Wealth Management

Posted by Lawrence Gillum, CFA, Fixed Income Strategist

Tuesday, July 19, 2022

Fixed income markets have been hit hard this year by changing monetary expectations due to stubbornly high inflationary pressures. For investors allocated to a core bond strategy (as defined by the Bloomberg Aggregate index), returns have been the worst ever to start a year. And within these core bond sectors, there’s been no place to hide—even the traditionally defensive mortgage-backed securities (MBS) sector is down 8% this year (although the broader index is down nearly 10%). So what can investors expect going forward? While near term uncertainty is certainly high, we think the sector is in a good position to outperform.

Agency MBS performance is largely impacted by interest rate volatility as these securities are AAA-rated and government guaranteed. MBS have an embedded optionality with regard to the timing of principal and interest payments, so higher interest rate volatility equates to higher uncertainty around refinancing and mortgage prepayments. This is the primary fundamental risk for MBS. As seen on the LPL Chart of the Day, interest rate volatility, as defined by the MOVE index, has been near historically high levels and has seen a recent divergence from implied equity volatility (as defined by the VIX index). “MBS may have been disproportionally penalized given the rate volatility and uncertainty surrounding Federal Reserve (Fed) rate hikes,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “As interest rate volatility decreases, however, which we think will happen as the Fed gets through its rate hiking campaign, MBS may be poised to outperform.”

View enlarged chart.

Another key risks for the MBS market in 2022 and 2023 is the potential for outright sales of securities by the Fed as it shrinks its balance sheet. Currently, the Fed is allowing securities to naturally roll off as they mature; however, the Fed has stated that it would like to aggressively shrink its balance sheet and primarily hold Treasury securities. However, given the maturity profile of the Fed’s MBS holdings and the repricing higher of mortgage rates recently, natural roll-off through prepayments seems unlikely at this point. As such, the Fed will likely be a seller of MBS in 2023, if not earlier. And while this would seemingly put upward pressure on yields and spreads, its likely we’ll see traditional MBS investors (mutual funds, banks, foreign investors) re-enter the market as they were crowded out due to Fed purchases. Moreover, the relative attractiveness of MBS versus high-grade corporates may improve to the point that investors may choose the AAA-rated paper with lower prepayment risks over the BBB-rated corporate paper that may experience elevated risks during an economic slowdown. That said, a continued weakening of the housing market could cause the Fed to reevaluate its plans to exit the MBS market completely. As such, we continue to think the risk/reward profile for owning MBS is attractive.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks 

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

https://signaturechicagowm.com/wp-content/uploads/2022/07/Weekly_Market_Commentary_7182022.pdf

Posted by Jeffrey J. Roach, PhD, Chief Economist

Friday, July 15, 2022

Supply-Driven Contributions to Inflation

You have heard it here many times that the current inflationary environment has been irritated by supply-related problems with ports, international manufacturing shutdowns, and global shipping as primary challenges. And indeed, these have been major factors in inventory management. For example, auto manufacturers are still hampered with ready access to necessary components. As shown in the LPL Chart of the Day, inflation surprised markets with an accelerated inflation print this week, although the more comprehensive metric of inflation, the Personal Consumption Expenditure (PCE) deflator may not be as hot. The PCE deflator for June will be published on July 29.

View enlarged chart.

For the past year, supply-related problems contributed more to inflation than demand-related imbalances as shown in the gray box in the chart below. China’s zero-COVID policy was one of the biggest glitches in supply chains as metro areas and ports were shuttered by the Chinese government. However, things may be on the verge of changing. In May, the latest data point for the PCE, demand-driven contribution to inflation was slightly higher than the supply-driven contribution. This is an important development because the Fed’s monetary policy tools do not work on supply shocks but rather, only on demand.

View enlarged chart.

Good News for the Federal Reserve

The good news is that inflation may become more demand-driven and less supply-driven. This is positive for policy makers because monetary policy tools are now more relevant than they were when inflation was primarily from supply bottlenecks. So as supply constraints ease and as Fed tools become more impactful, we could see the rate of inflation decelerating in the latter half of this year.

For more on the current environment, be sure to watch our latest Econ Market Minute, where LPL Financial Chief Economist discusses more about the current state of affairs.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks 

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Posted by Lawrence Gillum, CFA, Fixed Income Strategist

July 12, 2022

The consumer price index (CPI) is scheduled to be released on Wednesday and it is widely expected that the headline inflation number will again resemble consumer price increases last seen in the early ‘80s. Currently, consensus expectations are for headline inflation numbers, which include food and energy prices, to increase by 8.8% year-over-year (YoY) and by 5.7% YoY excluding food and energy. So with inflation pressures continuing to run hotter than many investors have experienced in quite some time, are Treasury Inflation-Protected Securities (TIPS) an appropriate inflation hedge within a diversified asset allocation?

Certainly from a valuation perspective, the argument for owning TIPS has improved. As seen on the chart below, after spending years in negative territory, TIPS yields are decidedly positive again for 5-year, 10-year and 30-year maturities. Moreover, since 2013, TIPS yields have rarely been higher. For the three tenors presented below, yields are currently in the top quartile, meaning only around 25% of the time have yields been higher than they are currently. “Paradoxically, despite higher realized inflationary pressures, TIPS yields have actually increased (and prices lower),” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “That may be because markets are pricing in a return to a more normal inflationary environment after these near term price pressures abate.”

View enlarged chart.

Additionally, one of the key metrics we look at as a guide to determine if/when it makes sense to own TIPS versus just owning comparable maturity nominal Treasuries is the “breakeven” rates between the two securities. That is, the difference in yields between the two securities, which is also the market’s best guess about what inflation will average over the maturity of those securities. All things equal, when the breakeven rate narrows, performance between two comparable maturity securities is expected to be similar absent inflation surprises.  As seen in the LPL Chart of the Day, market-implied inflation expectations seemingly peaked in March and have fallen closer to longer-term historical averages. So, if central bankers are correct and we are on the precipice of a new structurally higher inflation regime, it’s possible that we could get periodic upside inflation surprises, which may allow TIPS to outperform Treasury securities. As such, depending on your views on inflation on a go forward basis, it may make sense to allocate a small portion of your bond portfolio to TIPS.

View enlarged chart.

However, while valuations have improved for TIPS, the aggressive tightening expected from the Fed to arrest consumer price increases, potentially at the expense of economic growth, may cause real yields to increase and inflation expectations to fall further, in our view. Further, during periods of economic slowdowns, despite being a government-issued security, TIPS have not, historically anyway, provided the same level of equity market protection as nominal Treasuries. Finally, since 2013 and up until the COVID-19 pandemic, TIPS have generally underperformed Treasury securities as inflation was well contained and rarely surprised to the upside, at least consistently. So, if we’re not headed for a new higher inflation regime, TIPS may continue to underperform. Certainly the value proposition for TIPS has improved but given the expected reaction function of the Fed, we think TIPS could underperform nominal Treasuries in the near term.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks 

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Posted by Jeffrey J. Roach, PhD, Chief Economist

Friday, July 8, 2022

Broad-Based Job Gains Keep Recession Away

The U.S. added 372,000 jobs in June, at just a slightly lower clip from May, while the unemployment rate remained unchanged at 3.6%. The participation rate dipped to 62.2% in June as individuals dropped out of the labor force.

In contrast to what some pundits are suggesting, the economy is not currently in recession. The job market is too hot for that scenario – at least for now. We expect the labor market to expand throughout the next several months but at a slower pace as firms still struggle with finding suitable workers. Firms will still likely be increasing wages as they deal with a shortage of qualified workers and elevated quit rates. The National Federation of Independent Business reports that 60% of firms have few or zero qualified applicants for current job openings so this could turn into a long-term problem with the U.S. workforce.

Now for the good news. Job gains were broad-based in June. Every major sector added jobs except Government. Business Services, Education and Health Care along with Leisure and Hospitality sectors all experienced outsized gains in employment.

That Goldilocks Scenario

The ideal scenario for policy makers would be a slow deceleration in job gains as the economy progresses throughout this year. As shown in the LPL Chart of the Day, the 3-month average change in job growth slowed to 375,000 in June. “The trajectory for job growth really can’t get much better than this,” says LPL Financial Chief Economist Jeffrey Roach. This could be the perfect scenario for the Federal Reserve (Fed). A measured cool-down in job growth and a slight uptick in unemployment could be the antidote for treating the extremely tight labor market.

View enlarged chart.

One Nagging Problem Are Those Still Out of the Labor Force

The high number of people not returning to the work force is one of the nagging problems with the labor market right now. Relative to pre-pandemic levels, the economy has 4.8 million more people out of the labor force. Some likely took early retirements but that does not explain all of the story. If individuals do not reenter, the labor market could remain tight. However, as inflation pressures linger, we think that some individuals will eventually return to work.

View enlarged chart.

Federal Reserve Likely to Continue on Projected Tightening Path

Job gains in June were broad based and with another good labor report, the Federal Open Market Committee (FOMC) can emphasize the imbalances to price stability over supporting labor markets. Inflation is the paramount concern for committee members and a tightening labor market adds fuel to the fire. As job gains moderate and more people come into the work force, we could see the unemployment rate increase, removing some of the tightness of the labor market. Unless economic data deteriorate quickly, the FOMC will likely increase rates again in July by 75 basis points (0.75%).

For more on the current environment, be sure to watch our latest Econ Market Minute, where LPL Financial Chief Economist Jeffrey Roach discusses more about the current state of affairs.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks 

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Posted by Jeffrey Buchbinder, CFA, Equity Strategist

Thursday, July 7, 2022

It’s a bull market for pessimism right now. We know the list of concerns is long and includes an aggressive Federal Reserve with a spotty (and that’s putting it kindly) track record of navigating a soft landing, stagflation, ongoing China lockdowns, disrupted supply chains, overly optimistic earnings estimates, the ongoing Russia-Ukraine war, and the latest—failing crypto firms.

“We fully understand the bear case right now and acknowledge optimists are scarce,” noted LPL Financial Equity Strategist Jeffrey Buchbinder. “But based on the market’s track record after sharp downdrafts and favorable seasonal forces in July, we think now may be a good time for those with some dry powder to nibble at this market.”

The LPL Research Strategic and Tactical Asset Allocation Committee did just that in July, raising its equity allocation by 3 percentage points to 65%, compared with a benchmark of 60%.

So why now?

First, as shown in the LPL Chart of the Day, stocks have historically bounced back strongly from big 2-quarter drops as we just experienced. In fact, after a more than 20% drop over 2 quarters (the S&P 500 Index fell 20.6% in the first half of 2022), the average gain the next 2 quarters has been 21.5%.

The average performance over the following year has been 31.4%, which is consistent with the average gain off of a midterm election year low (32%). That low may have been put in place last month, though we’ll have to wait to see for sure.

View enlarged chart.

While of course we can’t predict that historical pattern will repeat, it certainly helps reassure those who have stuck with this market that better days for stocks may be on the way.

Another reason to be encouraged that stocks may soon be poised for a rebound is that in recent years July has tended to be a good month for stocks. Over the last decade, the S&P 500 has gained an average of 2.5% in July, behind only April and November—and only marginally—as the best months over this time period. Going back further, since 1950 only April, November, and December have been better months for stocks.

View enlarged chart.

The next round of inflation data, the start of a much-anticipated third quarter earnings season, and what we hear from the Fed at the end of this month will go a long way toward determining whether July follows this pattern of stock market gains. Regardless, we like the chances. Don’t forget, shallow bear markets like we have so far tend to bottom in about 7 months on average. Month seven is July. History seems to be on the bulls’ side.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks 

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Posted by Barry Gilbert, PhD, CFA, Asset Allocation Strategist

Wednesday, July 6, 2022

A historically weak quarter, six months, and year for stocks, bonds, and the two combined is now behind us. With stocks and bonds both showing weakness, not surprisingly a 60/40 balanced portfolio that combines the two has also shown weakness. As shown in the LPL Chart of the Day, since 1976 (the inception of the Bloomberg U.S. Aggregate Bond Index), the second quarter of 2022 was the fifth worst for the S&P 500 Index (“S&P 500”), the fourth weakest for the Bloomberg U.S. Aggregate Bond Index (“Agg”), but the worst quarter for a combination of the two, using a mix of 60% of the S&P 500 and 40% the Agg.

“This has been a very tough quarter for a 60/40 portfolio of stocks and bonds,” said LPL Financial Asset Allocation Strategist Barry Gilbert. “In fact it’s the worst on record. But better times may be ahead. Following the nine other worst quarters that round out the bottom 10, eight were higher a year later, with an average return over 17%, which is a very solid year for a 60/40.”

View enlarged chart. 

Some things to know about the most recent quarter:

• Of the 10 worst quarters for a 60/40 portfolio, every other one was driven mostly by S&P 500 losses. The third quarter of 1981 was the only other quarter in the bottom 10 that saw both stocks and bonds decline.
• Q1 and Q2 2022 combined was the second worst two-quarter period for a 60/40 portfolio.
• The four quarters ending Q2 2022 was the second worst four-quarter period for a 60/40 portfolio even though it does not appear among the 10 worst for the S&P 500 alone. It was, however, the worst four quarters for the Agg since its inception.
• The nine other worst four-quarter periods for the Agg saw an average gain of almost 11% over the next year. With yields still historically low we wouldn’t expect that kind of return now, but it does signal the potential for future gains.
• This is the second consecutive quarterly loss for a 60/40 portfolio. That has happened nine times in the past. The average return over the next quarter was 5.0%. The streak ended at two quarters seven times and extended to a third quarter twice.

We remain in a turbulent period for markets and the economy. While we don’t believe anything more than a mild recession is priced into the S&P 500 and see potential for more volatility, we think the S&P 500 still has the potential to see solid gains from here by year end, driven by earnings and some multiple expansion as inflation potentially starts to settle down. Bond returns will depend, in part, on how aggressive the Fed needs to be, but weak four-quarter periods (and this is the weakest on record for the Agg) tend to be followed by greater stability.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks 

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Posted by Lawrence Gillum, CFA, Fixed Income Strategist

Tuesday, July 5, 2022

The U.S. Treasury market is arguably the most important market in the world. Not only does the market provide the financing of the federal government, it also provides a safe and liquid asset to support the flow of capital and credit to households and businesses, and also facilitates the implementation of monetary policy. With Fed tightening taking place at an elevated pace and market participants positioned for still higher rates, intra-day price moves in the Treasury market have been outsized with double-digit moves becoming the norm rather than the exception. While some of those day-to-day price moves could be technical in nature, likely playing a role is the lack of liquidity in the Treasury market over the past 12-months.

“Treasury market stability is an important part of the Fed’s job,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “And if the Fed’s job wasn’t hard enough, the worst case scenario is that liquidity doesn’t improve and the Fed has to slow the shrinking of its balance sheet just as it gets started.”

As seen in the LPL Chart of the Day, liquidity in the Treasury market, as measured by the Bloomberg U.S. Government securities index, has been deteriorating with liquidity conditions as poor as they’ve been since the COVID-induced market volatility in 2020. Other metrics such as the spread between new and older issued Treasury securities (called on-the-run versus off-the-run securities) as well as the price action in the short-term funding markets further confirm the lack of depth in the Treasury market. Back in 2020, due to poor liquidity conditions in markets, the Fed had to step in to help stabilize markets. Now, the Fed is actively reducing liquidity to help tighten financial conditions in an effort to reduce consumer price pressures. Additionally, the Fed has just started paring back the amount it reinvests in Treasury securities. As such, the relative lack of liquidity in markets has been a big reason we continue to see elevated levels of volatility in fixed income markets broadly.

View enlarged chart.

So what’s next? Unfortunately, until inflationary pressures show definitive signs of cooling so the Fed can slow rate hikes, we’re unlikely to see liquidity conditions improve. Also complicating matters is the continued withdrawal of liquidity by the Fed, which owns nearly 25% of Treasury securities outstanding. As it starts to play a smaller role in the Treasury market, other investors will need to step in to help support the market. However, if volatility and illiquidity pressures remain high, we may need to see higher yields in order to entice other investors to take on these additional risks in the normally staid Treasury market. In the meantime, investors should brace themselves for elevated levels of volatility in fixed income markets.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks 

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Posted by Jeffrey J. Roach, PhD, Chief Economist

Friday, July 1, 2022

Goods versus Services

Before we think about the new world order that global inflation may enter, let’s start with the good news within the United States. The Federal Reserve’s (Fed) preferred measure of inflation, the core PCE deflator, is slowing on a year-over-year basis. As shown in the LPL Chart of the Day, the May core PCE deflator rose 4.7% from a year ago. The annual growth rate slowed for the third consecutive month after reaching a high of 5.3% year-over-year in February. “Inflation is still stubbornly high and far above the Fed’s long run target of 2%, but the deceleration is encouraging,” explained Jeffrey Roach, Chief Economist at LPL Financial.

View enlarged chart.

Price conditions in the U.S. are best understood by breaking out goods inflation from services inflation, and the rate of inflation seems to be cooling for durable goods.

Auto prices continue to moderate as growth rates for motor vehicles and parts slowed for the fourth consecutive month. Used auto prices rose at the slowest pace since May 2020 and as supply bottlenecks improve, the car market should begin to revert to pre-COVID-19 behavior.

Recreational goods and vehicle prices were flat from a year ago, as high gas prices are slowing demand for recreational vehicles.

However, a major concern for the Fed is that the surge in travel-related demand is pushing services inflation up. Consumer prices for housing, restaurant, and accommodation services are reaching new highs as consumers release pent up demand for travel and housing costs react to the recent hot real estate market.

Overall, this is a positive report for investors as the core year-over-year growth rate has consistently fallen since February. This inflation report gives some salve to policy makers after what seemed to be unanchored inflation expectations in the previous week’s Consumer Confidence Report. According to the Conference Board, inflation expectations 12 months hence rose to 8%, a record high but conflicting with the University of Michigan report as well as the inflation rate implied by Treasury Inflation-Protected Securities (TIPS).

Could Inflation be Entering a New World Order?

With all the talk on inflation rates decelerating, in actuality, inflation may not reach the preferred target in the near term.

Consumers may have to live in a new world order where inflation consistently runs hotter than the previous decade. At least, that’s what global central bankers warned at the ECB conference in Portugal.

Reshoring production, newer health protocols, and tight labor markets could keep inflation rates above the 2% long run average for the near term.

Policy makers must come to grips with a real possibility that inflation rates will not come down to their preferred targets for many years. The latest inflation report is a juggernaut for the Federal Reserve as they use blunt instruments to slow aggregate demand during a time when inflation is also irritated by supply shocks. For more on the current environment, be sure to watch our latest Econ Market Minute, where Chief Economist Jeffrey Roach gives more economic insights.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks 

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.