Keep Calm and Carry On

Friday Reflection | September 9, 2022

Mourning a leader with the extraordinary global stature of Queen Elizabeth II is a unique historical moment. Her reign was one of variety and immense change, throughout which she projected a calm presence that softened the anxiety of those around her. Now her son Charles III assumes the duties of King, bringing a new temperament and set of priorities to royal activities.
 
It seems that a moment of change is upon us in financial markets as well. Mixed economic data isn’t providing a clear view of a coming recession in the US, nor any real confidence that there will be economic strength over the coming quarters. Basic goods and services are increasingly expensive and are provoking many to think hard about adjusting their spending. Thoughtful modifications to spending can help maintain a sense of calm about the sustainability of our resources over time and prepare us to face life’s next zig or zag. Businesses are making similar adjustments to maintain profitability and preserve their brand and momentum for growth over the intermediate and long-term.
 
In a sense, we are living in a shortage economy. Various goods are hard to find due to supply chain issues, local stores and restaurants have disappeared or cut their hours, and home remodeling and healthcare professionals are scarce. The consistencies we imagined in the past have been upended, and the longer-term impact of these new choices we face is hard to know. While there is always a shortage of certainty about the future, consistent and deliberate planning can ease the discomfort of forced change.

Markets have cycled down and up repeatedly this year, and in the final weeks of September will likely pause in anticipation of corporate earnings reports in October, as well as further guidance from the Fed and other central banks on interest rates. Investors are taking time to assess whether current prices reflect the true value of companies’ future prospects, and how further interest rate increases may adversely impact profitability.
 
For companies as well as investors, adjustments and adaptation have been hallmarks as we collectively learned to live with the pandemic. In US markets, residential real estate has been a recent example of this rapid adjustment. As mortgage rates have increased, prices have experienced downward pressure and nearly half of home sales in July were sold below their list price.¹ Inflation and “shrinkflation” are reducing purchasing power and forcing consumers to make do with less. At the same time, inflation is beginning to turn downward in certain key areas; gasoline prices are now down -24% from their peak in early June. Initial unemployment claims have also been trending downward, as one of many signs of a strong labor market.
 
The emergence of inflation after many years of relatively slow increases in consumer prices has been particularly disconcerting. The road back to price stability is likely to be bumpy in the real economy as well as the markets before there is widespread agreement that inflation is no longer a threat. The current moment shows some signs of inflection, as various commodity prices retreat from their highs and governments take action to slow price increases and protect consumers.

Against the backdrop of reassessment by investors, and consumer alarm over energy and food inflation, central banks continue to increase the price of money. The European Central Bank raised rates this week by 75 basis points, echoing the moves the Fed has made in recent months. In the UK, the Bank of England intends to raise rates sharply later this month, even as newly elected Prime Minister Liz Truss has proposed a cap on energy bills to reverse the impact of supply shortage caused by the war in Ukraine. In the UK, energy prices have risen even further than in the EU or the US, with the overall increase in gas and electricity prices for consumers projected to reach +80% this year.²
 
In the US, the Fed is also expected to raise its short-term target rate by 75 basis points to 3.25% when they meet on September 20. They have framed their persistent rate increases as a way to wrestle inflation back to their long-term target of 2%. They are seeking a plateau of stability for the economy, and a reduction in uncertainty for consumers and businesses alike. While these may be prudent policy steps, periods of economic transition are often paired with periods of extended price volatility.

The UK has entered a ten-day mourning period intended to allow a pause for remembrance of Queen Elizabeth II before preparing to carry on under new leadership. Commentary is spilling out of every newsroom around the world on her life and her death; in the words of Andrew Roberts of the Wall Street Journal, “she was the best of us.”³ While Queen Elizabeth’s legacy has complexities, she faced economic, political, and social transformations with both courage and common sense.
 
Opportunities and challenges arise without warning in our lives, and it can be helpful to pause and reflect before taking action that moves us forward. Financial markets rise and fall, but over time asset prices grow consistently. It is against this backdrop that we support our clients in staying invested for the long-term and remaining committed to their personal and financial plans. As new challenges arise, courage and common sense act as a foundation that allows us to carefully navigate both consistency and change. 

Resources

¹ Redfin, “US Housing Market Overview,” redfin.com.

² Anna Cooban, “Why UK energy prices are rising much faster than in Europe,” CNN Business, August 19, 2022.

³ Andrew Roberts, “She Was the Best of Us,” Wall Street Journal, September 9, 2022.