by Jason Norris, CFA
Principal Equity Research and Portfolio Management
As investors handicap the most anticipated recession in history, fourth quarter equity returns are playing out as expected. Historically, the fourth quarter, specifically the month of December, delivers the best results for equity investors. While this quarter has continued the positive trend, December is not acting as planned. This month usually delivers more than double the monthly average return, but this year stocks are down almost 3% in December. Next week’s Fed meeting and CPI data will be key catalysts for both equity and bond returns for the rest of the year.
Vital Signs
“Monetary policy affects the economy and inflation with uncertain lags, and the full effects of a rapid tightening so far are yet to be felt.” Fed Chair Jerome Powell, November 30, 2022.
This year we have seen the most aggressive interest rate tightening cycle since the early 1980s. The chart below highlights the magnitude of the aggressiveness we’ve seen.
Source: Federal Reserve
But as Chairman Powell has stated, changes in interest rates take time to work their way through the economy. While the Fed started hiking rates in March, they didn’t get aggressive until May. Therefore, it is likely the full effects of these increases have not been felt. While we are starting to slowdown in some areas, specifically the housing industry, the U.S. consumer continues to remain resilient. Higher rates, as well as higher inflation have affected some, but an increase in wages means consumers are still spending.
In The Mood
On Friday, the University of Michigan released its measure of consumer sentiment. With lingering inflation and recession fears, a lower reading than November was expected. Despite this, the findings came in ahead of expectations, showing that U.S. consumers maintained their resilience. As such, inflation fears are starting to wane. This waning can be seen in the changes in consumer sentiment surrounding gas prices. This summer, skyrocketing gas prices led to a large dip in consumer sentiment. With prices falling by 33% since the summer, consumers are starting to feel better.
Source: University of Michigan and Federal Reserve
Takeaways for the Week:
Stocks finished the week lower and rates higher as inflation concerns continue to add uncertainty.
All eyes are on next week’s Fed meeting. Expectations are for a 0.5% increase, and the press conference will be “must see TV”.