Despite the general sense of uncertainty in the market, the outlook for U.S. investors remains largely positive, according to Brian Klimke, chief market strategist with Cetera Financial Group, who delivered the keynote address “Cruise Market Dynamics: Advisers and Clients Influencing Trends” at the Conference EDGE Wealth Management at Diplomat Beach Resort in Hollywood Beach, Fla. on Monday.
Customers are expressing concern about inflation, high interest rates, the possibility of a recession and political uncertainty, Klimke noted. However, in most cases, the macroeconomic data do not show reason for these concerns, which are mainly driven by a misunderstanding of market forces and a lack of historical context. Klimke brought up the fact that the latest reading of US consumer sentiment came back lower than it was in May 2009, during the height of the Great Financial Crisis. Meanwhile, the unemployment rate today stands at 4%, and the stock market is near an all-time high, he noted.
Many Americans also believe they should see falling prices as a sign that inflation is easing. In reality, today's prices are here to stay as further price increases are easing, according to Klimke. The good news is that high housing costs are the main force currently pushing up inflation numbers, accounting for 40% of CPI, he noted. The market has seen some rent deflation, but this data has not yet been fed into the CPI numbers. And when housing costs are removed from the CPI, the inflation figure stands at about 2%, the Fed's target rate.
As a result, Klimke believes that the Fed will cut rates this year and may still have time to cut them three times, as discussed in meetings at the end of 2023. At the same time, he added that most sectors Interest rate-sensitive economies, such as manufacturing and housing, have already bottomed out and appear to be on their way to recovery.
Klimke also assured the audience that despite what is turning out to be a contentious election season, a win for either candidate is not likely to send the stock market down. He presented a chart showing that in every election year between 1960 and 2020, except for two, the S&P 500 ended in the positive category. The two exceptions – 2000, when the S&P 500 lost 9.1% and 2008, when it fell 37% – coincided with the dot-com bust and the Great Financial Crisis, respectively.
The one economic indicator that has given Klimke a little pause involves job growth numbers. The unemployment rate has been below 4% for 27 consecutive months, but is slowly starting to rise.
Historically, “the unemployment rate tends to go down before a recession and then starts to go up,” he noted. “I get a little nervous about it, but nothing about this pandemic recovery has been normal, so I take it with a grain of salt.”