The saying “Don't Fight The Feds,” or DFTF for short, has been the theme this year on Wall Street. Since March 16, when the Federal Reserve embarked on its rate hike policy, the stock market has plummeted. Mortgage interest rates doubled during the second quarter, which stopped the new residential and existing housing market in its tracks. Stock selling continued as Investors feared the Fed would drive the US economy into a recession along with a myriad of other financial challenges that include soaring energy prices, the Ukraine war, hyperinflation, and supply chain dysfunction, to name a few.
The only news that matters to investors are topics that may influence the Federal Reserve slowing or stopping their rate hike policy. Despite strong employment participation, over 10 million job openings, strong household savings and income, and even declining energy prices during the summer would offset investors' concern about rising interest rates. The S&P 500 index seemed to bottom on June 19 this year as analysts projected the slowing of inflation, potentially resulting in the Federal Reserve slowing their rate increases. This proved to be baseless optimism, and the rally ran out of steam on August 12 as discouraged investors sold their stocks to drive the S&P 500 index to new lows reached October 12.
However, in November, investors renewed their optimism again with the forecast the Federal Reserve may slow their rate hikes in December. This began another mild recovery from mid-October to date. A big boost for the market occurred on November 10 and 11 as the S&P 500, Dow Jones Industrial Average (DJIA), and NASDAQ had their best two-day performance in years, increasing 6.52%, 4.92%, and 9.37%, respectively. The impetus that kept the rally going was reported in November that the Consumer Price Index (CPI) had declined for the fourth consecutive month. Since October's low, the S&P 500 index has recovered back above its 200 Day Moving Average for the fourth time this year.
All previous bounces this year have been short-lived as Investors' hopes for slowing Fed rate hikes were squashed with every new announcement by Jerome Powell, the Federal Open Market Committee voted for another rate hike. Four rate hikes have occurred so far this year of 0.75% each.
However, today the Bureau of Labor Statistics announced that the November CPI has eased for the sixth consecutive month to an annual rate of 7.1% and below the consensus of 7.3%. This is below October's year-over-year (YoY) rate of 7.7% and well below the 9.1% YoY increases reported at the start of this year.
Today Jerome Powell will announce the results of the Federal Open Market Committee (FOMC) meeting and their decision on the amount of their rate increase. Investors are hoping for a 0.5% rate hike and, more importantly, will be listening carefully to Jerome Powell's speech for indications the FOMC may slow their rate hike policy in 2023.
Meanwhile, the US economy and business marketplace continue to remain stable or better. Apparently not a concern for investors. Employers are still looking for 10 million new workers as supply chain disruptions are easing and consumer demand remains strong. Small business owners are the front line of the economy that employ 46.4% of all workers in the US and represent 99.9% of all businesses in America. Small businesses typically have less flexibility and are particularly impacted by rising interest rates and material and labor costs. Business owners have been challenged this year; choosing to either pass on their rising costs to their customers may slow sales or absorb rising costs that lower profits. Understandably, the NFIB (National Federation of Independent Business) Optimism index has been declining since July of last year. However, since bottoming in June this year, the index has slowly improved but remains well below previous highs.
What Does This Mean to Me?
Wednesday, December 14, is the date investors have been waiting for all year. It is widely hoped Jerome Powell will provide indications the FOMC recognizes the impact of this year's rate hike campaign and a slowing of their rate hikes in 2023. Monday and Tuesday this week were modest positive days for the stock market as investors cautiously increased their stock holdings. Inflation has been slowing but well above the Federal Reserve target goal of 2%. Jerome Powell and the committee have been very clear in their objective.
Whether Jerome Powell provides the message that institutional investors are hoping for or not, the real key is the economy remains stable and more people are working in the history of this country. Yes, wage growth has not kept pace with the recent surge in prices, but that is way better than not having a job at all. We maintain our favorable view of the US economy and stock market. Patient investors are historically rewarded in times like these when the stock market is poor but the economy is stable or growing. The opposite is far riskier than rising stock prices during times of poor economic fundamentals.