Good Riddance 2022, Welcome 2023

Good Riddance 2022, Welcome 2023

December 28, 2022

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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.

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