THE WEEK ON WALL STREET
Better-than-expected updates last week on consumer and wholesale price inflation buoyed investor sentiment, driving stocks higher and lower bond yields. The Dow Jones Industrial Average rose 2.29%, while the S&P 500 increased 2.42%. The Nasdaq Composite index advanced 3.32% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, gained 4.67%.
FACT OF THE WEEK
Douglas Corrigan, the last of the early glory-seeking fliers, takes off from Floyd Bennett field in Brooklyn, New York, on a flight that would finally win him a place in aviation history.
Eleven years earlier, American Charles A. Lindbergh had become an international celebrity with his solo nonstop flight across the Atlantic. Corrigan was among the mechanics who had worked on Lindbergh’s Spirit of St. Louis aircraft, but that mere footnote in the history of flight was not enough for the Texas-born aviator. In 1938, he bought a 1929 Curtiss Robin aircraft off a trash heap, rebuilt it, and modified it for long-distance flight. In July 1938, Corrigan piloted the single-engine plane nonstop from California to New York. Although the transcontinental flight was far from unprecedented, Corrigan received national attention simply because the press was amazed that his rattletrap aircraft had survived the journey.
Almost immediately after arriving in New York, he filed plans for a transatlantic flight, but aviation authorities deemed it a suicide flight, and he was promptly denied. Instead, they would allow Corrigan to fly back to the West Coast, and on July 17 he took off from Floyd Bennett field, ostentatiously pointed west. However, a few minutes later, he made a 180-degree turn and vanished into a cloudbank to the puzzlement of a few onlookers.
Twenty-eight hours later, Corrigan landed his plane in Dublin, Ireland, stepped out of his plane, and exclaimed, “Just got in from New York. Where am I?” He claimed that he lost his direction in the clouds and that his compass had malfunctioned. The authorities didn’t buy the story and suspended his license, but Corrigan stuck to it to the amusement of the public on both sides of the Atlantic. By the time “Wrong Way” Corrigan and his crated plane returned to New York by ship, his license suspension had been lifted, he was a national celebrity, and a mob of autograph seekers met him on the gangway.
Inflation Sparks Stocks
Back-to-back positive inflation reports emboldened investors, sending stocks to their highest levels since April 2022. Lower-than-forecast inflation on both consumer prices and producer prices sparked investor optimism that inflation may be able to fall further without tipping the economy into recession and provide the basis for the Fed to moderate its more hawkish rate hike stance.
After four straight days of increases, investor attention turned to the kick-off of a new earnings season on Friday. Despite some positive earnings surprises from several big banks and a major healthcare provider, stocks closed out a good week with a slight decline.
Inflation continued its downward trend last month, falling at its slowest pace in over two years. Consumer prices rose 0.2% in June and 3.0% from a year ago. Both were below economists’ consensus forecast. Core inflation (excludes food and energy), which has been more stubborn, fell to 4.8% year-over-year–its lowest level since October 2021.
The positive disinflationary story continued the following day with a lighter-than-forecast increase in producer prices. Wholesale prices increased 0.1% in June, which was lower than the consensus forecast of 0.2%. The increase from a year ago was also 0.1%, representing the smallest gain in nearly three years. Core producer price rose 2.6% year-over-year.
FINANCIAL STRATEGY OF THE WEEK
Everyone loves a winner. If an investment is successful, most people naturally want to stick with it. But is that the best approach?
It may sound counterintuitive, but it may be possible to have too much of a good thing. Over time, the performance of different investments can shift a portfolio’s intent – and its risk profile. It’s a phenomenon sometimes referred to as “risk creep,” and it happens when a portfolio has its risk profile shift over time.
When deciding how to allocate investments, many start by taking into account their time horizon, risk tolerance, and specific goals. Next, individual investments are selected that pursue the overall objective. If all the investments selected had the same return, that balance – that allocation – would remain steady for a period of time. But if the investments have varying returns, over time, the portfolio may bear little resemblance to its original allocation.
Rebalancing is the process of restoring a portfolio to its original risk profile. But remember, asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss.
There are two ways to rebalance a portfolio.
The first is to use new money. When adding money to a portfolio, allocate these new funds to those assets or asset classes that have underperformed.
For example, if one investment fell from 40% of a portfolio to 30%, consider purchasing more of that investment to return the portfolio to its original 40% allocation. Diversification is an investment principle designed to manage risk. However, diversification does not guarantee against a loss.
The second way of rebalancing is to sell enough of the “winners” to buy more underperforming assets. Ironically, this type of rebalancing actually forces you to buy low and sell high.
Periodically rebalancing your portfolio to match your desired risk tolerance is a sound practice regardless of the market conditions. One approach is to set a specific time each year to schedule an appointment to review your portfolio and determine if adjustments are appropriate. If you'd like to discuss questions about the timing of rebalancing, let’s connect. We're here for you.
Have a great week!
Keep in mind, however, that the information in this material is not intended as tax advice, and may not be used for the purpose of avoiding any federal tax penalties. Please consult your tax professional before rebalancing. Rebalancing by selling “winners” may result in a taxable event.