As Q3 rolls to a close, we look back at a clearing picture. The equity (stock) markets had some small “give backs” which is not unexpected given the magnitude of the second quarter rise. The more aggressive stuff got hit harder but it was fairly consistent across the board. Interest rates continued to rise (more on that below) and the economy continued to roll along without hitting the level of recession and slowdown many predicted. From a portfolio standpoint, remaining balanced was the call and keeping bond duration short certainly helped out.
Economically, the biggest talking point is that thing called “interest rates”. Not because it’s all the rage in the financial media, but because “cost of money” aka interest rates is a major determinant of all things financial. Be it home purchases, large consumer buys, business expansion decisions, government financing, consumer credit costs….they are all impacted by interest rates. When money costs more, it costs everyone. Eventually it shows up as a drag on the economy and tends to slow things down.
This brings us to the “why are rates up… why does money cost more”. Some would say the Federal Reserve is to blame. While the Fed does set short term rates the cost of money is set in the bond markets. Those markets, like all markets, function on the basis of supply and demand and are more impacted by inflation than anything else. With inflation being stubborn and hanging at the 3.7% mark one would expect interest rates to hover near or even above current levels. The “free money” from the Covid debacle was the gasoline and the government stimulus was the match. Inflation was the result and now other inflationary spirals are at risk. As things cost more employees demand pay raises, unions strike for better compensation, and costs of production go up (which ultimately raises unit pricing for goods).
The other side of the story is the work and efforts of the central bankers. Specifically, the Federal Reserve and its efforts to stem the inflation tide and keep the economy functional. As mentioned before, the Fed, by raising short term rates and decreasing the money supply, are a counter force against the inflation genie. Our belief is the the Fed will eventually win the war and economic slowdown (recession) will be the result. A short shallow recession would be win. A positive is that similar to the 90’s….we have entered a potential era of increased productivity which will help the economy over the long haul. The crappy level of service we have been patterned to accept coupled with the advent of AI will be business cost cutters in the coming years.
Looking ahead we are planning to add more duration to our fixed income and small and mid-cap equity to the stock side. We remain underweight international. As always, balance and diversification remain the rule. Thanks for reading and don’t hesitate to reach out to chat about this or anything on your mind. We are here for you.
Stay well. Talk soon.
Ed, Frank, Tammy
Edward Stiles
200 N Union St.
Kennett Square, PA 19348
office 610-719-0615 cell 610-745-1931
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