At the end of the third quarter, the S&P 500 Stock Index was up over 20% for the year-to-date. The Fed reduced the short-term borrowing rate by ½% during the quarter, easing fears of inflation and recession. After this reduction, debate continued over the future direction of the economy, interest rates, and the stock market, but there seemed to be agreement on one issue: Inflation is under control.
Not so fast. While current inflation numbers are looking better and approaching the 2% Fed target, I have serious longer term concerns regarding the inflation rate. We may well continue to see wage inflation pressures, as evidenced by the preliminary dock workers settlement and other coming labor negotiations. Neither political party seems to have an appetite for reducing government spending or the fiscal deficit. Both political parties are proposing some degree of increased tariffs, which will increase the cost of goods we purchase. Mitigating these factors somewhat, we have seen gasoline prices decline recently, primarily due to the U.S. releasing petroleum reserves which may only be temporary. For these reasons, I believe we must continue to factor inflation into our investment thinking, while also considering the possibility of recession or unanticipated external events.
A portfolio of high-quality stocks of well managed companies along with short duration high quality bonds seems to be a reasonable hedge against the issues discussed above. We will continue to pursue this strategy.
As always, please feel free to call regarding any questions or concerns.
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Bill
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