Challenging Environment for Stocks

The U.S. Landscape model is cautious based primarily from the observed change inflation and monetary policy. While anticipated for a long time, in the second and third quarters the Federal Reserve got serious in its efforts to combat inflation. The result has been a strong increase in bond yields across the yield curve, with short-term interest rates jumping the largest amount. This caused, at times, an inversion of yields where the shorter maturity bonds had higher yields than the longer-term bonds. Historically this is an ominous sign for stocks. In addition, the money supply has contracted to combat inflation, a situation also associated with a challenging outlook for stocks.

On the positive side, the global supply chain constraints are showing clear signs of easing which will help combat inflation. However, continued low unemployment creates an environment of higher wages, which is often the largest contributor to inflation taking aside the cyclical swings in food and energy.

For clients we continue to suggest a modest underweight to stocks versus their long-term target asset allocation, perhaps 5% of the portfolio. Take advantage of stock rallies to at least get back to target weights. Do not be in a hurry to add to stocks on price weakness. Slaying inflation will take time. 

ViaWealth, LLC is a Registered Investment Adviser. Information in this article is for educational purposes only and is not intended to be an offer or solicitation for the sale or purchase of any specific securities or other types of investments. Investing in the securities markets involve risk of principal and unless otherwise stated, returns are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before making any financial decisions. Past performance is not indicative of future performance.