A Few Key Dates!
The week of July 12th, 2021 is an important week for the capital markets!
Since April 2020 I have been writing about the impact we could expect for inflation. As I have written, perhaps as much as 6% per year for this year and the next two years.
The Federal Reserve (Fed) has continued to keep interest rates low in their effort to increase the employment rate. At some point they will normalize the interest rates, i.e., increase them, and this could cause some volatility in the market valuations.
Up to this point, we were not expecting the fed to increase interest rates until 2023. However, if inflation continues to heat up, they may have to increase interest rates in 2022. I have now read where a few economists think the fed could increase interest rates by September 2021.
If interest rates get increased that soon it could cause a touch of volatility in the market valuations. The reason for this is that an interest rate increase increases corporate costs and therefore reduces profit margins. In addition, there is a rather large amount of investing going on at this time that involves borrowed money. Interest rate increases may cause some selling of those positions.
The dates to keep on your calendar are July 13th when the Consumer Price Index, CPI, is reported and July 14th when the Producer Price Index, PPI, is reported. If these numbers continue to come in at the increased levels, like the last several months, it is highly likely the Fed will have little choice and move to increase interest rates sooner rather than later.
Also, on July 14th the minutes will be released of the last Federal Reserve meeting. It is highly likely that we will see in the minutes that the Federal Reserve Board of Governors are now quite concerned about inflation, discussing increasing interest rates and the timing of those increases.
Just the talk of this could be all it takes to cause the markets some volatility.
It is for that reason we have been carefully reviewing our client asset allocations to be ahead of these types of potential changes. This includes increases in our cash positions. If we do get a 10% - 15% reduction in valuations, we will be busy putting that cash to work at what would be considered reasonably good prices!
I am interested in your thoughts, comments, and observations. Feel welcome to call, email or just stop by the office and say hi!
Jim Lunney, CFP®
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.