Mid-Year Market Outlook: The Big Question

June’s consumer price index (CPI) report calculated the year-over-year rise in inflation at a scorching 9.1%!¹ For investors, this is an area of focus as high inflation is a primary driver of Federal Reserve interest rate policy decision making. The higher the inflationary pressure, the higher the probability that the policy committee will respond, perhaps aggressively, with a higher Federal Funds Rate that is intended to stymie economic growth and future price increases. Periods of slower economic growth are typically correlated with lower corporate profit margins, and lower profit margins are not typically great for potential future stock market returns. Aggressive Federal Reserve interest policy is widely regarded as a significant catalyst for this year’s stock market sell off. Higher rates are also not a positive for bond markets, hence the selloff in that space as well. Since higher inflation beckons higher rates, that puts downward pressure on asset valuations across the board. The big question of the moment is: When will inflation pressures peak and give the Federal Reserve policy committee an excuse to pause future rate hikes?

While the latest higher than expected CPI report was indeed troubling, it is important to know that it is backward looking and may not capture current and likely future data trends. For instance, there are signs of hope on the inflation front as some major commodities, while still priced higher than previous years, are seeing sharp price declines from their all-time highs (see graphic below). These lower prices for basic materials used in many consumer goods should eventually filter through the production chain and lead to lower price inflation for the end consumer. If this comes to pass, future lower CPI measures should allow the Federal Reserve to pause further rate hikes, which will create a more favorable environment for asset price appreciation in the post-peak inflation era.

CWM Risk-Adjusted Models: It should be expected that markets will continue to be dramatic as the world combats 40-year high inflationary pressures along with major geopolitical events like the invasion of Ukraine. Based on established disciplines, your CWM team believes that maintaining defensive positioning while awaiting a potentially more favorable future risk-taking investment environment is still the most prudent course for the time being. Future allocation changes will be made as relevant datapoints change.

CWM Accumulator Models: Your CWM team believes there is a high potential for continued market volatility and perhaps even further sharp market valuation drops in the near-term (0 – 2 years). A significant benefit of choosing this more passive investment style is the longer-term focus (5+ years) of the strategy and the ability to ignore day-to-day news, so long as discipline is maintained. However, that discipline still involves controlling your own behavior and continuing planned regular contributions despite market activity, assuming the ability to do so. This will be harder in negative market environments, where there will be strong emotional temptation to discontinue contributions and/or reduce model risk AFTER a market drop.

Part of having investment discipline is the responsibility of investors, who should, assuming they are able, continue to make portfolio contributions in line with their financial plans. New contributions are particularly important in scary market environments, where often the best future return (buy low) opportunities exist.

If you are interested in a deeper dive into the current market data, have questions, or would like to schedule an appointment with a CWM advisor please contact us or call the office at (425) 778-6160.

¹Cox, J. (July 13, 2022). Inflation Rose 9.1% in June, Even More Than Expected, as Consumer Pressures Intensify. CNBC.

*Past performance is no guarantee of future results.