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Tag: interest rates

The Watch List

Here at Minich MacGregor Wealth Management, our team has a “watch list” of economic factors, market data, and ongoing storylines that we keep an eye on.  Sometimes, we move some items up or down on the list, depending on the impact we expect them to have on the markets.  By doing this, we can ensure that you stay current with what’s going on. 

Recently, a few items have dominated our watch list that we want to update you on.  While the markets have had a good year overall – the S&P 500 gained 10.2% in the first quarter alone1 – they were somewhat more volatile in April.  That’s largely due to three factors: GDP, inflation, and what both mean for interest rates.  So, with your April statement soon to be in your hands, we figured it was a good time to explain how these factors are affecting the markets.  

Let’s start with GDP, or gross domestic product.  GDP is the value of all the goods and services produced in a given period.  Typically, a rising GDP indicates a healthy, growing economy.  Here in the U.S., GDP growth has been positive for seven consecutive quarters.  In fact, on April 25, the U.S. Bureau of Economic Analysis reported that the economy grew by 1.6% in the first quarter of the year.2  But then a funny thing happened.  When the news came out, the markets promptly slid. 

Now, at first glance, this might seem counterintuitive.  After all, isn’t the economy growing a good thing?  If so, wouldn’t the markets go up on that news?    

The daily movement of the markets is always driven by a variety of factors.  In mathematics, we know that 1+1 always equals 2.  In physics, we know that e=mc2.  (Don’t ask us to explain why, though.)  But the markets are not governed by consistent laws.  They are driven by data, yes, but also by the context surrounding that data…and by the emotions that context provokes. 

In this case – and likely for the near future – there is a lot of context to consider when trying to parse any economic data.  In this case, the context is as follows:

While the economy expanded in Q1, that growth was much lower than economists thought it would be.  Most had forecast the nation’s GDP – the value of all the goods and services produced in a given period – would rise by around 2.4%, not 1.6%.2  And the Atlanta Fed had estimated a 2.7% gain.3 

This disparity between forecast and results was largely due to lower consumer spending.  While spending did increase in Q1, to the tune of 2.5%, this was also lower than economists estimated.2  A small decrease in exports and a slight increase in imports also dragged GDP down for the quarter.    

That brings us to the second factor, inflation.  On the same day as the most recent GDP report, the BEA also reported new data suggesting inflation may remain “sticky” for the foreseeable future.  The Personal Consumption Expenditures (PCE) price index, which measures the change in the prices of goods and services purchased by all consumers in the U.S., rose by 3.4% in Q1.  That’s a big jump from the 1.8% mark we saw in Q4 of 2023.2 

Normally, the fact that the economy grew at all would still be cheered by investors, if for no other reason than what it might mean for the third factor: interest rates.  As you know, the Federal Reserve has kept rates elevated for the past two years to help bring down inflation.  Since higher rates typically lead to less borrowing and lower spending, they are effective at cooling prices down.  But when the rate hikes began, many experts thought they would also cause the economy to decline

So far, that hasn’t happened.  So, investors figured that lower inflation, combined with a strong economy, would prompt the Fed to start lowering rates in the spring or early summer.  (This expectation is one of the main reasons the stock market has performed so well over the last year.)  But with inflation trending higher again, it’s now unlikely the Fed will cut rates anytime soon.    

For investors, though, all this data suggests a new potential problem: stagflation

While inflation is never easy, the pain has been cushioned somewhat by the fact that our economy has continued to grow at a healthy rate.  But what if prices remain high while growth becomes stagnant?  That’s stagflation.  It’s rare, and to be clear, we’re still a long way from that.  But Q1’s lower-than-expected GDP, combined with an uptick in inflation, now makes it a possibility our team has added to our “things to watch” list. 

So, what does this mean going forward?  Well, it’s important to remember that, while the markets move around like a motorboat, affected by every rock and wave, the overall economy turns like an aircraft carrier.  The data we see from one quarter may not make its true effects known for months to come.  So many outcomes are still in play.  The economy may slow just enough to bring down inflation without stopping altogether.  (That would be the Fed’s preference.)  On the other hand, new factors may lead to the economy accelerating again in Q2 or Q3 while also keeping prices high.  (In other words, a continuation of the status quo.) 

It’s impossible to predict which way the ship will go.  But what we can do is track which way the markets are trending now and then follow the rules we’ve established for your portfolioIf our signals indicate we should be offensive and look for opportunities, we’ll do that.  If they indicate it’s time to play defense and focus on preserving your money, we’ll do that.  In the end, it’s these rules and signals that will govern our decisions…not parsing every economic report, and certainly not emotion. 

As always, our team will keep you apprised of what’s going on in the markets and why.  We are constantly monitoring the items on our watch list and will continue to do so.  So, if you ever have any questions or concerns, we are always here to address them.  Have a great week!  

1 “Stocks close out 2023 with a 24% gain,” CBS,
2 “GDP growth slowed to a 1.6% rate in the first quarter,” CNBC,
3 “Stagflation fears just hit wall Street,” CNN Business,

A Tricky Recipe

You’ve probably noticed the volatility wreaking havoc in the markets over the past few weeks. To understand what’s going on, let us tell you a story.

Imagine you are inside a fancy restaurant, waiting for your meal to be prepared. While you wait, you can watch the chefs as they work. Suddenly, though, you notice there seems to be some uncertainty going on in the kitchen. By listening closely, you can just barely make out what the chefs are arguing about: Does the recipe call for two teaspoons of salt, or two tablespoons? Or is it even two cups?

One by one, the other diners start paying attention to the debate, too. Each voices their opinion to the other. Some diners want the chefs to add two teaspoons of salt. They rationalize that, while you can always add more salt later, but you can’t ever un-salt your food. Too much salt will ruin both the meal and everyone’s night. Others point out that there are no salt shakers on the tables, meaning if more salt is needed, the chefs will have to do it themselves. That will delay the meal, and people need to eat now. Better to just use two tablespoons. Sure, maybe the food will end up a little too salty, but that’s better than overly bland food — or no food at all.

As the wait drags on, the diners start getting nervous. They decide to amend their order and ask for less food. Other diners decide to leave the restaurant entirely. Finally, the head chef announces the restaurant is committed to adding just the right amount of salt, so they will add it gradually, little by little, until they know they have it right.

Unfortunately, this little speech, while providing clarity as to the chef’s intentions, does nothing to quell the concerns of all the diners. Some applaud loudly, others boo. Some rush to order more food, while others ask for the check. Before long, the noise is deafening.

Maybe, you think, we should have just ordered a pizza.

Crazy as it may seem, this little play actually describes some of what’s going on in the markets right now. (Except that the chefs are the Federal Reserve, the food is the economy, the recipe is for bringing down inflation, and the salt is interest rates.)

For the last nine months, the Federal Reserve has been trying to follow an incredibly tricky recipe: Bring down inflation without bringing down the economy. Just as chefs use salt to flavor food, our nation’s central bank uses interest rates to help moderate runaway consumer prices. The problem both face is it can be difficult to know how much of that magical ingredient to use. Just as too much salt can make food unbearable to eat, raising interest rates too high, too fast can trigger a recession. Raising interest rates too little, however, might do nothing to quell inflation. And like those diners in the story who needed to eat, consumers need relief from inflation now.

Those diners, of course, are investors. Every investor has their own opinion on what the Fed should do. More importantly, every investor is trying to guess what the Fed will do. That guessing is the prime reason for all this volatility. Investors who believe rising interest rates will hurt corporate earnings and trigger a recession decide to eat somewhere else, bringing the stock market down. Investors who still see the restaurant as the best place in town – regardless of interest rates – order more food and drive the markets back up.

Remember in the story how the head chef came out and made a big speech? Well, that’s my attempt at describing what Fed Chairman Jerome Powell did two weeks ago. Every year, Powell delivers a speech in Jackson Hole, Wyoming where he reveals the Fed’s views on the economy. In the days leading up to his speech, some investors thought he might announce the Fed would look to dial back on hiking rates much further. Their reasoning? Some data suggests inflation is peaking, so there’s no need to keep raising interest rates.

Powell wasted no time in dashing those hopes, however. In his speech, Powell said that this is “no place to stop or pause.”1 Fighting inflation will remain the Fed’s number one priority for the foreseeable future. That means the Fed will continue to gradually raise interest rates, likely around 0.5% to 0.75% every few months. He further said:

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” 1

In other words, bringing down inflation is simply more important than stimulating economic growth right now. (Or propping up the markets.)

This is why there’s been so much volatility in the markets lately. It’s also why we can expect volatility to continue, at least in the short-term. Many economists expect the Fed to hike rates by another 0.75% later this month. So, don’t be surprised to see more volatility before and after that announcement, if it comes.

The reason we’re telling you all this is to assure you that, while volatility is never fun, it is not unexpected. It has not taken us unawares. Nor, frankly, do we feel it’s something you need to stress over. You see, here at Minich MacGregor Wealth Management, we act more like “financial dietitians” than anything else. (This is the last food metaphor, we promise.) A dietitian focuses on using the fundamentals of good nutrition to help people eat better, healthier foods so they can achieve their health goals – regardless of what’s “in style” or what celebrity fad-diet is trending. As your financial advisors, our job is to help you achieve your financial goals, in part by making sound, long-term decisions, not overreacting to what the Fed does – or says – or what the market thinks about it.

To put it simply, the volatility we’ve seen lately is the same old story we’ve been reading about all year long. It’s the same story we’ll probably continue to read about moving forward. For that reason, our advice is to enjoy the end of summer rather than stressing about market headlines. Our team will continue to monitor your portfolio. And of course, if you ever have any questions or concerns, please let us know. That’s what we’re here for!

1 “Powell warns of ‘some pain’ ahead as the Fed fights to bring down inflation,” CNBC, August 26, 2022.