January 2023 Market Update

The Federal Reserve delivered everything they telegraphed in the way of aggressive rate hikes during 2022. It was an abrupt reversal of the generous monetary policy in effect for the past decade, and it resulted in a dramatic reset of valuations in the capital markets. We expect some smaller rate hikes are coming early in this new year, then it appears the Fed will wait to see if they have done enough to tame inflation. Attention will turn to the economy and possible recession, with corporate profits under pressure from higher wages and sluggish revenues in the forecast. Employment remains strong, but it is expected to weaken in the months ahead. If the anticipated recession does materialize, the Fed’s focus may shift toward lowering rates as we head into the latter part of 2023. For investors, the tapering of rate hikes is an important milestone that brings us a step closer to the time when markets can get back on a positive path.

 

In an effort to slow an overheated economy, the Fed stepped on the brakes hard and consistently throughout 2022, raising interest rates seven times for a total increase of 4.25 percent. Inflation has begun to show modest signs of easing. According to the U.S. Bureau of Labor Statistics, the November reading of the Consumer Price Index (CPI) came in at 7.1 percent. This is still a high figure that is well above the Fed’s target rate of two percent, but it has retreated from the mid-summer peak CPI of 9.0 percent. Higher borrowing rates are meant to curb spending. The housing market has clearly felt the impact of tighter monetary policy, with mortgage rates roughly doubling in the past year, effectively stalling buying activity and curtailing the opportunity for refinancing.  

 

Consumer spending will be under pressure. Household budgets have already been stretched thin due to inflation, with consumers paying more for essentials such as food, energy and shelter. According to the U.S. Bureau of Economic Analysis, the Personal Saving Rate collapsed in 2022 to a 17-year low of 2.4 percent, down from 7.5 percent just a year ago. According to the New York Federal Reserve, credit card balances are seeing the biggest jump in more than 20 years.

 

Corporate profits have also weakened. Just six months ago, analysts were counting on profit growth of 9.1 percent in 2022 for companies that comprise the S&P 500 index. Now, those numbers appear closer to a decline of one percent, and some industry sectors have experienced even greater deterioration in their profit picture. For the most part, companies have been reluctant to trim their workforce, as hiring has proven to be a challenge, and workers have succeeded in securing higher levels of compensation. Wages surged 5.5 percent in the past year, the largest increase in the 25 years that those data have been maintained. Unemployment is currently very low at 3.7 percent, although that figure is likely to rise as economic activity slows. Stories of labor shortages are giving way to stories of layoffs, hiring freezes and reduced bonus pools. Employment and wage growth are expected to soften this year, with analysts forecasting a rise in the unemployment rate to around mid-four to five percent.

 

Investors endured a difficult and turbulent year in 2022, and we expect the economy will go through a rough patch in coming months. Price stability and full employment for our economy are the top jobs of the Federal Reserve, and their primary lever for controlling inflation is through adjusting interest rates. Making money cheaper or more expensive has an impact on borrowing and spending patterns. Last year’s rate hikes should set the stage for a slowing economy and reduced levels of inflation. Once price stability is regained, monetary policy can return to normal and the economy can get back on an upward trajectory. The prospect of waning inflation, a more dovish Fed and accelerating corporate profits would be a solid boost to the capital markets.

 

Our best wishes to you and your family for a healthy, happy and productive new year. 



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Market Update January 2023


Past performance is not indicative of future results. The information contained in this report is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the items mentioned. The information, while not guaranteed as accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.