Weekly Market Update: December 19, 2022
The Federal Reserve continues to walk a tightrope in its battle to tame inflation. The central bank has been very aggressive in raising the benchmark short-term interest rate in an effort to slow demand for goods and services enough to put downward pressure on prices. However, the Fed is trying to guard against slamming on the monetary brakes too hard and pushing the U.S. economy into recession.
Recent inflation data have been mixed, but are showing some moderation in prices. The November Producer Price Index came in double the consensus expectation, but the Consumer Price Index (CPI) showed growth of just 0.1%, down from the 0.4% gain registered in October. For the 12 months ending November, the CPI rose 7.1%, the smallest year-over-year increase since December, 2021. Treasury market yields and the value of the dollar fell on the CPI report, while equities rose for the couple of days preceding the Fed’s decision.
Meantime, worries about the economy are not going away. The U.S. consumer sector has proven resilient in 2022, but the effects of stubbornly high inflation and the Fed’s restrictive monetary policies have reduced the purchasing power of the consumer. Over time, this has eroded savings accounts and caused consumers to take on more debt. According to The Federal Reserve Bank of New York, Americans held $925 billion in credit card debt at the end of the third quarter. This was a 15% year-over-year increase, the biggest jump in more than two decades.
The Treasury market yield curve remains inverted. This occurs when the rates on short-term Treasuries exceed those of longer durations. That, along with the recent drop in the price of oil (on concerns about demand), often portends that a recession is on the horizon. Many industry leaders think corporate profit growth will slow next year. If earnings were to fall, valuations for the S&P 500 companies may come under pressure.
Conclusion: Given the likely more difficult setting that lies ahead for Corporate America, we continue to recommend that investors add high-quality companies that have demonstrated an ability to deliver steady earnings growth even in a slowing economic environment.