Let’s hope January’s inflation numbers that were released this month will not continue!
Last Friday’s Personal Consumption Index (PCE) increased from 5.3% in December to 5.4% in January. The “Core,” stripping out food and energy also increased from 4.6% to 4.7%. These numbers are on the back end of hotter than expected CPI and PPI numbers.
Should this be a surprise? Not really! With gas prices moderating over the last several months, the average income taxpayer has more money to spend elsewhere, regardless of the higher prices (for now). Combine this with a current extraordinarily strong labor market and excess household savings, it is hard to imagine winning the inflation battle in a straight line.
As expected, the stock market sold down last week, obviously concerned the Fed may become more hawkish going forward. Prior to the last three inflation readings, investors were banking on 2 more rate hikes of .25% each, and then rate cuts later this year, as the economy slows due to higher interest rates.
Unless the economy starts to truly slow, I do not believe the Fed will be considering lowering rates in 2023. More likely, we will get a few more rate hikes and then rates will be left alone for several months, if not longer.
When this inflation issue is finally in the rear-view mirror, I do not see inflation reverting to 2019 levels of 2% and below. With the sheer number and strength of the millennial generation, overall spending on goods and services should be high for many years. I’m thinking inflation in the 3%-3.5% range is likely at this point.
Corporate Earnings Winding Down
465 out of the 500 S&P 500 companies have reported 4th quarter profits, with 70% beating the consensus estimates. Profits have fallen by (3.2%). This is a true reflection of higher wage costs and higher supply costs that most business are grappling with.
This is where the rubber hits the road for the markets. How much further do profits need to fall before we see a reverse higher? I wish I knew the definitive answer, however keep in mind, consumers will spend as long as they have resources… whether that is income, cash, credit, or home equity!!
All major indexes fell last week on the heels of inflation. The Dow dropped (2.99%), the S&P 500 (2.67%), the Nasdaq (3.33%) and the Russell 2000 (2.87%).
Over the pond, foreign stocks fell (2.79%) and Emerging Markets (3.48%).
The Yield on the 10-Year US Treasury this morning is 3.92%.
So far in 2023, the Dow is down (.7%) the S&P 500 up 3.7%, the Nasdaq higher by 9% and the Russell 2000 7.5%. Foreign stocks are higher by 4.9% and Emerging Markets up 1.7%.
I would expect volatility to continue for the foreseeable future…. Keep in mind, volatility does not always move in the down direction. Plenty back & forth should be expected for the next few months.
The best course of action is to make sure you have a comprehensive financial plan, and your portfolio is properly aligned with your goals/desires, represented in your plan. If you have any questions about your situation, please do not hesitate to schedule a consultation.
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