Partly Cloudy with a Chance of a Hurricane

"Partly Cloudy with a chance of a Hurricane", is a headline I read

recently used to describe our economy's divergent outlook of possible

outcomes.

The last couple of weeks was busy for the markets. A Federal Reserve

(Fed) rate hike, a much-anticipated gross domestic product (GDP) report,

the release of the inflation rate at 8.5% and the busiest week of earnings

season got most of the headlines.

Stocks didn’t seem to be bothered by an 8.5% inflation number and a

negative GDP report for the 2nd quarter in a row. Some market watchers

call this a recession. The S&P 500 Index enjoyed its best month since

November 2020. I believe the markets have gotten a little ahead of

themselves.

The inflation battle is far from over, but the market’s reaction last couple of

weeks looks a bit encouraging. There’s talk that the Fed may be poised to

surprise the market with a pause by year-end. I find that difficult to

believe when inflation is still at 40-year highs. If we do see a drop in

inflation and a continued slowing in the economy, then yes, I can see the

Fed maybe pausing.

Looking ahead, August has historically been a weaker month for stocks.

Which might be an opportunity to increase the Equity allocation in your

portfolios. Considering that midterm election year lows, which typically

come around this time on the calendar for the S&P 500, have historically

been followed by an average gain of over 30% over the subsequent 12

months. Moreover, some of the timeliest indicators of inflation, such as

commodity prices and various consumer and business surveys, indicate

some cooling ahead, even if it may be a slow process. Market-based

interest rates—those not controlled by the Fed—have come down quite a

bit, supporting stock valuations.

At the same time, geopolitical tensions are rising as House Speaker

Nancy Pelosi visited Taiwan and the war in Ukraine continues. But we

believe the combination of low valuations, prospects for lower inflation, and

the possibility that the Fed signals a pause over the upcoming months tip

the scales toward a more positive trend. The ride probably won’t be

smooth, but we believe adding equity exposure gradually, not all at once,

in the coming weeks will be prudent.

Our team at Texas Private Wealth is monitoring the markets daily and will

continue to keep you informed every month. Please call or email us

anytime if you have any questions.

Thank you,