I wish there was a completely painless way to restore price stability. There isn’t.” - Jerome Powell, 12/14/22 FOMC Press Conference
Last week's market recap:
- The S&P 500 was down -2.05% for the week. Year-to-date the index is down -18.23%.
- Large-Cap Value leads performance YTD at -8.51%
- NASDAQ closed the week down -2.70% and is down -31.02% YTD.
- Barclays Aggregate Bond index is down -10.87% YTD.
- 10-Year Treasury Rate decreased, ending the week at 3.48% from 3.57% the prior week.
- Fed Funds Target rate is 4.50%
- The 1-Year Treasury is yielding 4.64%
- A 6 Month Treasury is yielding 4.69%
- What is your savings account rate?
The week ahead:
- PCE Inflation
- Personal Income Data
- Housing Starts
- Earnings (Nike, General Mills, FedEx, and more)
Last week, inflation data showed easing which is good. Then the Fed delivered a hawkish message at its press conference and the markets sold off. They downplayed progress on inflation, ignored economic slowing, and maintained a higher for longer stance on interest rates (monetary policy).
As negative as this may seem, there are some silver linings ahead…
- Bonds held up. With the Fed Funds rate at 4.5%, bonds are more attractive than they were earlier in the year. After the Fed’s press conference, the bond market basically said, “We don’t like uncertainty. We’ll go hang out in the safe haven trade for now.” The intermediate and long end of the curve rallied.
- For Equities, most of the damage to the downside has probably already been done in 2022. That doesn’t mean we can’t go lower, especially after we rallied 10% in Q4, but the S&P 500 is down almost 20% YTD. If inflation continues to ease, and the global economy weakens, the Fed won’t have much incentive to raise rates. Near term volatility in equities may be an opportunity as an end to rate hikes seems to be in sight.
- The Fed is not good at predicting interest rates. Trust the bond market!
- Last year, the Fed didn’t believe rates would be above 1%. They were still easing up until March of 22!! Now we have a Fed Funds rate of 4.5%, and it’s probably going to 5%. However, the Bond Market is saying, we’re near the top. Look at the yield curve!
Source: JP Morgan
We’ll be entering 2023 with extremely attractive short term rates. This could serve as a solid foundation for good returns for both stocks and bonds after a very difficult 2022.
As always, let us know if you have any questions.
CRA Investment Committee
Matt Reynolds CPA, CFP®
Tom Reynolds, CPA
Robert T. Martin, CFA, CFP®
Gordon Shearer Jr., CFP®
Jeff Hilliard, CFP®, CRPC®
Joe McCaffrey, CFP®
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