Soft Landings

For years now, I have enjoyed taking people flying and introducing the peaceful, miraculous experience of flight. However, from the moment I take off, I think principally of one key aspect of the flight, and that is the landing. My thoughts are focused on everything related to the landing, including my approach to the airport's landing pattern and airport destination environments, such as cloud ceiling, wind direction and velocity, and any NOTAMS (Notice to Airmen).

As the saying goes, "Taking off is optional, but landing is mandatory ." However, it's not just safely landing that is my goal. I want to end a terrific flight with a soft landing. I am talking about a passenger complimenting butter soft landing. What a way to end a wonderful flight and relieve the nerves of my first-time passengers.

When the Federal Reserve initiated its interest rate hike campaign to slow inflation, the predominant response from analysts and economists last year was that the Federal Reserve would drive the economy into a recession. It is literally a "hard landing" with huge economic disruptions of rising unemployment, slowing economic growth, and declining consumer spending.

However, as we have seen, the economy did not slow down even with the increase in lending costs to businesses and consumers. For the past six months, analysts and economists have begun speculating that maybe the Federal Reserve assessed the US economy correctly and possibly resulted in, you guessed it, a soft landing.

In economic terms, soft landing refers to the slowing of a fast-growth economy to a smooth transition to slow to moderate growth. That was Jerome Powell's Federal Reserve Chairman's exact objective with the Federal Open Market Committee (FOMC) interest rate hike campaign initiated last March 2022. He stated the FOMC's goal with the interest rate hike campaign was to slow both inflation and economic growth resulting in a "soft landing". Their key targets were:

• 2% annual inflation rate

• 1.5% annual GDP economic growth

• 4% unemployment

After 13 consecutive rate hikes that ended in June of this year, the FOMC has voted unanimously to hold rates at the last three meetings. Jerome Powell has stated the committee will remain patient, watching key economic reports before approving either an interest rate increase or decline. 

Today, the US Bureau of Labor Statistics announced that the Consumer Price Index (CPI) edged up 0.1% in November while the annual rate edged down from 3.2% to 3.1%, which remains above the Fed's 2% annual target.  

Wall Street investors have indicated a cautious but optimistic sentiment, with their buying pushing up the S&P 500 and NASDAQ 1.68% and 2.13%, respectively, for the past week. Investors are concerned that the Federal Reserve will raise interest rates to achieve their 2% inflation target, which increases corporate lending costs and lowers profit margins. So far, the Feds appear to be done raising interest rates for the near term and may relieve concerns of their upsetting what appears to be a "goldilocks" scenario of prices not rising too fast with not-to-hot economic growth. AKA "smooth landing."

WHAT DOES IT MEAN TO ME?

As we have mentioned many times, we agree with the Federal Reserve's rate hike policy and believe they have significantly approached their desired goals. The decision for the FOMC to hold rates and let the previous 13 consecutive rate hikes work through the economy and credit markets is smart, as the average term for a rate hike to fully impact the economy is typically nine to twelve months. Holding rates will also give credit markets, consumers, and businesses a breather to acclimate to the new lending marketplace. Investors are speculating that if inflation continues to decline into 2024, then it is possible the FOMC may vote for a rate cut that may be a huge boost for the economy. My view is that the FOMC is satisfied with current rates and, short of a pending recession, will not be reducing rates anytime soon.

The major indices have rebounded nicely since October 26. The S&P 500 is solidly above its 20, 50, 200 Day Moving Averages (DMA).

Also, the rebound since October 26 has been broad-based, as indicated by similar rallies by NASDAQ, S&P400 (Mid Cap), and S&P 600 (Small Cap).

The S&P 400 and S&P 600 remain well behind their large-cap and technology peers. These sectors may provide excellent buying opportunities in 2024.

Thank you for another year of serving you with our Weekly Briefs. We appreciate the opportunity to provide you with insights each week on the economy and investing strategies. Let us know your thoughts on this issue. More importantly, let us assist you with your financial and investment planning for 2024. We welcome the opportunity to be of service to you and your family.

Merry Christmas, and have a Happy New Year!