This Week’s Blogger: Scott D. Heins, CFP®, IAG Chief Investment Officer
On Saturday, January 28, the military identified a large balloon north of Alaska’s Aleutian Islands. It peacefully floated southeast across the North Pacific Ocean into Canada, and by last Tuesday reached the Idaho/Montana border.
The balloon then successfully and likely inadvertently captured the imagination of the entire country as it continued its southeastern journey over the next 5 days before being deflated by an A9X sidewider missile off the coast of South Carolina.
According to the balloon’s owner, this incursion was merely a weather-monitoring exercise gone awry. According to the landowner, more nefarious intentions were in play.
We will likely know more once we clean up the ocean and examine the balloon’s remains.
In some ways, the financial markets have been floating a trial balloon so far this year. Traders inflated a narrative that the Federal Reserve may have successfully converted the much-anticipated recession of 2023 into an economic soft landing. They thought the Federal Reserve would stop raising interest rates in March and then, hope of all hopes, start cutting interest rates as soon as September.
In response to this trial balloon, stock prices rose and bond yields fell throughout January and into early February. And then the trial balloon sprung a (non-missile-induced) leak thanks to last Friday’s employment report.
Not only did employers go on a tremendous hiring spree in January (perhaps due to optimism about a soft landing?), but it turns out they hired 71,000 more people in November and December than previously reported. The unemployment rate dropped from 3.5% to 3.4%.
This good news for people with newfound jobs is bad news for the Federal Reserve’s mission to eradicate inflation and, therefore, a threat to the idyllic soft landing for the trial balloon. Higher labor demand leads to higher wages which leads to more consumer spending which leads to more inflation. In the Fed’s view, higher unemployment dampens the inflation fires.
Immediately bond traders responded by pricing in one additional interest rate hike in May and pushing any potential interest rate cut until December. Stock traders reacted by pushing stock prices down for the last couple of days. Traders are now viewing the soft-landing trial balloon with suspicion.
It is entirely possible that the January jobs report will be revised downward in February or that future economic reports reflecting on the past will redirect the course of this trial balloon. However, in the short term, it appears that we could experience some turbulence in our journey as traders reset their expectations.
While these balloon gyrations may capture the imagination of the attention-span deprived, we suggest that keeping your focus firmly on your future long-term plans will help you successfully weather these events.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
Any opinions are those of IAG and not necessarily those of LPL Financial. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. No strategy assures success or protects against loss. Investing involves risk including loss of principal.
Quote of the week:
Charlie Munger: “A majority of life’s errors are caused by forgetting what one is really trying to do.”
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