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We usually look to economic data for clarity on the state of the U.S. economy. But the usual analysis is difficult at this time.  Every day, observers change their stance, as one day’s news provides a different picture from the previous day’s news. And often, it seems we have a never-ending stream of bad news—if it’s news about inflation (and the Fed’s reaction) one day, the next day’s headlines indicate a possible recession, followed by more bad news about inflation. As opposed to clarification, we think all this reporting and analysis has added to the stock market volatility of recent months.

We expect the outlook to remain confused in the months ahead. Inflation will remain stubborn given continued supply chain problems, the Ukraine war, and Covid lockdowns in China. The Federal Reserve has announced its intention to maintain aggressive monetary policy until inflation is contained. The big questions are: Where does inflation go from here and how will the Fed respond?  Will that response be too overly aggressive and push the economy into recession? How will the stock market react?

Some analysts argue that we may be poised for recovery in the stock market. They believe inflation is now subsiding and the Fed will pull back from its current policy. We certainly hope the Fed will be cautious about further rates hikes at its November meeting. But we cannot predict at this time what will happen. We think the market will remain unsettled in its current trading range for at least the next six months – and that further declines are certainly possible. The good news is that portfolio income has remained the same or slightly elevated with higher short-term yields and consistent dividend payouts among quality companies.

In this environment, we are advising clients to be calm and maintain their identified portfolio strategies. Equities remain the best long-term investment and we look for sectors and companies that can push beyond the current turmoil. We also are acting on new opportunities in the non-equity portion of client portfolios.

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