Greetings and warm wishes from our team at Kessler Investment Group. We appreciate the trust you’ve placed in us as your financial partners and wanted to provide you with a comprehensive update on the current state of the market, our outlook, and the strategies we’re adopting to steer your investments in the right direction.
The market’s recent volatility has undoubtedly caught your attention, and we’d like to assure you that this is not unexpected. As we predicted in our May letter to clients, weakness has crept into stock prices this quarter. We see this current weakness as a garden-variety patch of weakness and not the beginning of a deeper move. However, it’s important to note that this is a normal part of market cycles, and our experience equips us to guide you through it.
While short-term fluctuations can be unsettling, our analysis indicates that clients should not anticipate stock price declines exceeding 10% from the peak observed in July. This serves as a reminder that, despite the roller coaster ride, the broader market retains a degree of resilience. Certain sectors will experience weakness while others see strength, even during the recession we believe is ahead.
Looking at sector-specific performance, we anticipate positive movements in energy, industrial, real estate, communication, and material stocks. These sectors are poised to benefit from evolving economic dynamics and changing consumer preferences. On the other hand, utility and consumer staple stocks may experience strength in the short term, but we don’t foresee this trend enduring for long.
As we look toward the fourth quarter, we’re optimistic about the potential for stock price gains. Historical trends often show a positive correlation between this period and market performance. As inflation continues to subside and consumer spending remains buoyant, this setup aligns with our prediction for stock price gains later this year.
Analyzing the yield curve, we note signals indicating a future recession. Historically, whenever short term interest rates exceed long term interest rates for an extended period, a recession follows. However, we believe that this recession might not manifest until next summer. Our assessment of the current economic robustness gives us confidence in this projection, although we remain vigilant in monitoring potential developments.
In terms of interest rates, our prediction is that the Federal Reserve will refrain from further hikes but will hold them steady for as long as possible. Their approach, centered on maintaining a balance between growth and stability, holds significant implications for various sectors, including housing.
It is important to remember the Fed has two mandates: Price Stability (inflation) and Low Unemployment. One sign of inflation has been rising home prices. Despite the Fed’s efforts, the desired impact on the housing market is hindered by the prevalence of locked-in low-rate mortgages. Consequently, there’s a decrease in the number of homeowners attempting to sell their properties, contributing to a shortage in housing supply.
The shortage in housing supply has led to an increase in home values. Stable to increasing home equity values will soften the impact of the recession on the economy. It also eliminates any comparison to the 2008 Great Financial Crisis that was led by falling real estate prices.
With more homeowners staying in their existing home and not “trading up” to a larger one, the consumer will stay strong for longer. The Fed’s “jawboning” about raising rates versus acting will persist. More “talk” and less “action” on interest rates by the Fed is crucial to maintaining the delicate equilibrium they’ve established in their fight against inflation. This measured approach between action and “jawboning” should continue until the recession comes.
As we tread further into the economic landscape, we anticipate the acceleration of job losses soon. Nonetheless, the overall economic outlook remains robust, underpinned by the resilience of various sectors. This enduring strength forms the foundation of our optimism about the broader market’s performance through this year and into 2024.
It is worth noting that our view is the Fed has done an admirable job of responding to inflation over the past two years. It was appropriate to allow inflation to accelerate before acting. This slow response reduced the risk of deflation regaining a hold on the economy. Hiking rates at an unprecedented pace during a period of low unemployment has given the Fed cover to focus exclusively on inflation. During the stagflation of the early 1980’s, the Fed did not have the luxury of tackling one mandate at a time as they do now. We see this as reducing the stress on the economy and the risk of a catastrophic policy mistake.
To control inflation, the Fed has worked hard to achieve what is called a “restrictive” policy. This is achieved when short-term interest rates are higher than the rate of inflation. The Fed has successfully achieved this outcome as the current rate of inflation is below the current Fed Funds rate of 5.5%. What is important to keep in mind is that if inflation continues to move lower, which we believe will be the case, the Fed can begin to cut interest rates while keeping them in restrictive territory. This would be ideal for the economy.
Once inflation is under control, the Fed will be able to turn its attention toward the worsening employment picture. It is at this point that we expect the Fed to begin cutting rates. Therefore, we do not expect the Fed to shift from “restrictive” to “accommodative” territory until we see accelerating job losses.
Our projections suggest that stock prices will likely continue their upward trajectory until the third quarter of 2024. While volatility remains a factor, we’ve strategically positioned your portfolio to maximize opportunities while minimizing risk.
Looking further into the horizon, our analysis points toward a likely recession in the coming year. Yet, this doesn’t imply that stocks should be avoided entirely. On the contrary, the growth of artificial intelligence (AI) holds the potential for substantial gains in productivity, even as job losses escalate. This dynamic could set the stage for a multi-year rise in stock prices comparable to the internet boom of the 1990s.
In conclusion, the current market environment may be turbulent, but it’s also rife with opportunities. Investors are “locking in” recent gains and positioning their portfolios ahead of shift in Fed policy from “restrictive” to “hold” to “accommodative”. This will continue for a little while longer, but we do not expect a crash or recession to take root this year.
Our commitment to you remains unwavering, and we are here to guide you through these fluctuations with a steady hand. Please don’t hesitate to reach out for a personalized discussion about your investment strategy and any questions you may have.
Thank you for your trust and partnership as we navigate these financial waters together.
Sincerely,
Kessler Investment Group, LLC
All information in this presentation is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic performance data is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. Certain statements contained within are forward looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Please consult your adviser for further information.
Opinions shared in this presentation are not intended to provide specific advice and should not be construed as recommendations for any individual. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.