On and on you will hike. And I know you’ll hike far and face up to your problems whatever they are.” - Dr. Seuss: Oh, the Places You’ll Go
Last week's market recap:
- The S&P 500 closed the week up 1.64%. Year-to-date the index is up 7.86%
- NASDAQ closed the week up 3.33%. YTD the index is up 14.77%
- U.S. Aggregate Bond index was up .03% for the week. YTD the index is up 3.02%
- 10-Year Treasury Rate increased a basis point, ending the week at 3.53% up from 3.52% the prior week.
- Fed Funds Target rate is 4.75%
- The 1-Year Treasury is yielding 4.87%
- A 6 Month Treasury is yielding 4.86%
- The 9 month Treasury has a higher yield vs the 1 year Treasury bond and beyond. This is the bond market telling the Fed, “The economy is not strong enough to sustain these higher rates much longer.”
- If your savings account is still under 1%, you should probably find a new savings account.
The week ahead:
- Earnings season continues: Disney, PepsiCo, Paypal, Uber, Toyota, etc.
- Fed Chair, Jerome Powell will be speaking at the Washington Economic Club
- Consumer Sentiment Index
Last Week the Federal Reserve hiked interest rates by .25%.
This was the Fed’s eighth rate hike in a row, but it’s smallest since last March. Chairman Powell declared, “the disinflationary process has started.” The drop in inflation over the past three months allowed the Fed to slow their tightening.
While Powell acknowledged there was still more work for the Fed, and there are probably more hikes to come – in March and maybe even May – they are getting close to their stated target interest rate of 5% to 5.5%.
The terminal rate seems to be within reach.
The light at the end of the tunnel is looking a bit brighter. Both stocks and bonds reacted positively to the news, adding to the strong performance that stocks have seen since the start of the year.
Does this mean the bear market is over?
It’s too early to say. Corporate earnings are down, and the yield curve remains inverted. These are signs of a pending recession, but the job market is strong. Chairman Powell believes growth will slow, and we’ll avoid recession. Many economists disagree with Jerome Powell. If we do go into a recession, it will be the most anticipated recession of all-time.
Isn’t a slowdown already priced into the market?
Economic growth estimates and corporate earnings projections have been lowered. The bar has been low for companies to meet or exceed expectations. Stocks are forward-looking and they seem to be looking past the effects of rate hikes. Is it possible that Powell may successfully orchestrate a “soft landing”? The Bond Market doesn’t think so. The Bond Market’s inverted yield curve is basically saying…
Rate hikes take time to work through the economy and the Fed may eventually “face problems whatever they are.”
Jerome Powell and the Bond Market disagree. They can’t both be right. The silver lining is you don’t need to pick a side. Diversification should help portfolios in 2023. Fixed Income yields are attractive. This should provide a solid foundation for diversified portfolios going forward.
Source: CME GroupThe picture above is showing... The CME Group's Fed Fund Tracker is showing a 93.7% chance of another 25bp rate hike in March.
2023 Financial Planning Notes:
- Later age for RMDs
- Bigger contribution limits on retirement accounts
- Higher income limit for Roth IRA contributions
- Increased Standard Deductions
- Higher Marginal Tax Bracket Thresholds
- 529 rollovers to Roth IRAs (requirements need to be met)
- Higher threshold for 0% long-term capital gains
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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