Weekly Market Update: December 26, 2022
The Federal Reserve rendered its final monetary policy decision of 2022. At its mid-December Federal Open Market Committee (FOMC) meeting, the central bank raised the benchmark short-term interest rate a half-point, to a range of 4.25%-4.50%, which marked the highest level since December, 2007. The Fed also continued its $95 billion monthly bond-selling program. These moves are designed to decrease the money supply, with the expectation that less liquidity in the financial system will lead to reduced demand for goods and services and ultimately put downward pressure on prices. Investors were surprised that Fed Chair Jerome Powell indicated that rates would likely not come down until 2024.
Moreover, the FOMC upped the 2023 interest rate target to 5.10%; a Fed statement showed that 17 of the 19 senior central bank officials believe that this benchmark federal funds rate needs to rise above 5.00% and stay at that level for some time to effectively fight inflation. Thus..
Concerns persist that the Fed may misstep on how hard it hits the monetary policy brakes in 2023 and push the nation into recession. On point, the housing market is suffering from higher mortgage rates. Likewise, the consumer is having to borrow more money at higher rates to purchase both discretionary and non-discretionary items. We think this will put added pressure on their spending down the road when the bills on those purchases come due. Credit card balances rose 15% in the third quarter, the highest year-over-year increase in 20 years.
The expectations for corporate earnings are weak. According to FactSet Research, profits for S&P 500 companies are estimated to have declined nearly 3% in the fourth quarter of 2022, and the prognostications for calendar 2023 are for shrinkage in earnings. This may put downward pressure on near-term stock valuations.
Conclusion: The stock market sold off on the recent hawkish commentary from the Federal Reserve. And with corporate earnings likely to decline over the next few quarters, stocks may face an uphill battle, particularly as to the equities of less profitable entities. Thus, we recommend a portfolio tilted to financially strong companies.