The Dow (+2.0%), NASDAQ (+4.8%), and S&P 500 (+2.7%) each exhibited strong gains for the week. Similarly, taxable and tax-free bonds also exhibited healthy gains of around 1%. Thus, both stocks and bonds have kicked off the new year on a favorable note and, much like 2022, they are reacting to the same news (or speculation). The 800-pound gorilla of inflation (and the Fed’s response with raising interest rates) has not left the room.
In last week’s economic news, December’s Consumer Price Index (CPI – the leading measure of inflation) fell 0.1% since the prior month and 6.5% compared to the prior December. That 6.5% inflation number was below the reported value of 7.1% in November. That value was also the 3rd consecutive month of a decline of 0.5% or more, and the 6th consecutive month of a decline since the peak of 9.1% in June 2022. On the surface, these statistics demonstrate a great trend, but we are still nowhere close to reaching the 2% inflation target repeatedly stated by the Fed. Jobless claims, as well as continuing claims also each fell last week, demonstrating that the labor market continues to remain robust.
We are experiencing a tug-of-war between what the Fed has been saying and the hopes and speculation of the stock and bond markets. More recently, the markets have been responding very favorably to the hopes that the Fed’s rate hikes will soon conclude. However, while the CPI data is decreasing, the labor markets remain very strong, and the Fed has commented that the labor markets represent 55% of the CPI. So, if the Fed stands strong on their 2% target and the labor market represents more than half of the CPI, then we have a long way to go before the Fed begins to ease off its hawkish stance. Trust me, we love to see the markets rally, but we also feel vulnerable to the Fed maintaining its hawkish stance and the markets responding unfavorably. We will see more clarity at the Fed’s next meeting on February 1, when it announces if and how much it will raise rates again. Until then, corporate earnings season starts this week, and investors will be paying attention not only to corporate earnings for the 4th quarter, but more importantly to their forecasts of earning ahead.
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