As 2022 comes to a close, we’re rounding out the year with our final market update. In this market update, we discuss our view on the current market environment, economy, and importantly, what we can look forward to in 2023.
Are you tired yet of hearing about the Fed? Us too. While Fed interest rate hikes and commentary will likely persist into 2023, we received some welcome words from Fed Chair Powell last week. He essentially confirmed the Fed will end its 75-basis point interest rate hikes and drop to a projected 50-basis point hike in December.
Stocks and bonds rallied on the news, but the key question is: will the markets sustain the rally? The answer – yes or no – depends on your outlook on inflation, interest rates, and the economy.
Inflation, as measured by the consumer price index, appeared to have peaked in June. In the November CPI report, inflation was down to 7.7% year-over-year which is the lowest it has been since January. To be clear, 7.7% is very high inflation. And Americans still feel the pain at the gas station, grocery store, and everywhere in between. But remember, the market is forward-looking. It’s focused on incremental changes in the pace of inflation… and inflation appears to be headed in the right direction.
The economy, while slowing, is still on relatively stable footing. Jobs data released last Friday was hotter than expected, with better-than-expected month-over-month wages. Wages were up 0.6% month-over-month… double the expected 0.3%. Year-over-year wages were expected to be up 4.6% but came in at a whopping 5.1%.
Somewhat counterintuitively, good news on jobs and wages is bad news for inflation. Because inflation has a strong correlation to wages, this is not the number the Fed wanted to see.
On the other hand, good news on jobs and wages is good news for the economy. This is where it gets complicated.
Threading the needle, or a “soft landing” for the economy, means jobs and wage growth gradually decline over time, taking pressure off goods and services pricing… ultimately reducing inflation without drastically increasing unemployment. We think a soft landing is still very much a possibility.
So, what does all this mean for you, your family, and your portfolio? Despite the volatility, there’s been progress on inflation, and we see light at the end of the tunnel for interest rates. We expect another 50-basis point rate hike in December, and the market is pricing in another 50-basis point rate hike in February 2023. This puts the Fed Funds rate at a peak of 5% to 5.25% by the second quarter of 2023 [1]. Two CPI reports will be released before the Fed meets in February, and the results will have a significant impact on the Fed’s decision to continue raising interest rates in 2023.
Over the next few months, we expect continued episodic volatility tied to inflation reports, economic data, interest rate hikes, and Fed commentary. We continue to position portfolios in a balanced manner, favoring high-quality companies and funds, and asset classes that can benefit from periods of growth, but importantly, be resilient during volatility.
We think there will be sunnier days ahead in 2023 and project equity markets can make new highs in the third or fourth quarter of 2023. Some of the strongest returns can occur during the late stages of an economic cycle, or immediately after a market bottom. Patience is the name of the game, particularly at this point in the market cycle.
We know that it has been a difficult year to be an investor. Thank you for placing your trust in our team. It is a responsibility we do not take lightly. The entire team at Evans May Wealth wishes you and your family a happy holiday and New Year. Cheers to 2023 and a brighter year ahead!
Source:
- Source: CME Group, FedWatch Tool, December 6, 2022
