The Fed's Challenge
The Fed has a tough challenge ahead of them with very few options. Most of the aggregate growth in the economy was financed by massive deficit spending, credit creation, and a reduction in consumer savings.
2022 Market Review
The year 2022 ended with the stock market delivering its largest yearly losses since 2008. The fourth quarter of 2022 saw new bear market lows in the S&P 500 index, Nasdaq Composite, and Bloomberg Agg Bond Index.
Wrapping Up 2022
As the Fed continues its inflation fight, the economy continues to weaken. While the Fed may say they have a chance at a “soft landing” of the economy, history tells us the odds of that happening are not great. The economy will really begin to feel the effects of the rapid interest rate hikes early in 2023.
All Eyes Remain on the Fed
The historic pace of Fed interest rate hikes this year continue to dampen markets. While there is room for a reflexive rally in the short-term, we believe this bear market has longer to play out. Over the next 6-9 months the effects of the spike in interest rates should begin to weigh on the economy. Higher borrowing costs and prices will ultimately start to force consumers to choose to spend less thereby slowing economic growth.
Surging Stocks Are the Last Thing the Fed Wants
The reversal of the bear market from mid-June to mid-August provided relief for many and hope that the worst was over. However, while the rally was pushing stocks towards positive territory, encouraging an increase in equity exposure, we remained increasingly concerned about the challenging monetary policy and economic backdrop as well as our stubbornly negative market indicators.
Recession: Good News Or Bad News?
When is the bad news of inflation actually good news for investors? It's when an oncoming recession appears likely to push interest rates down and crush problematically high inflation. Recessions have a cleansing effect on inflation, debt, leverage, and excessive exuberance.