December Economic Update
The major market indices retraced back higher again in November into the upper ranges we’ve experienced over the past six months. The Dow Jones Industrial Average rose 5.67%, the S&P 500 gained 5.38%, and the Nasdaq Composite added 4.37%. (1)
Throughout most of this year, there has been two factors front and center for the market: inflation and interest rate increases. There were some notable developments with these macro-economic issues. Early last month, the Federal Reserve increased interest rates by another 0.75% for the fourth time since June. Coming off of the heels of the disappointing inflation report in October, Fed Chair Jerome Powell added that it was too soon to consider any slowdown with the pace of interest rate hikes and that the terminal rate (peak interest rate) may be higher than originally expected, which the markets reacted to the downside.
The markets turned around the following week when on November 10th the monthly Consumer Price Index (CPI) data was released which showed inflation had slightly contracted with Core CPI dipping from 6.6% to 6.3% year-over-year. While this wasn’t a substantial decrease and remained above the 5.9% levels we saw back in July and August, it gave the market hope that inflation may finally be decreasing. This may very well be the case as many forward-looking indicators do show inflation rapidly dropping into 2023. One month doesn’t make a trend, but it was a positive move in the right direction. (2)
Toward the end of last month, the Federal Reserve released their meeting minutes which suggested slowing the pace of rate hikes may be on the horizon, perhaps beginning in December with a 0.50% increase rather than another 0.75% hike. This contradicted Fed Chair Powell’s earlier comments made at the beginning of the month where he stated it was too soon to slow the rate hike pace. The change in tone can likely be attributed to the slight decline seen with the November CPI report. (3)
Looking Ahead to 2023...
November was a month full of headline whipsaws, Federal Reserve double speak, and hopes that progress toward battling inflation may finally be improving. We agree that inflation is possibly reaching its peak as we head into next year, which is positive news.
However, the storyline for the markets could shift into 2023 due to the steep interest rate increases we’ve experienced this year have not fully impacted both businesses and the underlying economy at this time. Most analysts agree that the full effects of higher rates could take as long as nine months before the market has fully priced-in the higher cost for borrowing money. This means the impact of the four consecutive 0.75% rate increases since June would not be felt until late next summer.
These matters will likely become the focal point into the first and second quarter of next year if inflation does begin to retreat. Specifically, the market will be looking for resilience with corporate earnings reports as higher rates begin to impact the bottom lines of both companies and consumers. The beginning of next year could be a careful balancing act between the market moving higher with improving inflation reports which could be juxtaposed against declining corporate profits.
All of these issues are yet to be seen, most importantly of all, having several consecutive months where inflation does steadily decline. As always, we take a thoughtful and analytical approach with balancing risk and reward, as well as interpreting new data as it presents itself. This has been a complicated macro-economic environment this year and it may continue a bit longer into the first part of 2023.
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1. WSJ.com, November 30, 2022
2. WSJ.com, November 02, 2022
3. WSJ.com, November 10, 2022
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.