Sep 19, 2022

When Good News is Bad News

When Good News is Bad News

The National Bureau of Economic Research called the economic expansion of the 2010s the longest on record. Its records go back to the 1850s. For much of the decade, good economic news was good news for investors.

Stocks performed well against the backdrop of modest economic growth, which fueled corporate profit growth. Low inflation and modest economic growth limited interest rate hikes by the Federal Reserve, further underpinning equities.

It’s a different environment today. Aided by fiscal stimulus, the economy recovered much faster than most had expected, including a return to full employment.

However, inflation is a big problem. While it would be unfair to blame today’s inflationary environment completely on the Fed—trillions of dollars in fiscal stimulus, pandemic lockdowns, and supply chain woes have also contributed to the problem, they are tasked with cleaning up the mess.

The rate of inflation may have already peaked, but whether the rate of inflation might plateau, decline slowly, or fall quickly is up for debate.

Yet, even if inflation has peaked, we aren’t yet seeing ‘peak hawkishness’ from Fed officials. Consequently, good economic news may encourage further hawkishness and rate hikes, which has created headwinds for stocks.

In other words, good economic news today could lead to bad news for investors, at least over a shorter-term time horizon.

The message from the Federal Reserve: failure to subdue inflation is not an option.

In an interview last Thursday at the Cato Institute’s Monetary Conference, Fed Chief Jerome Powell strongly reiterated the Fed’s commitment.

“History cautions strongly against prematurely loosening policy. I can assure you that my colleagues and I are strongly committed to this project, and we will keep at it until the job is done,” he said.

Bottom Line

There is a high degree of uncertainty regarding how high interest rates may rise, and how long rates may remain elevated to bring inflation down.

Would the Fed blink if the jobless rate drifts too high? The Fed’s not saying, but the unified message from Powell and various Fed officials suggests it will stay the course.

Reproduction Prohibited without Express Permission. Copyright FDP Wealth Management. All rights reserved. Advisory Services offered through FDP Wealth Management, LLC, a state Registered Investment Adviser and Valmark Advisers, Inc. a SEC Registered Investment Advisor. Securities offered through ValMark Securities, Inc., Member FINRA/SIPC. 130 Springside Drive, Suite 300, Akron, OH 44333-2431 800.765.5201 Prosperity Partners and FDP Wealth Management, LLC are separate entities from ValMark Securities, Inc. and Valmark Advisers, Inc. Prosperity Partners, FDP Wealth Management, LLC, ValMark Securities, Inc., Valmark Advisers Inc., and their representatives do not offer tax advice. You should consult your tax professional regarding your individual circumstances. Indices are unmanaged and cannot be invested directly in. Past performance is not a guarantee of future results.

Indices are unmanaged and do not incur fees, one cannot directly invest in an index. You should consult your tax professional regarding your individual circumstances. This information is provided by Financial Jumble, LLC. Financial Jumble, LLC is a separate entity from ValMark Securities, Inc. and ValMark Advisers, Inc.

RELATED POSTS

Heavy Data Week Offers Mixed Picture

Last week was packed with economic developments, as reports poured in from all directions. We saw the release of second-quarter Gross Domestic Product (GDP) figures, the broadest measure of goods and services produced, alongside the July jobs report.

One Big Beautiful Bill and You

Signed into law on July 4, the One Big Beautiful Bill (OBBB) Act introduces sweeping changes into the tax code that could influence how you plan for and pay your taxes. Given the depth and complexity of the new law, our review is not all-encompassing. But we’ll touch on some of the key provisions.

Tariffs Begin to Bite

At first glance, June’s Consumer Price Index (CPI) was reassuring. The US Bureau of Labor Statistics reported that the CPI rose 0.3% in June as expected, while the core CPI, which excludes food and energy, rose a smaller-than-forecast 0.2%, per the Wall Street Journal.

Inside the Front Door of the Housing Market

Home sales have fallen sharply over the last three years, with sales near the levels we last saw in 2008, according to the National Association of Realtors. Yet, unlike in 2008, housing prices haven’t collapsed this time around.

A Quirky Jobs Report

The US Bureau of Labor Statistics reported that nonfarm payrolls rose 147,000 in June, topping the forecast of 110,000 (Wall Street Journal), while the unemployment rate fell to 4.1% in June from 4.2% in May. Private sector jobs rose a more muted 74,000.