Focused Investing: Economy & Markets Update

Economic reports that were published last week gave us a glimpse of the health of the economy and maybe an indication of what the Fed will do at their meeting this week. Both consumer and business reports suggest the economy is performing better than expected. On the other hand, inflation exceeded expectations, which is not a positive for the outlook. In total, though, the reports painted an optimistic picture of the economy.

Economy

The biggest news last week was the inflation reports, both the consumer price index and the producer price index. Both measures increased a little more than expected which pushed the headline year-over-year numbers higher. The upside was supplied by the energy sector with consumer energy prices rising 10.5% in the month of August. Prices excluding energy were up a much more modest 0.3% and we did see housing related prices increase 0.3% month-over-month. The downside is the acceleration in the inflation measures increases the odds the Fed will increase rates at least once more. This is not certain, but the chances are certainly higher.

Reports painting a more optimistic outlook for the economy were retail sales, rising 0.6% month-over-month, industrial production, up 0.4% and the Empire State manufacturing survey, up to 1.9. These reports show the consumer continues to spend money and, at least in the Northeast, the manufacturing sector is climbing out of contraction. The downside last week was consumer sentiment for September, which fell 1.5 points to 67.7. Consumers are less optimistic about the future of the economy.

Capital Markets

Equity markets were up through Thursday, but a drop Friday pushed equities into negative territory for the week. Conversely, bond prices declined, and yields rose reflecting the acceleration in the inflation data. The inflation reports last week paint a picture that rates will indeed be higher for longer. And if true, equity valuations are more elevated than they appear. Real yields are approximately 2% and combined with a 16% increase in the S&P 500 year to date, the S&P 500 is priced at levels seen in the post-Covid stimulus and the tech bubble of the late 1990s. Following those periods, equities plunged. While not predicting similar declines, we do believe stocks are likely to struggle in the near term. With that said, there are areas of the equity markets that we believe are attractive and we are looking to take advantage of these opportunities.

The economic picture, at least temporarily, is improving and interest rates are now at levels that buying bonds no longer causes indigestion. The good buying opportunities in bonds do not extend to the whole of the stock market, so we are approaching stocks with caution, but nevertheless believe opportunities do exist.