Tenth Edition

A conversation with Tandem’s Chief Financial Officer

Angus: The decrease in the inflation rate over the past year has been good for stocks, resulting in higher valuations (price-to-earnings ratio (P/E)) and stock prices. Is the Fed close to reaching its 2% inflation target?

Amy: Substantial progress has been made in reducing inflation, and stocks have reacted favorably. Yet headline inflation (CPI) is still increasing at a 3.2% annual rate, down from its peak of 9% in June of 2022. Core inflation, which excludes volatile food and energy prices, is much higher at 4.7%. So, the Fed has been effective at cooling inflation, but prices are rising more than desired. Expect interest rates to stay high for longer, with a reversal in policy not expected by investors until next summer. If the Fed keeps rates high for too long, it may crush both inflation and the job market.

Amy Bush, CFA

Chief Investment Officer

C. Angus Schaal, CFP®

Senior Managing Director

Angus: The S&P 500 is up 17.26% year to date as of September 7th. Can stocks move higher from here?

Amy: The recovery in stocks since last October has been caused by investors’ perception that the inflation fight is mainly behind us rather than the initiation of a sustained business cycle upturn.

S&P 500 earnings have declined for three quarters in a row, yet investors anticipate an upturn over the next few quarters. Consensus estimates call for 11% growth in 2024 compared to flat growth this year. Given the rise in P/E ratios, corporations must deliver on earnings for stocks to climb higher.

Angus: Most economists and strategists called for a recession this year. What happened?

Amy: Gross Domestic Product (GDP) is slowing gradually, and not in a straight line. Pandemic-era stimulus was so substantial that it provided enough of a cushion to absorb the higher cost of credit, extending the business cycle without shedding jobs. GDP is expected to grow 2% this year before slowing to 1% in 2024 as the lagged effect of higher rates filters its way through the economy, pinching consumers and businesses that require financing.

Fortunately, the labor market has remained strong, adding nearly 1.9 million jobs so far in 2023, which is supporting spending. The Fed may have engineered a cyclical slowdown in economic growth that avoids recession, with the current unemployment rate hovering around 3.5%. Yet higher wages are part of the inflation problem the Fed is targeting, and corporations will be quick to cut labor if necessary to maintain profit margins and earnings growth.

Angus: What can investors expect from the bond market as the Fed comes closer to the end of its campaign?

Amy: One benefit of a more normal interest rate environment is increased earned income from bonds, especially on low-risk, short-term treasuries, money markets, and CDs. Yet, overall, bond returns are expected to remain lackluster until the Fed stops hiking interest rates.

Angus: Finally, can you comment on AI (artificial intelligence) and investing opportunities? Amy: AI hype helped push technology stocks up over the past six months. The opportunity is real over the next decade, but not over the next quarter. Very few public companies can claim revenues directly from an AI source now. Nvidia, which makes the graphics processing units (GPUs) and software stack that comprise AI’s computing infrastructure, is the exception and a core holding in Tandem portfolios.


Tandem Wealth Advisors LLC (“Tandem”) is an SEC-registered investment adviser.

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