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Sticky Inflation: Market Commentary

Kris Venezia, Market Analyst

The market took a spill on Tuesday. The major U.S. indexes had their worst day in over two years. The Nasdaq lost more than 5%.

The catalyst for the decline was the CPI report or Consumer Price Index. It's a way to measure a basket of good that's designed to make up the average cost of what Americans spend money on. When people quote inflation, it's the CPI number that is commonly used.

The expectation was for inflation to decline from July to August, but it actually rose .1%. This caught investors off guard and.. prompted a wave of selling.

Gasoline prices, as many of you have probably noticed, have dropped since the summer highs. That's terrific. But, there's sticky inflation in other places. Food continues to rise at about a percent a month rate. Rent is also a major issue pushing inflation higher.

Outside of CPI, other data shows the cost of manufacturing goods in the U.S. is starting to flatten or decline. But, the services part of the economy is way too hot. Medical care, going out to eat, transportation services, are all steadily rising.

The main issue hitting services is higher labor costs. Employers, especially at restaurants, medical centers, transportation like truck drivers, have been really struggling to hire people. It's forced them to raise wages which get passed on in some form to the consumer.

So it's great that gas prices have fallen, and it certainly helps the average American. However, the stickiness of inflation in other parts of the economy is a major challenge.

Clint Carpenter, Director of Operations

As we’ve mentioned, with the Fed staying committed to raising interest rates to combat inflation, this has the effect of making short-term bonds an attractive investment again.

What we have been doing with the conservative portions of a lot of client portfolios has been introducing laddered positions in short-term treasury notes. These are bonds that are purchased directly from the U.S. treasury, so, backed by the full faith and credit of the U.S. government. So far, we’ve just been interested in bonds that have a maturity date about one year out.

The idea is to purchase these bonds in stages, spreading out the purchases every few months so that we’re not locking all of it up in a single bond at one time. This means we can continue to take advantage of rising rates each time we purchase a bond, without having to wait and try to time the peak of interest rates.

Staggering the bonds this way also means that around this time next year, that first bond matures, and then a few months later the second one matures, and so on. So eventually you can see there is a cycle where bonds are coming up on their maturity and can either be reinvested into a new bond, or allowed to remain in cash, or perhaps used for stock purchasing.

As I mentioned, this is something we have already been doing in our client investment portfolios, but if this sounds like something you might be interested in for cash you have sitting around in a bank account or some other sort-of short-term investment, we’d be happy to discuss whether this is a good strategy for you as well.

Daryl Eckman, President

Real estate is something I am watching closely. We'll see what happens with home prices over the next 12 months.

Real estate has a big effect on the economy. If we see a real estate pull back, that would certainly have an impact on the overall state of things.

We want to buy stocks low so we want to start nibbling with dollar cost averaging into the market with stocks tumbling.

We will look at funds that have performed well and have come down in prices. We will dollar cost average there.

The times are difficult right now, but we are savvy investors, and we know that there are long term opportunities by being smart.

We will be monitoring and getting some cash to work where it is appropriate.


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