The stock markets of the world are struggling into the close of 2022, capping what has proven to be a horrible year for equities. In our view, US core inflation has apexed (mid-2022) and now running at closer to 2%. But due to lags in how price-level series works (inflation is a price level), inflation will not be officially "2%" (year over year) until Sept 2023. If inflation, on a forward basis, is running at 2%. Will markets and Fed wait until Sept 2023 to say inflation is running at 2%? Fed previously said, "3 consecutive months" of improvement is a sign of progress.
In reflecting on 2022 and looking at what were the facts that added to a tough year, the points were quite clear:
- Russia / Ukraine war
- China’s COVID policy
- US recession fears in the coming year
- US spike in interest rates at a very aggressive pace
- Continued US Government spending capped by last week’s $1.7 Trillion stimulus package
Needless to say, all of these are either in full swing or are showing virtually no signs of ending in the immediate future, except for expected inflation readings. The slowdown in the US economy should be a very thin margin between an economic slowdown to a slow growth rate or too much slowing into a recession of some level. The inverted yield curve seems to be confirming this slowdown/recession fear, yet it appears that the slowdown should be industry-specific, not uniformly across all sectors.
The Fed’s forecast of inflation just a week ago is already appearing too high and could lend itself to the Fed not having to raise more than once in February for the rest of 2023. See below:
I could provide more proof, but in the end, it is really dependent on bond yields to show what Mr. Market believes is the case. At present, the short-term rates (two years or less) and longer-term rates (ten to thirty years) are not going up any more, but are not breaking hard to the downside either. Remember, the short rates are driven by the action of the Fed, and the longer rates are driven by expectations and demand in the bond markets.
In closing, there really isn’t much new news to go over this week. With us being in a quieter period between Christmas and New Year’s, there is not a lot of economic reports to digest and add to the forecasting mix. Also, even though the international turmoil is still a concern, issues don’t seem to be escalating at present and in this week’s Wall Street Journal there were statements to a cease-fire being considered by Putin and Ukraine.
May we be the first to wish you, your family, and your friends a very Happy New Year, and may 2023 bring you everything you have worked so hard for.
Get Ken's Weekly Market Commentary Delivered In Your Inbox!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Investing involves risks including possible loss of principal.
The Standard & Poor's 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The Nasdaq-100 is a large-cap growth index. It includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
This information is not intended to be a substitute for specific individualized tax advice.We suggest that you discuss your specific tax issues with a qualified tax advisor.