Investors have been on pause since early 2022 with their new investments to determine when the Federal Reserve rate hikes will cease. More importantly, they are concerned that higher interest rates will drive the US economy into a recession. The Federal Reserve began its rate hike policy on March 17, 2022, which continued throughout the year. Below is a list of all rate hikes in 2022 following their Federal Open Market Committee (FOMC) meetings:
Jerome Powell, Federal Reserve Chairman, stated in March 2022 that their target goals were to lower inflation based on several indicators that, include the Consumer Price Index (CPI) to 2%. The committee projected that they would need to raise the Federal Reserve discount rate from 0.25% – 0.5% to 5.0% to 5.5% to achieve their target inflation goal.
As we have opined in previous Weekly Briefs, there are many solid indications that inflation is near their target rate and potentially the end of the rate hike campaign. Our assessment is based on significant declines in housing, energy, and consumer spending. Last week, the Bureau of Census released its monthly report on Retail Sales. For the past two months and during the holiday season, retail sales declined month over month.
Econoday provided this analysis of the report:
“Retail and food services sales are down 1.1 percent in December after a downward revision to down 1.0 percent in November and up 1.1 percent in October. The December decline is below the down 0.8 percent consensus in an Econoday survey. The weaker-than-expected December, combined with the softer performances in the prior two months, sets up the advance estimate for third-quarter GDP to be lower than previously thought, with personal consumption expenditures less supportive of growth. Retail and food services sales, excluding motor vehicles, are also down 1.1 percent in December on top of downward revisions to down 0.6 percent in November and up 1.0 percent in October. Sales of motor vehicles and parts were down 1.2 percent in December.
Gasoline sales are down 4.6 percent in December from November, reflecting the decline in prices at the pump. Sales excluding gasoline only are down 0.8 percent. Sales excluding gasoline and motor vehicles are down 0.7 percent month-over-month.
Sales at nonstore retailers – which includes online shopping – are down 1.1 percent in December. Some of that may be due to lower prices for commodities like home heating fuels, but it suggests that online shopping suffered a similar trend with the lackluster holiday results at brick-and-mortar stores. Weakness in December sales is widespread. The only increases are a small 0.3 percent rise for building materials and increases of 0.1 percent in grocery stores and sporting goods, respectively. These are minor gains that do not offset the broad-based softness in the December report.”
Not mentioned in Econoday’s opinion is the impact on consumer spending due to the dramatic impact rising interest rates have had on housing. House prices peaked in the summer of 2022 and since have steadily declined in price, as reported by the National Association of Home Builders/Wells Fargo. The recent decline breaks a decade-long consecutive trend of increases in the index going back to 2012.
However, the combination of a 100% increase in mortgage rates and weakening housing prices has resulted in a fast drop in existing house transactions. In fact, the number of house transactions has only been this few during two periods in the past 30 years, and both were the result of catastrophic economic collapse. The most recent low level of transactions was in 2020 during the worldwide pandemic.
Before 2020, the time before that was 2008, the worst housing crash since the great depression. Prior to 2020, the next lowest level of sales was 1995, when there simply were fewer people and houses.
The relevance of the housing market is it typically represents the largest expenditure of consumer spending. The US economy, stock market, and corporate profits ebb and flow based on the willingness of consumers to spend, which represents 66% of the national GDP, followed by corporations, government, and non-profits representing the remaining 33%. We anticipate consumers to eventually resume their spending on their homes but instead prepare for a profitable sale to keep long term.
What Does This Mean to Me?
The obvious concern is if consumers significantly slow their spending, the economy is at risk of declining into a recession or, worse – a disinflationary cycle. Investors are keenly aware of this risk and hence the concern about how much more the Fed will raise rates. We maintain that the Federal Reserve rate hike policy is nearing an end and may be the key to the sustainability of the US economy and, eventually, the establishment of a new positive stock market trend.
In other words, a soft landing to the slowing of the economy and the 2022 stock market selloff.
The S&P 500 had maintained a positive trend since October 14, 2022, when it bottomed at its lowest level 2022. As of today, the S&P 500 has crossed above its 20-Day Moving Average (DMA), 50 DMA, and 200 DMA.
NASDAQ, which has had quite a volatile ride these past three years and a solid rally so far in 2023, has crossed above its 20 DMA and 50 DMA and just approaching its 200 DMA.
Watching the index respective DMA’s is akin to monitoring baseball players’ batting averages. Attempting to determine when a player may recover from a slump can be identified when their batting averages start to improve. A few good hits will not change a longer-term average; however, as the player is more productive at-bats over durations of weeks, the average will begin to improve.
The same is true for monitoring DMA’s of stocks and market indices. We are encouraged by the improving technical trend of the indices, which we believe is justified as more evidence indicates that inflation is slowing to a level that meets the Fed’s target. If the Federal Reserve ceases its rate hike policy in the next two meetings, we could foresee the possibility of the continuation of the positive trend, with some bumps along the way, for the rest of 2023.