Inflation Strikes Again

Market Update
Written By Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®
Consumers continue to see food prices rise

In the 12 months through August, the Consumer Price Index (CPI) increased 8.3%

The All Items category rose +0.1% m/m, above the - 0.1% m/m consensus. Food rose +0.8% m/m (+11.4% y/y) with broad increases across most food categories, both at home and away from home. Energy fell -5% m/m, following July's -4.6% m/m decline, as Energy Commodities declined -10.1% m/m. However, the Energy Services category rose +2.1% m/m, with Electricity rising +1.5% m/m and Utility Gas Service rising +3.5% m/m. Housing, the third major expenditure for most consumers, continued to show price pressures as Shelter increased +0.7% m/m.

To summarize the data – the consumer faces inflation across three categories of necessities: food, utilities, and housing.

Uncertain Fed Policy

Inflation's uncertain trajectory is humbling both the Fed and investors, making it difficult to forecast investment returns and economic growth and therefore position portfolios.

Change in Fed Funds Rate %

Pace of Fed rate hike compared to previous cycles. Source: Source: Bloomberg. Federal Funds Target Rate - Upper Bound (FDTR Index), using monthly data.

With that being said, the August CPI report is similar to the July CPI report: (1) inflation is proving to be more persistent than expected and (2) the Fed is unlikely to view the latest data as clear and convincing evidence that inflation is receding. A +0.75% rate hike at the September meeting appears to be a lock, and the theme of higher for longer is gaining traction.

Actionable Advice

  • Given the current recessionary environment, we favor a value sector weight approach vs. a growth stance. Historically, stocks paying dividends and having a reasonable price-earnings ratio have performed better in a recessionary environment.

  • Investors should review their holdings, put a defensive plan in place, and consider tax-harvesting positions in their portfolios that are technically weak. This advice would especially be true of portfolio holdings that have continued to show technical weakness this summer, including an uptrend for the market.

Our Insights

Featured
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Labor and Inflation Data Give the Fed the Green Light to Cut Rates
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This week, the Bureau of Labor Statistics released the latest inflation data, following recent updates on consumer and producer prices. While November's consumer price index (CPI) and producer price index (PPI) largely met expectations, both showed persistent upward pressure, disappointing Wall Street. We anticipate the Federal Reserve will respond by lowering short-term interest rates at its December 17-18 meeting, likely by 25 basis points to a range of 4.25%-4.50%.

Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

I am currently the Managing Partner for our independent investment advisory firm, Optima Capital Management. Together with my business partners, Todd Bendell CFP® and Clinton Steinhoff, we founded Optima Capital in 2019 as a forward-thinking wealth management firm that serves as an investment fiduciary and family office for high-net-worth individuals and families. In addition to being the Chief Compliance Officer, my role at Optima Capital is portfolio management. I have over 18 years of experience in managing investment strategies and portfolios. I specialize in using fundamental and technical analysis to build custom portfolios that utilize individual equities, bonds, and exchange-traded funds (ETFs). I began my financial services career with Merrill Lynch in 2003. At Merrill, I served in the leadership roles of Market Sales Manager and Senior Resident Director for the Scottsdale West Valley Market in Arizona. On Wall Street Magazine recognized me as one of the Top 100 Branch Managers in 2017. I am originally from Saginaw, Michigan, and a marketing graduate from the W.P. Carey School of Business at Arizona State University. I am a Certified Private Wealth Advisor® professional. The CPWA® certification program is an advanced credential created specifically for wealth managers who work with high net worth clients, focusing on the life cycle of wealth: accumulation, preservation, and distribution. In addition, I hold the following designations - Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst (CDFA®), Certified Plan Fiduciary Advisor (CPFA), and Retirement Management Advisor (RMA®). In the community, I am a member of the Central Arizona Estate Planning Council (CAEPC) and serve as an alumni advisor and mentor to student organizations at Arizona State University. My interests include traveling, outdoors, fitness, leadership, entrepreneurship, minimalism, and computer science.

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