Gill Capital Partners Mid-July 2023 Update

We hope you are all keeping cool out there, as the middle of summer has brought intense heat to much of the globe. On Sunday, temperatures in Death Valley, California reached 128 degrees, just slightly below the highest temperature ever recorded there of 134 degrees in 1913. While global temperatures are sizzling, inflation is finally starting to cool, which is good news for markets and the economy. As inflation continues to moderate, consumers are feeling better, and earnings season has started with a bang. We will get into all of that and more, but first, a few interesting facts for those music fans out there.

Swifties and Dead Heads Rejoice!

Taylor Swift is sweeping the nation by storm and the Grateful Dead (or what is left of them) is hanging it up (again). This past weekend saw two of the most popular musical talents ever drawing huge crowds and lots of emotions. Taylor Swift swept into Denver for two sold out shows that are estimated to have injected $200 million to Denver’s economy, with many concert goers shelling out well in excess of $1,000/ticket.

Meanwhile, Grateful Dead followers from across the country convened in San Francisco over the weekend to see the band’s successor, Dead and Company, play the last show of their proclaimed final tour. Dead and Company, which includes two of the original Grateful Dead band members (Bob Weir and Mickey Hart), along with John Mayer replacing the iconic Jerry Garcia, sold out three shows at San Francisco Oracle Field over the weekend. The Grateful Dead began in 1963 in Palo Alto, so the location is fitting. What a run for one of the most important bands in music history.

Inflation Update

The Consumer Price Index (CPI), which measures inflation, increased 3% from a year ago, which is the lowest reading since March of 2021. On a monthly basis, the CPI rose 0.2%. Core CPI, which strips out food and energy prices, rose 4.8% from a year ago and 0.2% on a monthly basis.

These numbers were slightly better than consensus estimates. This is a sharp cooldown from June of last year, when inflation spiked to 9.1%. The largest contributors to the monthly decline were energy and car prices. Energy declined substantially, with gasoline prices down nearly 27% from a year earlier. Shelter, which includes the cost of both rent and “renter equivalent rent” (which attempts to incorporate housing prices into the inflation calculation), now comprises 70% of the entire annualized CPI number, and has been the stickiest input. Economists are anticipating the shelter index to moderate, as this data lags significantly and real time indicators are showing a drop that should begin feeding into this index shortly.

The markets cheered these reports with the hope that the Federal Reserve is likely nearing the end of its interest rate hiking cycle.

Our view – What a great report! The rate of inflation is one third of what it was last summer. Core inflation still has some work to do to get down to the Fed’s 2% target, but this is certainly a positive report. It was not a huge surprise, as we are comparing this month’s inflation pace to 9%+ of last June. We anticipate a lumpy trend lower for the rest of the year with shelter prices finally beginning to moderate. Inflation-adjusted hourly wages rose 1.2% in June from a year earlier, marking the second month in a row that inflation-adjusted wage gains have outpaced inflation. This is great news for consumers and the economy, as consumers have seen negative wage growth since early 2021 with price increases far outstripping wage gains.

The Federal Reserve meets again later this month, and the market widely anticipates an interest rate increase of 25 basis points following a pause at the last meeting. Currently, the market anticipates this to be the last hike, and that rates will stay at these levels until the end of 2024. As we’ve seen, the market’s forecast can change dramatically over a short period of time, but that is currently what the bond market has priced in.

Where is the recession?

Economists are still expecting GDP to eventually contract, but current predictions are that it will happen later and less dramatically than previously asserted. In the latest WSJ survey, shown below, the probability of recession in the next 12 months moved lower to 54% from 61% the month prior.

Nearly 60% of economists pointed to waning inflation as their main reason for optimism.

Our view – While inflation is continuing to moderate, the impact of higher rates will continue to be a drag on the economy. This will bring a natural softening of the labor market, and likely the economy as a whole. However, the labor market, businesses, and the consumer came into this tightening cycle in extremely strong positions, and so the recession, should it come, may be shallower than we have experienced in other recessionary periods. We continue to look at the consumer as the engine for growth, and consumer sentiment is improving. The University of Michigan Consumer Sentiment Index climbed to 72.6 in July, up over 8 points, and the highest reading since September of 2021.

There are pockets of the economy that are struggling (commercial real estate and banks, to name a couple), and macro challenges (Russia and China, specifically), but a confident consumer will continue to spend, which will help to blunt the effects of higher rates on the economy. Maybe this Federal Reserve can actually guide this economy to the elusive soft landing economists have been discussing.

As always, please let us know if you have any questions or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.