Stocks, Bonds… Which is Correct?

What part of the market is right?  Is it the stock market, or is it the bond market?

Bond yields have come down, pushing prices higher so far in 2023.  The Bond market is attempting to price in a recession as many believe the economy and corporate earnings drift downward over the next several months.   The good news either way is that bonds now pay fairly attractive rates.  The caveat – if inflation reasserts itself, bond yields could quickly move in the opposite direction.

Stocks are moving higher, attempting to price in both a “soft” economic landing, as well as the belief our Fed will let-up on the rate throttle.  Many are now starting to believe a soft landing is possible, however much depends on the future actions of the Fed.

Last week, we heard a continuing to improving Producer Price Index, softer than expected retail sales, and existing home sales.  Good news for inflation.

The markets finished flattish with the Dow down (2.66%), the S&P 500 (.65%), the Nasdaq up .55%, and the Russell 2000 down (1.04%)Foreign stocks were up a slight .01% and Emerging Markets rose .64%.

The 10-Year US Treasury yield has been holding fairly steady around 3.5%.

This Week?

On the economic calendar this week, we’ll hear the first glance at 4th Quarter GDP, Leading Economic Indicators, Durable Goods Orders, and New Home Sales.

The most important number will be released on Friday, when we hear the Fed’s favorite inflation gauge: the PCI (Personal Consumption Expenditures Index).  This is the last report the Fed will have prior to the February 1st interest rate announcement.

We’ll also hear an industry variety of corporate profit reports, including Microsoft, Intel, J&J, Verizon, Halliburton, AT&T, Boeing and Tesla.

Will the rally continue?  What really matters is what the Fed does and says on February 1st.  Will the Fed stomp out the rally for the 3rd time?

Many believe the Fed will raise rates by .25% instead of .50%.  Keep in mind over the last couple of weeks, Fed speakers have indicated they will need to go over 5% on the Fed Funds Rate.  We are at 4.5%…

When thinking about inflation, one needs to consider China.  China is in the process of re-opening, which may put upward pressure on energy prices and perhaps pressure on the price of goods.  As China opens its manufacturing sector, that should assist with the supply side of the situation.

I think it’s a bit early to believe inflation pressures are behind us.  Let’s face it!  Very few of us were adults and investors back in the 70’s.

EV Tax Credits

The maximum tax credit for the purchase of an electric vehicle is $7,500.  If you’re single, your income must be 150K or less.  If you are married, filing a joint return, your income must be 300K or less.

For the EV to qualify, it must have final assembly in North America.

The MSRP limit for a sedan will be $55,000 and $80,000 for an SUV/truck/van.  Tesla just reduced prices of its Model Y and Model 3 to qualify.

Tax breaks are also available for hybrids

Upcoming, the government plans to impose battery-sourcing requirements to qualify.  For 2023, 40% of the battery’s critical minerals and 50% of it’s parts must be sourced in North America (or countries with a U.S. free-trade agreement).  The mineral and component requirements increase by 10% each year.  If a car only meets one threshold, for minerals or components, the buyer would only qualify for half of the credit, or $3,750.

To see if a car meets assembly requirements, you can input the vehicle’s identification number on the Department of Energy website:

As always, if any of your friends or family might benefit from this information, please feel free to share!

Broker Check Logo