

Here are the sector returns for the first quarter of 2023 and the fourth quarter of 2022:

Source: FMR

Reviewing the sector returns for just the first quarter of 2023, we saw that:

• Only 7 of the 11 sectors were painted green, although the Information Technology and Consumer Discretionary sectors made giant leaps;

• The defensive sectors (think Utilities and Health Care) struggled during the quarter

• Financials – not surprisingly – was the worst performer, driven down by two significant bank failures; and

• The difference between the best (+21%) performing and worst (-6%) performing sectors in the first quarter was massive.

Two Interesting Rallies This Quarter

Volatility in the Treasury Market

The Fed Raises Rates Again

One of the most talked about events this quarter was the Federal Reserve’s policy meetings, and as expected, the Fed raised official short-term rates by 25 basis points in late March. Further, the “dot plot” pointed to hopes that the Fed might stop raising rates after one final one in May. Most interesting is that the fed funds futures markets ended the week pricing in a 98.2% chance that rates would end the year lower – with a whopping 95% chance that cuts would start this summer.

Source: CME Fed Watch

For perspective, it was almost exactly one year ago, on March 16, 2022, that the Federal Open Market Committee enacted the first of what would become nine consecutive interest rate increases.

GDP Up 2.6% in 4th Quarter

As the quarter ended, the Bureau of Economic Analysis reported that the real gross domestic product increased at an annual rate of 2.6% in the fourth quarter of 2022. In the third quarter, real GDP increased by 3.2%.

This is the “third” GDP estimate released, and it is based on more complete source data than was available for the "second" estimate issued last month. In the second estimate, the increase in real GDP was 2.7%. The revision primarily reflected downward revisions to exports and consumer spending. Imports, a subtraction in the calculation of GDP, were revised down.

U.S. Bureau of Economic Analysis. Seasonally adjusted annual rates.

“The increase in real GDP primarily reflected increases in private inventory investment, consumer spending, nonresidential fixed investment, federal government spending, and state and local government spending that were partly offset by decreases in residential fixed investment and exports. Imports decreased.

Consumer Sentiment Drops

“Consumer sentiment fell for the first time in four months, dropping about 8% below February but remaining 4% above a year ago. This month’s turmoil in the banking sector had limited impact on consumer sentiment, which was already exhibiting downward momentum prior to the collapse of Silicon Valley Bank. Overall, our data revealed multiple signs that consumers increasingly expect a recession ahead. While sentiment fell across all demographic groups, the declines were sharpest for lower-income, less- educated, and younger consumers, as well as consumers with the top tercile of stock holdings. All five index components declined this month, led by a notably sharp weakening in one-year business conditions.

Year-ahead inflation expectations receded from 4.1% in February to 3.6%, the lowest reading since April 2021, but remained well above the 2.3-3.0% range seen in the two years before the pandemic. Long-run inflation expectations came in at 2.9% for the fourth consecutive month and stayed within the narrow 2.9- 3.1% range for 19 of the last 20 months.

But Consumer Confidence is Up

The Conference Board Consumer Confidence Index increased slightly in March to 104.2 (1985=100), up from 103.4 in February.

Further:

• The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—decreased to 151.1 (1985=100) from 153.0 last month.

• The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions— ticked up to 73.0 (1985=100) from 70.4 in February (a slight upward revision).

• However, for 12 of the last 13 months—since February 2022—the Expectations Index has been below 80, which often signals a recession within the next year. “Driven by an uptick in expectations, consumer confidence improved somewhat in March but remains below the average level seen in 2022 (104.5).

“The gain reflects an improved outlook for consumers under 55 years of age and for households earning $50,000 and over. While consumers feel a bit more confident about what’s ahead, they are slightly less optimistic about the current landscape. The share of consumers saying jobs are ‘plentiful’ fell, while the share of those saying jobs are ‘not so plentiful’ rose.

The latest results also reveal that their inflation expectations over the next 12 months remain elevated – at 6.3 percent. Overall purchasing plans for appliances continued to soften while automobile purchases saw a slight increase.”

Sources: The Conference Board; NBER

CPI Records Smaller Increase, But Food Index is Up 9.5% Over the Last Year

The U.S. Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers rose 0.4% in February after increasing 0.5% in January. Over the last 12 months, the all-items index increased by 6.0% before seasonal adjustment.

Source: U.S. Bureau of Labor Statistics.

Specifically:

• The index for shelter was the largest contributor to the monthly all-items increase, accounting for over 70% of the increase, with the indexes for food, recreation, and household furnishings and operations also contributing.

• The food index increased 0.4% over the month, with the food at home index rising 0.3%.

• The energy index decreased 0.6% over the month as the natural gas and fuel oil indexes declined.

• Categories that increased in February include shelter, recreation, household furnishings and operations, and airline fares.

• The index for used cars and trucks and the index for medical care were among those that decreased over the month.

Inflation Over the Past 12-Months

The all-items index increased 6.0% for the 12 months ending February; this was the smallest 12-month increase since the period ending September 2021.

• All items less food and energy index rose 5.5% over the last 12 months, its smallest 12-month increase since December 2021.

• The energy index increased 5.2% for the 12 months ending February.

• The food index increased by 9.5% over the last year.

Food Index

• The food index increased 0.4% in February, and the food at home index rose 0.3% over the month. Five major grocery store food group indexes increased over the month. The index for nonalcoholic beverages increased by 1.0% in February, after a 0.4% increase the previous month.

• The indexes for other food at home and for cereals and bakery products each rose 0.3% over the month. The index for fruits and vegetables increased by 0.2% in February, and the index for dairy and related products rose by 0.1%.

• In contrast, the meats, poultry, fish, and eggs index fell 0.1 percent over the month, the first decrease in that index since December 2021. The index for eggs fell 6.7% in February following sharp increases in recent months.

Existing Home Sales Jump in February

The National Association of Realtors reported that “existing-home sales reversed a 12-month slide in February, registering the largest monthly percentage increase since July 2020. Month-over-month sales rose in all four major U.S. regions. All regions posted year-over-year declines.

• Total existing-home sales completed transactions that include single-family homes, townhomes, condominiums, and co-ops – vaulted 14.5% from January to a seasonally adjusted annual rate of 4.58 million in February.

• Year-over-year, sales fell 22.6% (down from 5.92 million in February 2022).

• The total housing inventory registered at the end of February was 980,000 units, identical to January and up 15.3% from one year ago (850,000).

• Unsold inventory sits at a 2.6-month supply at the current sales pace, down 10.3% from January but up from 1.7 months in February 2022.”

Prices Slide After 131 Months of Gains

• “The median existing-home price for all housing types in January was $363,000, a decline of 0.2% from February 2022 ($363,700), as prices climbed in the Midwest and South yet waned in the Northeast and West.

• This ends a streak of 131 consecutive months of year-over-year increases, the longest on record.

• Properties typically remained on the market for 34 days in February, up from 33 days in January and 18 days in February 2022.

• Fifty-seven percent of homes sold in February were on the market for less than a month.

• First-time buyers were responsible for 27% of sales in February, down from 31% in January and 29% in February 2022.

• All-cash sales accounted for 28% of transactions in February, down from 29% in January but up from 25% in February 2022.

• Distressed sales – foreclosures and short sales – represented 2% of sales in February, nearly identical to last month and one year ago.

Regional Breakdown

• Existing-home sales in the Northeast improved by 4.0%, down 25.7% from February 2022. The median price in the Northeast was $366,100, down 4.5% from the previous year.

• In the Midwest, existing-home sales grew 13.5%, declining 18.7% from one year ago. The median price in the Midwest was $261,200, up 5.0% from February 2022.

• Existing-home sales in the South rebounded 15.9% in February, a 21.3% decrease from the prior year. The median price in the South was $342,000, an increase of 2.7% from one year ago.

• In the West, existing-home sales rocketed 19.4% in February, down 28.3% from the previous year. The median price in the West was $541,100, down 5.6% from February 2022.”

Durable Goods Orders Drop Again

The U.S. Census Bureau announced the February advance report on durable goods manufacturers’ shipments, inventories, and orders:

Source: U.S. Census Bureau, Manufacturers’ Shipments, Inventories, and Orders, March 24, 2023.

New Orders

• New orders for manufactured durable goods in February, down three of the last four months, decreased $2.6 billion or 1.0% to $268.4 billion.

• This followed a 5.0% January decrease.

• Excluding transportation, new orders were virtually unchanged.

• Excluding defense, new orders decreased by 0.5%.

• Also down three of the last four months, transportation equipment drove the decrease, $2.6 billion or 2.8% to $89.4 billion.

Shipments

• In February, the shipment of manufactured durable goods in two consecutive months decreased by $1.5 billion or 0.6% to $274.8 billion.

• This followed a 0.4% January decrease.

• Also down two consecutive months, transportation equipment led the decrease, $1.3 billion or 1.4% to $90.1 billion.

Unfilled Orders

• Unfilled orders for manufactured durable goods in February, down two consecutive months, decreased $1.2 billion or 0.1% to $1,155.4 billion.

• This followed a virtually unchanged January decrease.

• Transportation equipment, down following twenty-one consecutive monthly increases, led the decrease, $0.7 billion or 0.1% to $683.8 billion.

Inventories

• Inventories of manufactured durable goods in February, up twenty-four of the last twenty- five months, increased $0.9 billion or 0.2% to $493.6 billion.

• This followed a 0.2% January decrease.

• Up three of the last four months, transportation equipment led the increase, $0.6 billion or 0.4% to $158.8 billion.

Capital Goods

• Nondefense new orders for capital goods in February decreased $1.0 billion or 1.2% to $82.0 billion.

• Shipments decreased by $0.5 billion or 0.6% to $83.2 billion.

• Unfilled orders decreased by $1.2 billion or 0.2% to $662.6 billion.

• Inventories increased by $0.5 billion or 0.2% to $218.8 billion.

• Defense new orders for capital goods in February decreased $1.2 billion or 7.4% to $14.5 billion.

• Shipments decreased by $0.2 billion or 1.6% to $14.6 billion.

• Unfilled orders decreased by $0.2 billion or 0.1% to $188.9 billion.

• Inventories increased by $0.1 billion or 0.3% to $23.3 billion.

Sources: dol.gov; nar.realtor; umich.edu; census.gov; bea.gov; fidelity.com; msci.com; nasdaq.com; wsj.com; morningstar.com

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Partnering with Outside The Box Financial Planning offers numerous benefits for individuals seeking retirement planning, small business support, wealth management, and beyond.  With their fiduciary duty, comprehensive approach, unbiased advice, transparent fee structure, and ongoing support, OTBFP act as a trusted advisor who prioritizes your best interests. Click here to schedule a complimentary “Fit” meeting to determine if we would make a good mutual fit.

Remember, financial decisions have long-lasting implications, and working with a professional can provide the expertise and guidance necessary to make informed choices that align with your financial aspirations. 

However, if you would like to take a shot at building a financial plan on your own, we offer our financial planning software, RightCapital, free of charge. Click here to get started.

Global Market Commentary: Third Quarter 2022

Markets Have Awful Third Quarter

Global equity markets had an awful third quarter, and when the final Wall Street bell weakly tolled on Friday, September 30th, all major global equity markets were in the red, leading to overall market declines not seen in decades.

Further, entering the fourth quarter of 2022, the DJIA and S&P 500 are both at their lowest since November 2020, while NASDAQ is at its lowest since the end of July 2020.

For the third quarter of 2022:

• The DJIA dropped 6.7%;

• The S&P 500 lost 5.3%;

• NASDAQ lost 4.1%; and

• The Russell 2000 declined by 3.6%.

The themes that drove market performance in the third quarter were the same worries that drove markets in the first two quarters and toward the end of last year. And the two most dominant themes continue to be inflation and the Fed – with the former rising to 40-year highs and the latter causing Wall Street to worry that the course of rising rates would lead to a recession.

The other themes were at odds with one another at times: rising consumer and investor confidence; rising food and gas prices, negative GDP numbers, a cooling-off of the housing market, better than expected manufacturing data; not-so-great corporate earnings, continued supply-chain bottlenecks and more social unrest.

Further, we saw that:

• Volatility, as measured by the VIX, trended up this quarter, beginning the quarter under 27 and ending the month over 31, although there was a dip in the middle of the quarter.

• West Texas Intermediate crude trended down for the quarter, starting at just over $105/barrel and ending the quarter at just under $80, slightly higher than where it stood one year ago.

Market Performance Around the World

Investors were unhappy with the quarterly performance worldwide, as all 36 developed markets tracked by MSCI were negative for the third quarter of 2022 – with most recording negative returns in the double digits. And for the 40 developing markets tracked by MSCI, 38 of them were negative too, with only the EM Latin America and EFM Latin America and Caribbean Index both gaining about 1%.

Source: MSCI. Past performance cannot guarantee future results

Sector Performance Rotated in Q22022

The overall trend for sector performance for the third quarter was ugly, as 10 of the 11 S&P 500 sectors dropped, with only Consumer Discretionary staying positive. And as if those numbers weren’t bad enough, the performance leaders and laggards rotated throughout the quarter, and the ranges were substantial.

Here are the sector returns for the second and third quarters of 2022:

Source: FMR

Reviewing the sector returns for just the third quarter of 2022 and the first nine months of the year, we saw that:

• Almost all sectors were painted red for the third quarter, with only the Consumer Discretionary sector painted green;

• 2 of the 11 sectors saw double-digit declines in the third quarter, whereas 7 recorded a double-digit decline in Q2;

• The interest-rate sensitive sectors (Information Technology, Financials, and Real Estate specifically) struggled as the Fed raised rates; and

• The differences between the best (+4%) performing and worst (-13%) performing sectors in the third quarter were big.

GDP Down in 2nd Quarter

The Bureau of Economic Analysis released its third estimate of 2nd quarter's GDP and announced that it decreased at an annual rate of 0.6%, following a decrease of 1.6% in the first quarter. This third estimate was the same as was announced in the second estimate in August.

• The smaller decrease in the second quarter, compared to the first quarter, reflected an upturn in exports and an acceleration in consumer spending.

• Profits increased 4.6% at a quarterly rate in the second quarter after increasing 0.1% in the first quarter.

• Private goods-producing industries decreased by 10.4%, private services-producing industries increased by 2.0%, and government decreased by 0.2%.

• Overall, 9 of 22 industry groups contributed to the second-quarter decline in real GDP.

Housing Was Mixed

On September 20th, the U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly announced the following new residential construction statistics for August 2022:

Building Permits

• Privately‐owned housing units authorized by building permits in August were at a seasonally adjusted annual rate of 1,517,000.

• This is 10.0% below the revised July rate of 1,685,000 and 14.4% below the August 2021 rate of 1,772,000.

• Single‐family authorizations in August were at a rate of 899,000; this is 3.5% below the revised July figure of 932,000.

• Authorizations of units in buildings with five units or more were at a rate of 571,000 in August.

Housing Starts

• Privately‐owned housing starts in August were at a seasonally adjusted annual rate of 1,575,000.

• This is 12.2% above the revised July estimate of 1,404,000 but is 0.1% below the August 2021 rate of 1,576,000.

• Single‐family housing starts in August were at a rate of 935,000; this is 3.4% above the revised July figure of 904,000.

• The August rate for units in buildings with five units or more was 621,000.

Housing Completions

• Privately‐owned housing completions in August were at a seasonally adjusted annual rate of 1,342,000.

• This is 5.4% below the revised July estimate of 1,419,000 but is 3.1% above the August 2021 rate of 1,302,000.

• Single‐family housing completions in August were at a rate of 1,017,000; this is 0.4% above the revised July rate of 1,013,000.

• The August rate for units in buildings with five units or more was 318,000.

Mortgage Rates Jump

According to data compiled by Bankrate on the last day of the quarter:

• 30-year fixed rate: 6.83%

• 15-year fixed rate: 6.00%

• 5/1 ARM rate: 5.22%

• 30-year fixed jumbo fixed rate: 6.81%

Producer Price Index Drops

The Producer Price Index for final demand fell 0.1% in August, seasonally adjusted, the U.S. Bureau of Labor Statistics reported. Final demand prices decreased by 0.4% in July and advanced by 1.0% in June.

On an unadjusted basis, the index for final demand moved up 8.7% for the 12 months that ended in August.

In August, the decrease in the index for final demand is attributable to a 1.2% decline in prices for final demand goods. In contrast, the index for final demand services advanced by 0.4%.

• Prices for final demand fewer foods, energy, and trade services moved up 0.2% in August following a 0.1% rise in July.

• For the 12 months that ended in August, the index for final demand for fewer foods, energy, and trade services increased by 5.6%.

Final Demand

Final demand goods: The index for final demand goods fell 1.2% in August after declining 1.7% in July. The August decrease can be traced to a 6.0% price drop for final demand energy. Conversely, the index for final demand goods, fewer foods, and energy rose 0.2%, while prices for final demand foods were unchanged.

Product detail: In August, over three-quarters of the decrease in prices for final demand goods is attributable to the index for gasoline, which fell 12.7%.

Prices for diesel fuel, jet fuel, chicken eggs, primary basic organic chemicals, and home heating oil also declined. In contrast, the index for construction machinery and equipment increased by 2.6%. Prices for beverages and beverage materials and for electric power also rose.

Final demand services: The index for final demand services increased by 0.4% in August, the fourth consecutive rise. Sixty% of the August advance can be traced to a 0.8%increase in margins for final demand trade services. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand services, less trade, transportation, and warehousing, also moved higher, rising 0.3%. Conversely, the index for final demand transportation and warehousing services decreased by 0.2%.

Product detail: Forty percent of the price increase for final demand services can be attributed to margins for fuels and lubricants retailing, which rose 14.2%. The indexes for securities brokerage, dealing, investment advice, and related services; loan services (partial); transportation of passengers (partial); portfolio management; and chemicals and allied products wholesaling also increased. In contrast, prices for truck transportation of freight decreased by 1.9%. The indexes for guestroom rental and for food and alcohol retailing also fell.

Leading Indicators Drop

The Conference Board Leading Economic Index for the U.S. decreased by 0.3% in August 2022 to 116.2 (2016=100) after declining by 0.5% in July. The LEI fell 2.7% over the six-month period between February and August 2022, a reversal from its 1.7% growth over the previous six months.

From the Conference Board release:

“The US LEI declined for a sixth consecutive month, potentially signaling a recession. Among the index’s components, only initial unemployment claims and the yield spread contributed positively over the last six months—and the contribution of the yield spread has narrowed recently.

“Furthermore, labor market strength is expected to continue moderating in the months ahead. Indeed, the average workweek in manufacturing contracted in four of the last six months—a notable sign, as firms reduce hours before reducing their workforce. Economic activity will continue slowing more broadly throughout the US economy and is likely to contract. A major driver of this slowdown has been the Federal Reserve’s rapid tightening of monetary policy to counter inflationary pressures. The Conference Board projects a recession in the coming quarters.”

Further:

• The Conference Board Coincident Economic Index for the U.S. increased by 0.1%in August 2022 to 108.7 (2016=100), after increasing by 0.5% in July.

• The CEI rose by 0.6% over the six-month period from February to August 2022, slower than its growth of 1.5% over the previous six-month period.

• The Conference Board Lagging Economic Index for the U.S. increased by 0.7% in August 2022 to 115.4

Consumer Confidence Up

The Conference Board’s Consumer Confidence Index increased in September for the second consecutive month. The Index now stands at 108.0 (1985=100), up from 103.6 in August.

• The Present Situation Index – based on consumers’ assessment of current business and labor market conditions – rose to 149.6 from 145.3 last month.

• The Expectations Index – based on consumers’ short-term outlook for income, business, and labor market conditions – increased to 80.3 from 75.8.

Present Situation

Consumers’ appraisal of current business conditions was more favorable in September.

• 20.8% of consumers said business conditions were “good,” up from 19.0%.

• 21.2% of consumers said business conditions were “bad,” down from 22.6%.

Consumers’ assessment of the labor market improved.

• 49.4% of consumers said jobs were “plentiful,” up from 47.6%.

• 11.4% of consumers said jobs were “hard to get,” down slightly from 11.6%.

Expectations Six Months Hence

Consumers were more positive about the short-term business conditions outlook in September.

• 19.3% of consumers expect business conditions to improve, up from 17.3%.

• 21.0% expect business conditions to worsen, down from 21.7%.

Consumers were more optimistic about the short-term labor market outlook.

• 17.5% of consumers expect more jobs to be available, up from 17.1%.

• 17.7% anticipate fewer jobs, down from 19.6%.

Consumers were mixed about their short-term financial prospects.

• 18.4% of consumers expect their incomes to increase, up from 16.6%.

• Conversely, 14.3% expect their incomes will decrease, up from 13.9%.

Investor Consumer Rises

“The Global Investor Confidence Index increased to 108.8, up 1.5 points from August’s revised reading of 107.3. The increase was led by a 7.7-point jump in Asian ICI to 100.1. North American ICI rose as well, up 2.4 points to 109. European ICI, meanwhile, fell 5.5 points to 100.1.”

The release further stated:

“Despite heightened equity market volatility experienced globally, risk sentiment expressed by institutional investors remained steady in September as the Global ICI rose slightly to 108.8. As anticipated, European investors were rattled by a continued energy crisis, diminishing growth prospects, and hawkish global central banks; as a result, the EMEA ICI tumbled 5.9 points. Going forward, it will be important to monitor whether the dip in European investor confidence persists, given the market’s negative reaction to the UK’s recent fiscal plans. Overall, the increase in the September Global ICI can be largely attributed to Asia-Pacific investors as risk appetite grew in tandem with the reopening of borders and easing of restrictions in Macau and Chengdu, China.”

Consumer Sentiment

“Consumer sentiment confirmed the preliminary reading earlier this month and was essentially unchanged from the month prior, at less than one index point above August. Buying conditions for durables and the one-year economic outlook continued lifting from the extremely low readings earlier in the summer, but these gains were largely offset by modest declines in the long run outlook for business conditions. As seen in the chart, sentiment for consumers across the income distribution has declined in a remarkably close fashion for the last 6 months, reflecting shared concerns over the impact of inflation, even among higher-income consumers who have historically generated the lion's share of spending.”

The median expected year-ahead inflation rate declined to 4.7%, the lowest reading since last September. At 2.7%, median long run inflation expectations fell below the 2.9-3.1% range for the first time since July 2021. Inflation expectations are likely to remain relatively unstable in the months ahead, as consumer uncertainty over these expectations remained high and is unlikely to wane in the face of continued global pressures on inflation.

Compensation Up

Compensation costs for civilian workers increased 1.3%, seasonally adjusted, for the 3-month period ending in June 2022, the U.S. Bureau of Labor Statistics reported.

• Wages and salaries increased 1.4% and benefit costs increased 1.2% from March 2022.

• Compensation costs for civilian workers increased 5.1% for the 12-month period ending in June 2022 and increased 2.9% in June 2021.

• Wages and salaries increased 5.3% for the 12-month period ending in June 2022 and increased 3.2% for the 12-month period ending in June 2021.

• Benefit costs increased 4.8% over the year and increased 2.2% for the 12-month period ending in June 2021.

Sources: bls.gov; umich.edu; census.gov; msci.com; fidelity.com; nasdaq.com; wsj.com; morningstar.com

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Partnering with Outside The Box Financial Planning offers numerous benefits for individuals seeking retirement planning, small business support, wealth management, and beyond.  With their fiduciary duty, comprehensive approach, unbiased advice, transparent fee structure, and ongoing support, OTBFP act as a trusted advisor who prioritizes your best interests. Click here to schedule a complimentary “Fit” meeting to determine if we would make a good mutual fit.

Remember, financial decisions have long-lasting implications, and working with a professional can provide the expertise and guidance necessary to make informed choices that align with your financial aspirations. 

However, if you would like to take a shot at building a financial plan on your own, we offer our financial planning software, RightCapital, free of charge. Click here to get started.

If you've been reading or watching the news lately, you know a lot is happening in the financial world.

You've heard about changes in interest rates, rising inflation, and the potential of a looming recession.

If the headlines have caused you some anxiety, you’re not alone. We've all been through a lot, financially and personally, over the last couple of years. You may feel like any sense of certainty has gone out the window.

But we're here to reassure you. The best course of action during times of uncertainty is to stick to the financial plan you and your financial advisor have developed. Markets and circumstances will shift and change, but a well-developed financial plan will help you weather the storms. And if you haven’t crafted a financial plan yet, perhaps now is the time. 

Read on to find answers to your latest financial questions. 

What’s Happening in the Financial News?

Let's start by diving into what's happening in the financial news. In 2022, and in the last couple of years, the news has been full of dramatic headlines and financial uncertainty. But what is all this talk about the Federal Reserve raising interest rates and a tighter monetary policy? To understand, it's important to know what's been going on with inflation.

Inflation has been accelerating

In June of 2022, inflation rates jumped to 8.5%, the highest they've been since the 1980s. For some context, the Fed tries to maintain inflation at a rate of 2% over the long run.

Lately, you’ve likely experienced inflation at the gas pump or grocery store. You’re paying a lot more for these necessities than you were a year ago.

So, what is inflation? Inflation is a decrease in money's purchasing power, which results in higher prices for goods and services. 

Part of the reason inflation has been accelerating so quickly is due to widespread supply shortages in the wake of the pandemic. When supply goes down, demand goes up.

The real effects of accelerated inflation include a higher cost of living. We're paying more for gas, groceries, and rent than we were a year ago — roughly 8.5% more across the board. 

In response to rising inflation, the Federal Reserve increased interest rates

What, if anything, can be done to combat rising inflation? That's where the Federal Reserve comes in.

The Federal Open Market Committee (FOMC) makes decisions about open market operations on behalf of the Federal Reserve. Their main goals are to keep employment up, stabilize prices, and moderate long-term inflation rates. One of their main jobs is to control the supply of money in the US economy, which influences inflation rates.

When inflation is high, the FOMC tends to raise interest rates, which increases the cost of borrowing. The idea is to make borrowing less appealing, reducing the amount of money in circulation. This slows demand and therefore lowers prices.

 In June 2022, the FOMC voted to raise interest rates by 0.75%, or 75 basis points. And in July, the FOMC raised interest rates by another 75 basis points, for a total of 150 basis points so far this year.

This interest rate, also known as the Federal Funds Rate, is an important indicator of the economy. It's the rate at which banks charge each other to lend Fed funds overnight. It directly impacts consumer interest rates on mortgages, auto loans, and credit cards.

This is all part of a tighter monetary policy

Along with rising inflation and higher interest rates, you've probably been hearing the term “tighter monetary policy” being tossed around in the financial news.

A tighter monetary policy aims to slow down an “overheated” economy. An overheated economy is one experiencing high levels of inflation following a period of economic growth.

One way to cool an overheated economy is to slow inflation by raising interest rates. This makes borrowing less attractive — and more expensive. The result is a smaller amount of money circulating through the economy. 

Increasing the reserve requirement, the amount of money banks are required to have on hand, is another way of taking money out of circulation and increasing the cost of borrowing. 

On the other hand, a tighter monetary policy makes saving more attractive. This is because higher interest rates on savings accounts work in a savings account holder's favor. 

There’s talk of a recession

So, why all the fear in the news?

In response to the tighter monetary policy, stocks have been dropping, and there's a fear of a looming recession. Interest rates will likely continue to rise, making it more expensive for those applying for a mortgage, paying off debt, or getting a car loan. 

There are a few signs — like the fact that the economy shrank in early 2022, turbulence regarding political disruptions and the ongoing pandemic, and increased interest rates, that indicate the potential for a recession. But that doesn’t mean you should make any drastic decisions.

How You Should Respond to The Financial News

A lot of this news sounds scary. After living through 2008, the fear of a recession is real. But that doesn't mean you should panic. The truth is, no one knows exactly what's next. The economy is cyclical, and ebbs and flows are normal. The worst thing you can do is make knee-jerk reactions in response to what you hear in the news.

So, what should you do?

In general, less is more. If you've been working with a trusted financial advisor to balance a well-diversified portfolio as you approach retirement, you're on the right track. It's times like these when you have to sit tight and weather the storm.

If you’re managing your money without a professional’s perspective, this might be the time to get some trusted advice. If you’re feeling anxious or uncertain, a financial planner is a great person to consult.

Finally, you can make sure your emergency savings account is fully funded. As we mentioned earlier, one upside of higher interest rates is that your savings account benefits. 

Make sure your emergency savings are fully funded so you can be prepared in case of tough times. This means if something does happen and you need extra cash, you won’t have to dig into your hard-earned retirement funds. 

Work With a Financial Planner to Prepare For the Future

At Outside the Box Financial Planning, we take a personal approach to financial planning. When the financial news is unsettling, it can be tough to make level-headed decisions. Instead, you might be tempted to act on impulse.

The best thing you can do is have a trusted financial planner in your corner — one who’s ready to help you through whatever happens. We do more than manage your assets. We ease your concerns so you can feel financially secure and prepared.

To see if we can help you feel more secure in your financial future, click here to schedule a conversation today.

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Partnering with Outside The Box Financial Planning offers numerous benefits for individuals seeking retirement planning, small business support, wealth management, and beyond.  With their fiduciary duty, comprehensive approach, unbiased advice, transparent fee structure, and ongoing support, OTBFP act as a trusted advisor who prioritizes your best interests. Click here to schedule a complimentary “Fit” meeting to determine if we would make a good mutual fit.

Remember, financial decisions have long-lasting implications, and working with a professional can provide the expertise and guidance necessary to make informed choices that align with your financial aspirations. 

However, if you would like to take a shot at building a financial plan on your own, we offer our financial planning software, RightCapital, free of charge. Click here to get started.