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Tuesday, May 21, 2024

Telos CEO on Economy, Soft Landing Chances, Navigating Sticky Inflation

Wealth Management Roundtable - Stefan Meierhofer, Telos Capital Management

Stefan Meierhofer, CFA, CFP, AIF
President & CEO
Telos Capital Management, Inc.

The U.S. economy has grown at a surprising pace over the course of 2023, defying pessimistic forecasts. What is the current state of our economy?
Just a year ago, with the Fed amid its most aggressive rate hiking cycle in four decades, many investment banks and Wall Street investors were convinced that the domestic economy was headed for a downturn or even a recession in 2023. Yet instead of stumbling, the U.S. economy far outperformed expectations over the past year and a half and continued to expand real GDP at a robust clip of 2.5% for all of last year, up from 1.9% in 2022. Meanwhile, headline inflation, as measured by the Consumer Price Index (CPI) has declined from its peak of 9.1% in June 2022 to 3.5% in March this year.

Is the Federal Reserve on track to deliver a rare ‘soft landing’? What needs to happen to pull it off?
A soft landing – a scenario where the central bank brings inflation down without pushing the economy into a recession – is difficult to achieve and extremely rare. According to conventional wisdom, the Fed has managed to achieve only one soft landing in the past 60 years – in 1994-95. It represents a best-case scenario for the economy and markets, but pulling it off will depend on a lot of factors. With the economy expanding rapidly, job gains remaining unexpectedly strong, and progress on inflation showing signs of stalling, the path to a soft landing will not be easy.

The March CPI report marked the third consecutive month-over-month increase, indicating that inflation may remain higher for longer than expected. What are the implications?
One downside of a stronger economy is that it could make it harder for inflation to fall all the way back to the Fed’s 2% target. This will likely play a role in their interest rate decision-making process and cloud prospects for rate cuts as they need to see more compelling evidence that inflation is slowing in upcoming data releases before beginning to cut rates. As a result, investor confidence in Fed cuts has declined significantly since December, when the market was betting on anywhere between six and seven cuts during 2024. Now, the market’s base case is for two rate cuts.

How can investors navigate a stronger-than-expected economy amid sticky inflation?
Strong corporate earnings, a robust labor market and the continued strength of the U.S. consumer provided a supportive backdrop for stocks. Markets continued their rapid advance in the first quarter, rallying over 25% from late October 2023 despite rising bond yields. After the breathtaking advance, the S&P 500 ended the quarter trading at a 12-month forward P/E of 21 times expected earnings, incorporating a lot of good news into stock prices. Earnings growth will likely be a key driver in determining if stocks continue to move much higher. Investors should expect more volatility given the headline risks related to Fed policy adjustments. Periods of market volatility or pullbacks can be opportunities to add to or diversify portfolios. While challenging, we believe that investors should remain disciplined and focused on their long-term investment strategy. Being well positioned enables anyone to come out ahead, no matter what obstacles the unknown may present.

As President and CEO of Telos Capital Management, Inc., Stefan Meierhofer provides overall leadership and management of the firm. He is an industry veteran with over 30 years of investment management experience and is actively involved in providing investment advice to clients and helping them implement strategies to reach their financial and lifestyle goals. Dedicated to making a difference in our local communities, Stefan serves on the Board of Directors of the San Diego Rescue Mission where he provides his expertise and counsel to the Finance Committee. He also serves as a member of the Investment Advisory Committee of the City of San Diego. The IAC is charged with the responsibility to review the investment policy and practices of the City Treasurer and to recommend changes when appropriate. Stefan uses his wide range of expertise, experience and insight to provide comprehensive investment management and planning services to individuals, families and institutions with dynamic and complex financial situations.

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