Nobody walked into this week expecting a bargain, but the final number still surprises you when you see it on the window.
Markets have now fully priced in a rate hike over the next year. Last Friday's jobs report came in much stronger than expected, which added another line item to an already long sticker; a labor market this tight gives the Fed cover to stay restrictive longer, and the Fed is not currently in the mood to negotiate.
The traditional 60/40 portfolio has its own problem. Its main selling point is that bonds absorb what equities drop. That relationship has broken down in the post-COVID rate environment. Bonds and equities have been moving together ever since, which has reduced the cushion investors have historically relied on.
BofA ran the historical numbers on S&P 500 returns when CPI exceeds 4%: average three- and six-month forward returns have been negative. The range of outcomes is wide, and strong positive returns exist in that dataset, but the historical directional read is not encouraging.
This week's consumer-price index (CPI) confirmed headline inflation is officially above 4% year over year. Core prices came in slightly softer than expected, which briefly felt like a dealer discount until estimates for core personal consumption expenditures (or PCE, the Fed’s preferred measure of inflation) moved higher anyway. The softer print was driven largely by a decline in car insurance prices, which is a volatile component, and under the circumstances a detail so on-the-nose it barely needs a comment.
Kevin Warsh chairs his first FOMC meeting on June 17. He took over a lot with complicated inventory, a waiting room full of people who have been told the price is coming down for longer than anyone finds credible, and a labor market that keeps adding line items every time someone checks.
For client conversations
The clients with potentially highest exposure here are those whose portfolios were built around assumptions that no longer apply. Pre-retirees and retirees in drawdown may feel it most directly; the bond cushion they were counting on has not been performing its historical role, and high inflation has been compressing purchasing power while equity returns have faced headwinds. If those conversations haven't happened explicitly, the data this week provides a natural opening.
The above-4% CPI print is a concrete opener for clients who have been treating inflation as a household inconvenience rather than a portfolio variable. The BofA return history puts both numbers on the table: elevated inflation hasn’t just affected what things cost; it has historically created headwinds for portfolios simultaneously. Your clients may be experiencing sticker shock at the grocery store and on their portfolio statement at the same time.
Warsh's first meeting offers an opportunity to reset client expectations around Fed policy. The Fed is not managing equity prices; it’s managing inflation, and a labor market this tight suggests it could hold interest rates higher for longer regardless of how markets respond. Clients who understand the Fed isn’t looking for a reason to cut rates may sit in a higher-rate environment better than clients who keep waiting for relief that may not arrive on the timeline they’re expecting.
Sources: Bank of America, Bloomberg, Goldman Sachs