Clients of the Firm,  

Albert Einstein wrote, “He who can no longer pause to wonder and stand rapt in awe, is as good as dead; his eyes are closed.”  

As expected, the Fed voted to pause rates at current levels, but indicated they were prepared to increase rates one more time this year if incoming data warrants it.  Economic activity remains stronger than expected and this has led Fed officials to maintain rates at current levels supporting our “higher for longer, but not too high” rate thesis.  As a reminder, Fed officials began raising rates in March of 2022 and raised their benchmark federal-funds rate at their last meeting in July to a range between 5.25% and 5.5%.  

As previously discussed, rate changes typically lag real economy impacts. The Fed continues to desire more time to evaluate ongoing impacts from the current rate hike cycle.  Their goal is to avoid overdoing rate increases while at the same time fighting inflationary conditions.  The new Fed economic projections showed officials expect to raise rates once more this year, the same as in June. The next Fed meetings are on Oct. 31-Nov. 1. 

The Fed dot plot now indicates Fed funds rates to land at about 5% by the end of 2024.  This supports our bond positioning on the shorter end of the curve and is also supportive of money market positioning for the balance of 2023-24.    

Unemployment expectations have improved and now see only 4.1% levels for the forward 2 years.  This represents a significant improvement in the forecast for jobs versus expected impacts at the beginning of the hiking cycle. 

PCE expectations are now down to 3.7% versus the prior expectation of 3.9%.  PCE is the Fed’s preferred inflationary metric.  The Fed continues to maintain a target of 2% year-over-year for its policy objective. This is consistent with the Fed mandate of maximum employment in the context of price stability.  

Client equity portfolio positioning is impacted from this news to the extent that it appears we are nearing the end of the Fed hiking process. While we expect some economic drag from currently imposed rates over 5%, current employment levels and the removal of adverse rate policy may be absorbed better than previously feared.  This dynamic gives rise to a “soft landing” thesis for the economy which is currently consensus.  A soft landing is supportive of corporate profits as cost cutting measures work their way through in 2024 and beyond. The Factset consensus earnings forecast for 2024 earnings pegs S&P 500 earnings at $248 for 2024 with a forward P/E of 18 putting fair value at 4,464.  The S&P 500 currently trades at 4,402.  

Client fixed income positioning is also impacted by the implied end or near end of rate hikes.  High quality longer duration bonds may be considered in such an environment to augment existing shorter term bond positioning.  Maturing bonds may be reinvested for higher yield and longer maturity locking in higher rates for longer.  While the curve still offers a yield premium for shorter term paper, the longer end of the curve has adjusted higher and the inversion spread has narrowed from earlier in the year.   

At the same time, the US dollar strength should continue as long as the interest rate differential between the Fed and other major currency central banks remains steep. That said, the increasing steepness of that curve should abate with a Fed pause, at the margin reducing the headwinds from corporate profits.   

Ray Dalio said, “It all comes down to interest rates.  As an investor, all you are doing is putting down a lump sum for future cash flow”.  This simple view of investing informs our decision-making about what to invest money in.  However, taxes, currency and legal structures make that process more complex.  In addition, risk management should be considered, particularly in the case of individuals whose circumstances and liquidity needs may change over time.   

In concert with our clients, we will continue to strive to make these decisions on a data-informed basis in the context of client goals and objectives for their money. Thank you for your continued confidence in our firm.   

Sincerely,

Peter C. Wernau, CEO

Wernau Asset Management

pwernau@wernauassetmanagement.com

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This letter contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. Wernau Asset Management, Inc. ("Wernau Asset Management) is a registered investment adviser with its principal place of business in the Commonwealth of Massachusetts. Wernau Asset Management and its representatives are in compliance with the current registration requirements imposed upon registered investment advisers by those states in which Wernau Asset Management maintains clients. Wernau Asset Management may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements. This letter is limited to the dissemination of general information pertaining to its investment advisory services. Any subsequent, direct communication by Wernau Asset Management with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Wernau Asset Management, please contact Wernau Asset Management or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Wernau Asset Management, including fees and services, send for our disclosure statement as set forth on Form ADV from Wernau Asset Management using the contact information herein. Please read the disclosure statement carefully before you invest or send money.    

Wernau Asset Management 

30 Western Ave Suite 206 

Gloucester, MA 0193