“Deficits are a problem… But the problem is not the size of the deficit, it’s the size of the government’s claim on our economy.” – Ronald Reagan
Last week's market recap:
- The S&P 500 closed the week up .84%. Year-to-date the index is up 15.99%
- NASDAQ closed the week up 2.27%. YTD the index is up 30.59%
- U.S. Aggregate Bond index was up .28% for the week. YTD the index is up .41%
- 10-Year Treasury Rate decreased slightly, ending the week at 4.25% down from 4.26% the prior week
- Fed Funds Target rate is currently 5.25-5.50%
- The 1-Year Treasury is yielding 5.46%
- A 6 Month Treasury is yielding 5.59%
The week ahead:
- JOLTS – Jobs data
- Consumer Confidence
- PCE – The Fed’s preferred measure of inflation
Last Week's Market Recap:
Last week at Jackson Hole, Jerome Powell disappointed investors by saying, more work needs to be done to bring inflation back to the Fed’s 2% target. The Fed’s inflation target remains at 2% (for now…). The “higher for longer” theme is gaining traction.
Why are bond yields still rising?
There are many explanations for why bond yields are rising (This means bond prices are going down). The simplest explanation is we have economic strength, inflation is cooling, and people have jobs. The bond market is starting to accept that we may have higher rates for longer than previously anticipated. “Higher for longer” is starting to show up in long term rates. Expectations seem to be getting more realistic. The bond market and equity markets have been pricing in two completely different outcomes and it looks like they are both taking a step towards agreement.
Rate increases may lag more than previously expected:
Higher interest rates aren’t affecting many corporations (see the chart below) or individuals as much as expected. Most interest expenses have been locked in at lower rates. Some are arguing that higher rates are actually a form of stimulus for savers.
U.S. Government Debt:
The Treasury Department’s debt matures much faster than large publicly traded corporations. Over half of the Treasury’s Debt will mature by January 2026. U.S. Government Debt isn’t dominating the headlines at the moment, but eventually it may. The Fed is independent, so it should be up to Congress to figure this out. The simplest way to solve this problem would be a combination of higher taxes, less government spending, and some inflation to help inflate the debt away.
As always, let us know if you have any questions.
CRA Investment Committee
Matt Reynolds CPA, CFP®
Tom Reynolds, CPA
Robert T. Martin, CFA, CFP®
Gordon Shearer Jr., CFP®
Jeff Hilliard, CFP®, CRPC®
Joe McCaffrey, CFP®
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