2022 Has Been All About the Federal Reserve... Rates, Rates, and Higher Rates
The Fed did as the market expected and raised interest rates ½%. This was widely expected by market participants. The Fed funds rate was around ½% in January of 2022. Today the Fed funds rate is 4.50%. This increase in the Fed funds rate since the start of the year is the fastest and most aggressive on record. On a positive note, we have now had three consecutive months of lower top-line and core consumer price index readings. However, the top line number is still high at 7.10% year over year. The good news is that when you look at all the components that make up the consumer price index most of the inputs have fallen dramatically since October. It takes months for that to show up in the actual consumer price index. That is one main reason why the Federal Reserve has historically been behind the curve whether it is raising or lowering rates. The Federal Reserve Chairman, Jerome Powell, made it clear that inflation needs to fall a lot more, but he also made more – dovish signals. Based upon the Fed funds futures expectations the Fed may be finished raising interest rates in February or March of 2023. Another encouraging sign is the two treasuries note yield is trading below the Fed funds rate, signaling that the Fed has done enough. In past hiking cycles when the 2-year yield has traded below the Fed funds rate it has indicated that the end of the tightening cycle is near.
There is a lot of discussion about markets don’t bottom until a recession begins. That appears to be the case if you go back to data since WWII. There have been nine bear markets including this one and every one of them bottomed when the economy entered a recession. If we look back at a textbook definition of what has been classified as a recession it has been two consecutive quarters of negative GDP growth. There were many pundits that have come out and tried to say that definition no longer applied. However, it has been used for several decades.
We understand that markets, stock/bonds, have been challenging this year especially growth stocks, such as technology. However, stocks don’t necessarily hate higher rates, just the speed of rate increases plus volatility is what makes it hard to price stocks. We remain optimistic as we go into 2023 and feel like the second half of 2023 will be a strong period for stocks. Markets don’t always have to trade down to discount slower economic news sometimes trading in a range is harder over a period of time. Often when we have markets like we have experienced in 2022 they present super buying opportunities, and this time is no different. Blocking out the day-to-day noise and focusing on longer-term goals has always served investors well.
We wish everyone a Merry Christmas and a prosperous New Year!
The views expressed are not necessarily the opinion of Cadaret Grant, and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investing is subject to risks including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.