January Economic Update
Market Summary
Stocks were under pressure in December and traded back in the lower ranges we have experienced over the past six months. There were renewed concerns of a recession into 2023 and that the Federal Reserve may keep rates higher than markets anticipated. The Dow Jones Industrial Average ticked lower by -4.17%, the S&P 500 fell -5.90%, and the Nasdaq Composite moved lower by -8.73%. (1)
Economic Developments
Last month once again saw volatile trading both to the upside and downside as the market digested economic data, the inflation report, and the Federal Reserve’s comments. On the economic front, there were early indications the broader economy is beginning to stumble with industrial production output data declining for the second straight month, falling -0.2% in November. Retail sales fell by -0.6% as holiday shopping got off to a muted start and existing home sales dropped -7.7% from October which was the 10th consecutive month of declining sales. (2,3,4)
There was positive and encouraging news on the inflation front as prices of consumer goods and services rose only 0.1% in November and increased 7.1% year-over-year. Both figures came under consensus estimates and headline CPI has now declined for fifth straight. Core prices (excluding food and energy) were slightly lower than expected due to declining energy and used car prices which more than offset higher costs in food and shelter. The market did take these numbers in stride with a solid rally on the news. (5)
One day after the CPI report, the Federal Reserve approved another interest rate hike of 0.50% and raised its forecast for continued rate increases into 2023. In his press conference, Fed Chair Jerome Powell suggested that the next rate hike may be only a quarter-percentage point increase, but the terminal rate (the rate at which hikes would come to an end) was raised higher than the market had been anticipating up to 5% - 5.5% versus the 4.6% level the Fed had previously forecasted in September. Furthermore, projections showed the Fed intends to keep rates over 5% for all of 2023, which the market also had not anticipated leading up to the announcement. (6)
What to Watch this Month...
There will be four areas of focus for the month ahead. The first will come on January 12th with the latest CPI report. The second point of interest will be earnings season which will begin on January 13th with the bank sector with other major companies reporting throughout the entire month. The third will be on January 26th with the initial reading of the fourth-quarter GDP. Finally, the Federal Reserve will begin its two-day meeting on January 31st and the markets will be anxiously waiting for Fed Chair Powell says about the economy's direction in the post-meeting press conference.
We anticipate this year to be increasingly data-driven, even more than 2022. Every economic release and Federal Reserve statement will be heavily scrutinized by the market to gauge when the Fed may begin to pull back the reigns on stifling economic growth with high interest rates. Our greatest area of focus is whether the Fed is serious regarding placing less emphasis on inflation reports, and more emphasis on increasing the unemployment rate, seeing as the changes in the labor market would take much longer to unfold versus the likely rapid pace at which inflation could decline during the first half of the year. We will take these developments month-by-month as they unfold.
Monthly Financial Tip:
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Citations:
1. WSJ.com, December 31, 2022
2. WSJ.com, December 15, 2022
3. MarketWatch.com, December 15, 2022
4. CNBC.com, December 21, 2022
5. CNBC.com, December 13, 2022
6. WSJ.com, December 14, 2022
Disclaimers:
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.
