FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
October 18, 2022

IN THIS ISSUE:

1. The Economy: Are We In A Recession Yet?

2. CPI Inflation Remains At A 40-Year High

3. Fed Likely To Continue Record Rate Hikes

4. Update On Our Alpha Advantage Strategy

Overview – Touching All The Bases

When I prepare to write these weekly letters, as I have done for over 40 years, I always do a lot of reading, looking for a main topic to focus on. Some weeks, however, no one single topic comes up which I find important enough to focus a whole letter on. This is one of those weeks.

So today, we’ll touch on a number of issues including the economy, inflation and the Fed. Those are topics which seem to be on the minds of most Americans right now – plus the election which I’ll discus at some length next week.

Finally, I’ll update you on the performance of our Alpha Advantage Strategy this year. I think you’ll be interested to see how it has done in the first serious bear market since 2008.

The Economy: Are We In A Recession Yet?

As we all know, the US economy has slipped into negative territory this year, not by a lot so far, but significantly below the very strong showing in 2021, as you can see in the following chart. GDP fell at an annual rate of 1.6% in the 1Q followed by -0.9% in the 2Q.

Many analysts consider two or more consecutive quarters of negative GDP to be the definition of a recession. However, the National Bureau of Economic Research (NBER), which is the official arbiter of when recessions begin and end, has yet to declare this is a recession. Why is that?

The NBER considers numerous economic indicators, weights each one as they see fit, and then makes its decisions. While the NBER does not disclose how much weight it gives to each of its indicators, it has shared that it puts a lot of weight on the labor market and personal income.

The labor market has been super strong all year, with the unemployment rate falling to 3.5%, the lowest rate in over 40 years. There remain just over 10 million unfilled jobs out there. While that is down from a record 11+ million earlier this year, it’s still extremely high.

Personal income has risen every month since January this year, not by all that much mind you, but consistently higher as you can see below.

Since we know the NBER puts a lot of weight on these two indicators, this explains at least in part why the agency has not yet declared the economy is officially in a recession. However, if the economy turns in negative growth in the 3Q, that should easily push the NBER to make the call. We won’t get that report until later this month.

We do, however, know that the Index of Leading Economic Indicators (LEI) was down in July and August. So, barring a notable increase in September, the LEI will very likely have experienced three consecutive quarters of negative growth this year. This, too, could push the NBER to make the recession call. The LEI report for the 3Q comes out this Thursday.

In summary, the economy is not in an official recession yet, but for most Americans, it sure feels like it is, and it may be official before the end of this month.

CPI Inflation Remains At A 40-Year High

The Consumer Price Index edged slightly lower in September (-0.4%) to an annual rate of 8.2%, but the core rate (minus food and energy) rose to the highest level in 40 years, coming in at 6.6% year over year. Both numbers came in higher than expected. This has to be frustrating for the Fed as I will discuss below.

While some prices are starting to ease, costs remain high on an annual basis: Gasoline, down 4.9% in September, is up 18.2% year-over-year; used cars and trucks, down 1.1% in September are up 7.2% annually; and furniture, down 0.1% in September, is up 10.1% year over year – just to name a few.

While fuel costs have come down from their June high, the effects remain felt to this day, what with the average gas price at $3.89 a gallon per AAA. Moreover, gas prices could rise again in the months ahead as a result of ongoing uncertainty related to Russia’s war in Ukraine and the decision earlier this month by OPEC to slash oil production by 2 million barrels per day, the biggest cut since the start of the pandemic.

The increase in food prices is also worrisome. On an annual basis, food prices are up 11.2% from last September, just shy of the 43-year high of 11.4% hit in August, CPI data shows.

The Producer Price Index (PPI), which measures wholesale prices US businesses pay for materials, increased 0.4% in September and was up 8.5% year-over-year, but down slightly from 8.7% in August. The Core PPI, the Fed’s favorite measure of inflation, rose at an annual rate of 5.6%, matching the August rate of increase.

Inflation has been the economy’s biggest issue over the past year as the cost of living is running near its highest level in more than 40 years. And there is no sign prices are going to fall meaningfully anytime soon. As I’ll discuss below, it takes time for Fed rate hikes to work.

Fed Likely To Continue Record Rate Hikes

The minutes from the September 20-21 Fed Open Market Committee (FOMC) were released last week and revealed an even more hawkish tone on the part of most Committee members. Whereas Fed Chairman Jerome Powel said earlier last month that the FOMC was looking to raise its short-term benchmark rate by 125 basis points (1.25%) by the end of this year, the meeting minutes suggest it may well be more than that.

It is now widely expected the FOMC will raise the Fed Funds rate by 75 basis points at each of the two remaining meetings this year, with more hikes likely to come in 2023. If the rate is raised by 0.75% in November and December, which is now widely expected, that will put the Fed Funds target range at 4.5%-4.75% after the December meeting, up from 3.0% to 3.25% today.

The Fed has raised its benchmark interest rate five times this year as part of a plan to cool the economy by reducing demand from consumers and businesses. But it takes time for monetary policy to have a pronounced effect on inflation and the economy — typically 12 to 18 months, most economists agree.

The Fed is trying to implement its rate hiking effort without causing a recession in the economy. That’s a nice goal but it is proving harder than expected to pull off. Inflation is not coming down as quickly as the Fed would like to see which, as discussed just above, means the Fed will have to raise rates more than it previously expected and will very likely have to continue raising rates into next year.

It is my view that the Fed’s changing policy stance this year is a big reason stocks are so much lower in 2022. Remember earlier this year the Fed told us the spike in the inflation rate to the highest rate in 40 years would only be “transitory.” As regular readers know, I warned at the time that Mr. Powell’s transitory view on inflation was very unlikely to prove correct, and he has admitted as much in recent months.

Now the Fed is telegraphing another change in policy, specifically that interest rates will go up more than previously suggested in November and December, and more rate hikes are likely in 2023. These changes in policy have weighed heavily on the equity markets this year. While we may have seen the worst of the stock market correction, it is not impossible we could see more pain before this phase is over.

Alpha Advantage Strategy Having A Great Year

With all the uncertainty out there, this may be a great time to consider our Alpha Advantage Strategy which is enjoying one of its best years ever in 2022. How can that be? Alpha Advantage uses multiple independent strategies – each of which has the ability to be long or short in the stock market. Some of the strategies were short during the latest downward correction and were able to profit from the fall in the markets.

As a result, Alpha Advantage is having one of its strongest years ever. Click on the link to see for yourself. If you would like to have an investment in your portfolio with the potential to make money in rising or falling markets, I urge you to take a serious look at our Alpha Advantage Strategy. As always, past performance is not necessarily indicative of future results.

To get started, you open your own managed account at Guggenheim Investments where the Alpha strategy is executed. You have 24/7 online access to your account.

If you want to learn more about how Alpha Advantage works, we have a webinar with Paul Montgomery, the Trading Manager for Alpha Advantage, tomorrow, October 19, at 12:00 noon Central Time. Paul will make a brief presentation on Alpha and how his firm implements the strategies, and then he will take your questions.

If you can’t make tomorrow’s webinar, we will record the session and will send you the recorded version, which you can watch at your convenience. So, be sure to register here to ensure you get a copy of the recorded version.

As always, I invest a substantial part of my net worth in the programs we recommend at Halbert Wealth Management, and Alpha Advantage is a significant portion of my portfolio. If you join us, you’ll be investing right alongside me.

Finally, I don’t expect stock market volatility to get back to “normal” anytime soon. In fact, I expect it will only increase in the coming years. This is another reason I believe you should seriously consider Alpha Advantage which has the ability to be long or short at any time. Take a look at the actual performance and call us at 800-348-3601 if you have any questions.

Wishing you profits,

Gary D. Halbert

SPECIAL ARTICLES

Second Quarter GDP Falls At 0.9% Annual Rate

US Core Inflation Jumps Most in 40 Years

Gary's Between the Lines column:
IRS On Path To Get Much Larger & More Aggressive

 

Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.