Fed is Still Fighting Inflation
What is it?
As the Fed meets up in Jackson Hole this week, investors are analyzing the Fed’s continued fight against inflation.* While the inflation is not ramping up at an accelerating rate like it was last year, it’s still higher than the Fed is comfortable with long term. That means these higher interest rates may need to stick around longer. However, the Fed is also trying to slow inflation while keeping employment levels at a good spot. So if they raise and keep interest rates high, they’re hoping to do so without any major breakdowns.
Why does it matter?
They could keep interest rates higher for longer. Other countries around the world have felt the economic pressures and decided to raise interest rates. However, not all of those countries faced the same inflation as the U.S. did. Stocks have come down some in August so we are more comfortable adding some exposure here as opposed to when they were more overbought at the beginning of August. However, if the momentum declines more than we could see a downtrend coming and we would act on that if stocks continue this short term move downward.
We also added investments to commodities and energy that have done well. That is a sign that inflation has remained high or is expected to be high in the future.
Surprise in China
What is it?
China surprised the markets with a modest rate cut on its one year benchmark lending rate.** They followed other international countries that were feeling the pressure of a contracting economy.
Why does it matter?
We added some exposure to assets derived from Chinese companies in recent weeks. If those positions hold up well we may buy more since the policy change is currently favoring economic growth. However, these will not be very large positions. As this interest rate adjustment shows, China can make surprising moves at times. So we do not want to risk too much while we look to capitalize on the recent strength overseas.
Other articles we found interesting this week:
Subdued volatility ahead of this week’s key events
Stocks lose steam as August slump drags on
Current 401(k) portfolio
Our last 401(k) portfolio reallocation: 8/14/2023.
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Our process attempts to identify trends and momentum in the financial markets. With that information, we align our clients’ portfolio accordingly in the hope to help our clients accomplish their life goals while attempting to lower the risk of a large drop in their portfolio.
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Sources:
*Liz Capo McCormick, Jana Randow and Jonnelle Marte. “Fed Can’t Celebrate Yet as Investors Expect Rates, Inflation to Remain Elevated”. Yahoo Finance. 8/21/2023. https://finance.yahoo.com/news/fed-t-celebrate-yet-investors-000000225.html
**Reuters. “China surprises with modest rate cut amid growing yuan risks”. Reuters. 8/21/2023. https://www.reuters.com/world/china/china-cuts-1-year-lending-benchmark-keeps-5-year-unchanged-2023-08-21/#:~:text=SHANGHAI%2FSINGAPORE%2C%20Aug%2021%20
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