Stocks and bonds rallied this week after the April inflation report showed that prices rose a little slower than expected last month.  On a 12-month basis, the inflation rate now stands at 3.4%.

 

 

Prices rose 0.3% in April versus and a forecasted increase of 0.4%.  While the news was good, inflation remains stubbornly above 3%, far from the Fed’s target of 2%.  I’ve always thought the 2% target was probably unrealistic and I still expect the Fed to move the goalposts before the end of 2025.  Watch for the Fed to announce some new data or research that shows 2.5% is a better long-term target for inflation.  That would bring them in line with the assumed rate of inflation used by most pension funds.

 

https://www.nasra.org/files/Issue%20Briefs/NASRAInvReturnAssumptBrief.pdf

 

I spent some time with a couple of portfolio managers Thursday morning and they’re becoming concerned about market rallies like the one we had Wednesday in response to the inflation news.  They feel the markets and the economy are running a little too hot for the Fed to facilitate a “soft landing”.  Several US stock indices reached all-time highs this week and the latest forecast shows the US economy growing at a 3.6% rate this quarter.  This creates an environment where consumers feel encouraged to spend, translating to an inflation rate that is more likely to remain high, or rise, than fall.

 

 

While most everyone would love to see the stock market continue to melt up over the summer, that’s probably not the best scenario for lowering inflation, getting a couple of interest rate cuts, and avoiding a recession.  A better scenario would be a weaker stock market over the summer accompanied by slower economic growth.  We’ve only had one 5% dip in the stock market this year and the typical year has roughly 3 of these episodes.

 

 

Staying with the landing-the-plane metaphor, there’s some developing concern we may be coming in too hot.

 

Have a great weekend.

 

Jack C. Harmon II, CFP^®, CIMA

Principal, Harmon Financial Advisors

Registered Principal, Raymond James Financial Services

 

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